<PAGE>
AHA INVESTMENT FUNDS, INC.
ANNUAL REPORT TO SHAREHOLDERS
AS OF JUNE 30, 1997
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
PAGE
Portfolio of Investments 1
Full Maturity Fixed Income Portfolio
Limited Maturity Fixed Income Portfolio
Diversified Equity Portfolio
Balanced Portfolio
Financial Statements 34
Notes to Financial Statements 38
Report of Independent Public Accountants 49
Manager Discussion and Performance Graphs 50
Full Maturity Fixed Income Portfolio
Limited Maturity Fixed Income Portfolio
Diversified Equity Portfolio
Balanced Portfolio
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
SHARES OR
PRINCIPAL MARKET VALUE
--------- -------------
LONG-TERM OBLIGATIONS 101.3%
U.S. GOVERNMENT AND AGENCY OBLIGATIONS 64.9%
------------------------------------------------
United States Treasury Bonds Stripped
$ 700,000 0.000% 02/15/20 effective yield 6.25% $ 146,632
United States Treasury Bonds
2,700,000 9.250% 02/15/16 3,379,220
4,950,000 6.625% 02/15/27 4,843,269
United States Treasury Notes
1,670,000 5.125% 11/30/98 1,651,735
350,000 7.750% 12/31/99 362,578
400,000 5.625% 11/30/00 392,000
300,000 6.625% 07/31/01 303,094
1,700,000 6.625% 03/31/02 1,715,939
616,000 6.500% 05/31/02 618,503
695,000 5.750% 08/15/03 671,327
United States Treasury Inflation Index
1,905,924 3.375% 01/15/07 1,861,254
Federal Home Loan Mortgage Corporation
203,347 8.750% 04/01/09 209,543
88,403 10.500% 01/01/10 97,051
394,720 9.300% 04/15/19 416,781
700,000 7.000% 09/15/21 695,506
438,294 7.000% 05/01/24 433,101
462,692 6.500% 03/01/26 444,314
Federal National Mortgage Association
(mortgage-backed securities)
865,328 9.500% 07/25/19 921,822
600,000 7.600% 11/25/19 610,166
800,000 7.000% 04/25/20 797,648
712,094 6.500% 09/25/20 698,643
523,000 7.500% 09/25/20 528,584
814,385 7.000% 10/25/20 812,773
The accompanying notes to the financial statements are an integral part of
this schedule.
1
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (CONTINUED)
--------------------------------------------------
Federal National Mortgage Association
(mortgage-backed securities) (Continued)
$ 1,577,958 7.000% 01/25/21 $ 1,574,837
800,000 8.000% 02/25/21 822,604
906,048 8.500% 09/25/21 940,941
320,156 9.500% 02/01/25 344,719
351,448 7.000% 05/01/26 345,115
370,396 7.000% 06/01/26 363,721
64,265 7.000% 10/01/26 63,107
796,473 7.000% 12/01/26 781,954
2,813,181 7.000% 03/01/27 2,760,486
899,500 7.500% 06/01/27 902,873
Government National Mortgage Association
(mortgage-backed securities)
439,355 9.500% 12/15/17 476,805
574,660 7.125% 08/20/23 593,003
169,005 6.500% 11/15/23 163,149
218,221 6.500% 01/15/24 210,356
-------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 32,955,153
ASSET BACKED OBLIGATIONS 12.1%
Advanta Credit Card Master Trust
675,000 6.050% 08/01/03 Series 1995-F 667,913
Asset Security Corporation
195,543 7.100% 08/13/29 Series 1996-D 197,987
Capital Equipment Trust
600,000 6.280% 06/15/00 Series 1996-1 600,234
Chase Commingled Mortgage Security
508,000 7.370% 02/19/07 Series 1995-2 522,224
The accompanying notes to the financial statements are an integral part of
this schedule.
2
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- -------------
LONG-TERM OBLIGATIONS (CONTINUED)
ASSET BACKED OBLIGATIONS (CONTINUED)
------------------------------------
Chevy Chase Home Loan
$ 500,000 7.150% 05/15/15 Series 1996-1 $ 502,970
Ford Motor Credit Company
19,865 4.300% 07/15/98 Series 1993-B 19,865
180,000 7.700% 05/15/97 Series 1995-A 182,102
500,000 6.500% 08/15/00 Series 1995-A 500,435
250,000 9.500% 09/15/11 Series 1996-A 300,258
Nomura Asset Securities Corporation
200,000 7.120% 04/13/36 Series 1996-M 201,156
Premier Auto Trust
510,715 4.900% 12/15/98 Series 1993-30A 510,705
Resolution Trust Corporation
529,261 6.651% 04/25/22 Series 1992-9 523,614
441,198 7.500% 08/25/23 444,149
500,024 6.904% 06/25/24 502,524
Rural Housing Trust
125,498 3.330% 04/01/26 Series 1987-1 118,646
Standard Credit Card Trust Series 1993-2
65,000 8.250% 11/07/01 68,693
250,000 5.950% 10/07/04 239,818
-------
TOTAL ASSET BACKED OBLIGATIONS 6,103,293
CORPORATE OBLIGATIONS 24.3%
BANKS 2.0%
Midland Bank
375,000 6.950% 03/15/11 360,877
The accompanying notes to the financial statements are an integral part of
this schedule.
3
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS (CONTINUED)
BANKS (CONTINUED)
------------------
National Bank of Detroit
$ 220,000 8.250% 11/01/24 $ 245,406
NCNB Corporation
325,000 10.200% 07/15/15 409,078
-------
1,015,361
CHEMICAL 0.6%
Rohm & Haas
250,000 9.500% 04/01/21 280,407
COMMUNICATION 0.9%
Continental Cablevision Incorporated
200,000 8.875% 09/15/05 220,007
200,000 9.000% 09/01/08 224,318
-------
444,325
DISTRIBUTION 0.7%
Federal Express Corporation
300,000 9.650% 06/15/12 366,742
ELECTRIC 2.2%
800,000 11.750% 02/01/12 1,107,744
FINANCIAL 7.1%
Auburn Hills Trust
280,000 12.000% 05/01/20 419,565
British Aerospace Financial
650,000 7.500% 07/01/27 642,473
GEICO Corporation
125,000 9.150% 09/15/21 138,125
The accompanying notes to the financial statements are an integral part of
this schedule.
4
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS (CONTINUED)
FINANCIAL (CONTINUED)
---------------------
General Motors Acceptance Corporation
$ 800,000 0.000% 06/15/15 effective yield 6.35% $ 208,257
Green Tree Financial Corporation
442,141 6.900% 02/15/04 440,478
353,112 7.850% 07/15/04 357,802
JPM Capital Trust
50,000 7.950% 02/01/27 49,995
Lehman Brothers Incorporated
375,000 11.625% 05/15/05 470,811
Paine Webber Incorporated
150,000 6.730% 01/20/04 146,487
Security Pacific Corporation
200,000 11.000% 03/01/01 226,923
Zurich Capital Trust
500,000 8.376% 06/01/37 518,092
-------
3,619,008
INDUSTRIAL 2.1%
Caterpillar Incorporated
1,000,000 9.750% 06/01/19 1,084,627
PAPER 0.4%
Georgia Pacific Corporation
200,000 9.625% 03/15/22 220,269
RAILROAD 2.1%
Louisville & Nashville Railroad
600,000 3.375% 04/01/03 494,804
Hocking Valley Railway
570,000 4.500% 07/01/99 549,163
-------
1,043,967
The accompanying notes to the financial statements are an integral part of
this schedule.
5
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS (CONTINUED)
---------------------------------
RETAIL STORES 1.2%
Dayton Hudson Corporation
$ 286,000 10.000% 01/01/11 $ 350,876
J.C. Penney Incorporated
250,000 9.750% 06/15/21 275,173
-------
626,049
TELECOMMUNICATION 2.3%
GTE Corporation
900,000 10.750% 09/15/17 954,621
TCI Communications Incorporated
220,000 8.750% 08/01/15 231,324
-------
1,185,945
UTILITIES 1.6%
Korea Electric Power
50,000 7.750% 04/01/13 50,810
Long Island Lighting Financial
400,000 9.625% 07/01/24 412,116
System Energy Resource
382,667 7.430% 01/15/11 374,008
-------
836,934
MISCELLANEOUS 1.1%
News American Holdings
100,000 8.250% 10/17/96 98,901
400,000 8.875% 04/26/23 429,795
-------
528,696
-------
TOTAL CORPORATE OBLIGATIONS 12,360,074
----------
TOTAL LONG-TERM OBLIGATIONS (COST $51,456,295) 51,418,520
----------
The accompanying notes to the financial statements are an integral part of
this schedule.
6
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
SHORT-TERM OBLIGATIONS 2.1%
U.S. GOVERNMENT AND AGENCY OBLIGATIONS 0.4%
--------------------------------------
U.S. Treasury Bills
(A)$ 200,000 5.240% 08/21/97 $ 198,532
-------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 198,532
DEMAND NOTES 1.7%
American Family Demand Note
2,700 5.256% 12/31/31 2,700
General Mills Demand Note
32,823 5.245% 12/31/31 32,823
Johnson Controls Demand Note
671,459 5.276% 12/31/31 671,459
Pitney Bowes Demand Note
30,905 5.255% 12/31/31 30,905
Warner Lambert Demand Note
56,135 5.226% 12/31/31 56,135
Wisconsin Electric Demand Note
92,790 5.296% 12/31/31 92,790
------
TOTAL DEMAND NOTES 886,812
TOTAL SHORT-TERM OBLIGATIONS -------
(AMORTIZED COST $1,085,344) 1,085,344
---------
TOTAL INVESTMENTS
(COST BASIS $52,541,639) 103.4% 52,503,864
CASH AND OTHER ASSETS, LESS
LIABILITIES -3.4% (1,707,579)
-----------
TOTAL NET ASSETS 100.0% $ 50,796,285
----------
----------
The accompanying notes to the financial statements are an integral part of
this schedule.
7
<PAGE>
FULL MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
(A) $100,000 OF U.S. TREASURY BILLS PLEDGED AS MARGIN FOR FUTURES CONTRACTS. THE
PORTFOLIO HAD THE FOLLOWING OPEN FUTURES CONTRACTS AT JUNE 30, 1997:
OPEN FUTURES CONTRACTS:
<TABLE>
<CAPTION>
UNREALIZED
NUMBER OF PRINCIPAL GAINS (LOSSES)
TYPE CONTRACTS AMOUNT POSITION EXPIRATION JUNE 30, 1997
---- --------- ------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
5 Year Treasury Notes 20 20,000 Short September 1997 ($18,275)
10 Year U.S. Treasury Notes 17 17,000 Short September 1997 9,967
--------
($8,308)
--------
--------
</TABLE>
The accompanying notes to the financial statements are an integral part of this
schedule.
8
<PAGE>
LIMITED MATURITY FIXED INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS 98.1%
U.S. GOVERNMENT AND AGENCY OBLIGATIONS 64.6%
- ----------------------------------------
United States Treasury Notes
$ 8,160,000 5.875% 08/15/98 $ 8,160,007
7,215,000 6.000% 09/30/98 7,224,025
12,775,000 5.125% 12/31/98 12,627,294
13,895,000 5.875% 03/31/99 13,864,610
4,740,000 6.375% 05/15/99 4,765,183
1,000,000 6.000% 08/15/99 997,813
13,915,000 6.875% 08/31/99 14,128,079
8,250,000 7.875% 11/15/99 8,556,800
5,285,000 7.750% 01/31/00 5,478,235
4,270,000 6.375% 05/15/00 4,287,349
9,945,000 6.875% 03/31/00 10,109,718
Federal National Mortgage Association
(mortgage-backed securities)
880,000 5.280% 03/01/99 869,553
------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 91,068,666
ASSET BACKED OBLIGATIONS 7.6%
------------------------
Chase Manhattan Grantor
860,000 6.730% 02/15/02 Series 1996-4 869,271
2,126,115 6.610% 09/15/02 Series 1996-B 2,145,144
Ford Credit Auto Loan Master
2,120,000 5.500% 02/15/03 Series 1996-1 2,047,030
Navistar Financial
1,065,117 6.350% 11/15/02 1996-A 1,071,508
2,210,000 6.330% 04/21/03 1996-B 2,214,619
Olympia Auto Receivable Trust
467,073 6.200% 01/15/02 469,058
Western Financial Grantor Trust
650,000 6.400% 07/20/02 648,376
World Omni Auto Lease
1,300,000 6.850% 06/25/03 1997-A 1,316,224
------------
TOTAL ASSET BACKED OBLIGATIONS 10,781,230
The accompanying notes to the financial statements are an integral part of this
schedule.
9
<PAGE>
LIMITED MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS 25.9%
BANKS 2.2%
------------------------
National Australia Bank
$ 3,000,000 9.700% 10/15/98 $ 3,127,470
COMPUTERS & OFFICE EQUIPMENT 1.1%
Xerox Corporation
1,500,000 6.840% 06/01/00 1,508,937
FINANCIAL 22.0%
Associates Corporation
2,050,000 6.680% 09/17/99 2,063,335
700,000 7.450% 03/30/00 715,060
1,400,000 6.375% 06/15/00 1,394,865
Caterpillar Financial Service
670,000 6.110% 07/15/99 666,663
Commercial Credit
2,100,000 6.750% 05/15/00 2,110,323
Ford Credit Grantor Trust
2,000,000 7.900% 05/17/99 Series 1996-1 2,053,338
525,000 7.470% 07/29/99 Series 1996-1 535,420
810,000 7.600% 03/29/00 Series 1996-1 830,509
Fleet Financial Group
2,125,000 6.000% 10/26/98 2,119,405
General Electric Capital Corporation
3,850,000 8.100% 01/26/99 3,964,405
The accompanying notes to the financial statements are an integral part of this
schedule.
10
<PAGE>
LIMITED MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
LONG-TERM OBLIGATIONS (CONTINUED)
CORPORATE OBLIGATIONS (CONTINUED)
FINANCIAL (CONTINUED)
----------------------------------
General Motors Acceptance Corporation
Grantor Trust
$ 1,000,000 5.625% 10/22/98 $ 993,563
430,000 6.450% 04/15/99 431,009
1,150,000 7.375% 06/09/99 1,171,051
1,000,000 7.500% 05/25/00 1,024,113
Household Financial Corporation
2,300,000 6.250% 04/01/99 2,294,480
International Lease Financial Corporation
600,000 5.980% 11/16/98 598,032
1,000,000 6.600% 07/06/99 1,002,817
1,900,000 6.650% 04/01/00 1,910,547
Norwest Financial Corporation
1,260,000 8.500% 08/15/98 1,292,313
2,050,000 7.250% 03/15/00 2,087,761
Travelers/Aetna P&C
1,780,000 6.750% 09/01/99 1,791,676
------------
31,050,685
UTILITIES 0.6%
Pacific Gas & Electric
800,000 5.375% 08/01/98 794,084
------------
TOTAL CORPORATE OBLIGATIONS 36,481,176
------------
TOTAL LONG-TERM OBLIGATIONS
(COST $138,013,439) 138,331,072
------------
The accompanying notes to the financial statements are an integral part of this
schedule.
11
<PAGE>
LIMITED MATURITY FIXED INCOME PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL MARKET VALUE
--------- ------------
SHORT-TERM OBLIGATIONS 0.5%
COMMERCIAL PAPER 0.5%
----------------------
Merrill Lynch & Company
$ 663,000 5.530% 07/01/97 $ 663,000
------------
TOTAL SHORT-TERM OBLIGATIONS
(AMORTIZED COST $663,000) 663,000
------------
TOTAL INVESTMENTS
(COST BASIS $138,676,439) 98.6% 138,994,072
CASH AND OTHER ASSETS, LESS
LIABILITIES 1.4% 2,029,303
------------
TOTAL NET ASSETS 100.0% $ 141,023,375
------------
------------
The accompanying notes to the financial statements are an integral part of this
schedule.
12
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
SHARES OR
PRINCIPAL
EQUITIES 98.1% MARKET VALUE
AEROSPACE & DEFENSE 0.7% ------------
-------------------
600 Allied-Signal Incorporated $ 50,400
1,842 Boeing Incorporated 97,741
700 Lockheed Martin Corporation 72,494
400 McDonnell Douglas Corporation 27,400
1,100 Raytheon Company 56,100
900 Rockwell International Corporation 53,100
400 Textron Incorporated 26,550
1,200 United Technologies Corporation 99,600
------
483,385
AIR TRANSPORTATION 0.2%
1,200 Delta Airlines 98,400
800 US Airways Group, Incorporated 28,000
------
126,400
AUTOMOTIVE 4.3%
200 Aeroquip-Vickers, Incorporated 9,450
14,100 Chrysler Corporation 462,656
22,600 Ford Motor Company 853,150
3,900 General Motors Corporation 217,181
6,300 Genuine Parts Company 213,413
28,000 Lear Corporation 1,242,500
400 TRW Incorporated 22,725
------
3,021,075
BANKS 6.2%
5,300 Bank of New York Corporation 230,550
8,000 BankAmerica Corporation 516,500
1,800 Barnett Banks Incorporated 94,500
3,900 Chase Manhattan 378,544
6,400 Citicorp 771,600
1,000 Comerica Incorporated 68,000
47,500 Corporation Bancaria Espana ADR 1,347,813
2,900 First Union Corporation 268,250
1,200 Keycorp 67,050
1,600 Mellon Bank Corporation 72,200
900 Morgan (J.P.) & Company 93,938
6,300 NationsBank Corporation 406,350
900 Norwest Corporation 50,625
------
4,365,920
The accompanying notes to the financial statements are an integral part of
this schedule.
13
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
BASIC INDUSTRIES 1.7% ------------
----------------
3,200 Aluminum Company of America $ 241,200
300 Asarco Incorporated 9,188
3,600 Crane Company 150,525
200 Harnischfeger 8,300
7,700 3M Company 785,400
-------
1,194,613
BUSINESS SERVICE 1.8%
300 Cisco Systems Incorporated 20,138
950 Computer Associates
International Incorporated 52,903
100 John H. Harland Company 2,281
400 Moore Corporation 7,875
900 National Service Ind. Incorporated 43,819
38,200 Wallace Computer Services Incorporated 1,148,388
---------
1,275,404
CHEMICALS 2.2%
2,200 Dow Chemical Company 191,675
1,600 Eastman Chemical Company 101,600
14,600 E.I. duPont de Nemours and Company 917,975
1,100 Monsanto Company 47,369
1,100 PPG Industries 63,938
1,200 Rohm & Haas Company 108,075
5,800 Safety Kleen 97,875
------
1,528,507
COMMUNICATION 1.8%
700 Comcast Corporation 14,963
400 Dow Jones & Company 16,075
600 Gannett Company Incorporated 59,250
1,000 Harcourt General Incorporated 47,625
800 Interpublic Group Companies 49,050
20,000 New York Times 990,000
700 Time Warner Incorporated 33,775
600 Tribune Company 28,838
------
1,239,576
The accompanying notes to the financial statements are an integral part of
this schedule.
14
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
COMPUTERS & OFFICE EQUIPMENT 7.4% ------------
----------------------------
59,199 Astra ADR $ 1,124,781
400 Compaq Computers Corporation 39,700
400 Dell Computer Corporation 46,975
1,700 EMC Corporation Massachusetts 66,300
700 Honeywell Incorporated 53,113
24,400 International Business
Machines Corporation 2,200,575
5,000 Pitney Bowes Incorporated 347,500
400 Seagate Technology Incorporated 14,075
16,800 Xerox Corporation 1,325,100
---------
5,218,119
CONGLOMERATE 0.1%
400 Tenneco Incorporated 18,075
800 TYCO International LTD 55,650
------
73,725
CONSTRUCTION 1.0%
1,600 Johnson Controls 65,700
15,000 Masco Corporation 626,250
-------
691,950
CONSUMER DURABLES 0.2%
1,500 Brunswick Corporation 46,875
800 Eastman Kodak 61,400
600 Hasbro Incorporated 17,025
1,300 Mattel Company 44,038
------
169,338
CONSUMER NON-DURABLES 5.5%
24,500 American Greetings Company 909,563
3,700 American Stores Company 182,688
2,000 Avon Products Incorporated 141,125
14,300 Bandag Incorporated 700,700
500 Beverly Enterprises 8,125
The accompanying notes to the financial statements are an integral part of this
schedule.
15
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
CONSUMER NON-DURABLES- (CONTINUED) ------------
----------------------------------
100 B.F. Goodrich Company $ 4,331
600 Clorox 79,200
200 Colgate Palmolive Company 13,050
700 Corning Corporation 38,938
600 International Flavors &
Fragrances Incorporated 30,300
55,000 Nellcor Puritan Bennett, Incorporated 996,875
200 Procter & Gamble Company 28,250
5,900 Warner-Lambert Company 733,075
-------
3,866,220
CONTAINER 3.0%
1,000 Bemis Company 43,250
21,500 Crown Cork & Seal 1,148,906
30,000 Owens Illinois Incorporated* 930,000
100 Stone Container Corporation 1,431
-----
2,123,587
ELECTRONICS 5.2%
25,000 AMP Incorporated 1,043,750
4,400 General Electric Company 287,650
200 Grainger WW Incorporated 15,638
7,600 Intel Corporation 1,077,775
100 Tektronix Incorporated 6,000
42,000 Vishay Intertechnology Incorporated 1,215,375
---------
3,646,188
ENERGY & RELATED
(RAW MATERIALS) 0.2%
1,100 Halliburton Company 87,175
2,800 Occidental Petroleum Corporation 70,175
------
157,350
ENTERTAINMENT & LEISURE 0.2%
3,700 Service Corporation International 121,638
The accompanying notes to the financial statements are an integral part of
this schedule.
16
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
FINANCIAL COMPANY 1.5% ------------
-----------------
1,100 Ahmanson H.F. & Company $ 47,300
400 Household International Incorporated 46,975
4,200 Merrill Lynch Company 250,425
1,700 Salomon Incorporated 94,563
9,400 Travelers Group Incorporated 592,788
-------
1,032,051
FINANCIAL SERVICE 3.6%
20,200 Fannie Mae 881,225
800 MBNA Corporation 29,300
4,570 Morgan Stanley Group Incorporated 196,796
15,500 Student Loan Corporation 657,781
6,200 Student Loan Marketing Association 787,400
-------
2,552,502
FOOD, BEVERAGES & TOBACCO 5.9%
23,600 Anheuser-Busch Companies, Incorporated 989,725
8,300 Brown Foreman Class B 405,144
3,200 Campbell Soup 160,000
7,300 Coca-Cola Company 492,750
3,000 Conagra Incorporated 192,375
300 General Mills 19,538
1,300 H J Heinz Company 59,963
1,900 Kellogg Company 162,688
4,000 Loews Corporation 400,500
41,500 McCormick and Company 1,047,875
800 Pepsico Incorporated 30,050
400 Quaker Oats 17,950
1,700 Seagrams LTD 68,425
1,500 Wrigley Wm. Jr. Company 100,500
-------
4,147,483
GOLD & PRECIOUS METALS 0.1%
900 Barrick Gold Corporation 19,800
1,300 Freeport McMoran Copper 40,463
200 Homestake Mining Company 2,613
600 Placer Dome Incorporated 9,825
-----
72,701
The accompanying notes to the financial statements are an integral part of
this schedule.
17
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
HEALTH CARE 9.7% ------------
-----------
30,900 Abbott Labs Company $ 2,062,575
1,800 American Home Products Corporation 137,700
25,900 Baxter International Incorporated 1,353,275
600 Becton Dickinson & Company 30,375
5,000 Bristol Meyers/ Squibb 405,000
1,200 Boston Scientific Corporation 73,725
1,800 Johnson & Johnson 115,875
2,100 Lilly Eli & Company 229,556
900 Medtronic Incorporated 72,900
2,800 Merck & Company 289,800
1,200 Pfizer Incorporated 143,400
25,500 Pharmacia & Upjohn Incorporated 886,125
9,800 Schering Plough Corporation 469,175
15,000 St. Jude Medical * 585,000
600 U.S. Surgical Corporation 22,350
------
6,876,831
INSURANCE 2.9%
217 Aegon NV ADR's 15,218
8,201 Allstate Corporation 598,673
5,000 American International
Group Incorporated 746,875
300 General Re Corporation 54,600
6,000 Progressive Corporation Ohio 522,000
500 Providian Financial Corporation 16,063
1,200 Transamerica Corporation 112,275
600 USF&G 14,400
------
2,080,104
METAL & MINERAL 1.4%
1,890 Allegheny Teledyne Incorporated 51,030
400 Armco Incorporated 1,550
25,000 Minerals Technologies, Incorporated 937,500
500 USX- US Steel 17,531
------
1,007,611
The accompanying notes to the financial statements are an integral part of
this schedule.
18
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
PAPER & FOREST PRODUCTS 1.9% ------------
-----------------------
59,000 Asia Pulp & Paper Company * $ 892,375
1,400 Avery Dennison Corporation 56,175
476 International Paper 23,116
4,400 Kimberly Clark 218,900
2,900 Weyerhaeuser Company 150,800
-------
1,341,366
PETROLEUM 9.5%
700 Amoco Corporation 60,856
600 Ashland Incorporated 27,825
2,800 Atlantic Richfield 197,400
3,500 Enron 142,844
11,200 Exxon Corporation 688,800
400 Kerr-McGee Company 25,350
5,800 Mobil Corporation 405,275
6,300 Phillips Petroleum Company 275,625
42,000 Reading and Bates Corporation* 1,123,500
8,400 Royal Dutch Petroleum Co. N.Y.-ADR 456,750
400 Schlumberger 50,000
1,800 Texaco 195,750
15,000 Transocean Offshore, Incorporated 1,089,375
300 Unocal Corporation 11,644
200 USX Marathon Group 5,775
51,000 Western Gas Resource, Incorporated 994,500
30,000 YPF S.A. ADR 922,500
-------
6,673,769
POLLUTION CONTROL 0.1%
1,900 Waste Management Incorporated 61,038
RAILROADS 0.6%
1,200 Burlington Northern Incorporated 107,850
2,400 CSX Corporation 133,200
1,800 Norfolk Southern Company 181,350
-------
422,400
RESTAURANTS 1.5%
30,000 Darden Restaurants, Incorporated 271,875
88,000 Ryan's Family Steak Houses Incorporated* 753,500
-------
1,025,375
The accompanying notes to the financial statements are an integral part of
this schedule.
19
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
RETAIL STORES 4.7% ------------
-------------
400 Albertson's Incorporated $ 14,600
4,800 Dayton Hudson Corporation 255,300
1,800 Longs Drug Stores 47,137
2,500 May Department Stores 118,125
70,000 Office Depot 1,360,625
1,200 Rite Aid Corporation 59,850
2,800 Sears Roebuck & Company 150,500
1,300 Supervalu Incorporated 44,850
400 Tandy Corporation 22,400
47,000 The Limited LTD. 951,750
500 Wal-Mart Stores Incorporated 16,906
3,900 Walgreen Company 209,138
1,200 Winn-Dixie Stores Incorporated 44,700
------
3,295,881
SERVICES 1.4%
4,900 Caterpillar Incorporated 526,138
1,800 Cooper Industries 89,550
900 Ingersoll Rand Company 55,575
5,600 John Deere & Company 307,300
-------
978,563
SOFTWARE 0.3%
800 Microsoft Corporation 101,100
3,100 Sun Microsystems* 115,378
-------
216,478
TECHNOLOGY 1.3%
600 Harris Corporation 50,400
10,600 Hewlett-Packard Company 593,600
900 Micron Technology Incorporated 35,944
2,100 Northern Telecom 191,100
400 Texas Instruments 33,625
600 Thomas & Betts Company 31,538
------
936,207
TELECOMMUNICATION 3.4%
41,000 Airtouch Communications 1,122,375
17,108 Ascent Entertainment Group 156,111
200 Cabletron Systems 5,663
The accompanying notes to the financial statements are an integral part of
this schedule.
20
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
TELECOMMUNICATION (CONTINUED) ------------
-----------------------------
35,000 COMSAT Corporation 833,438
1,437 Lucent Technologies 103,554
2,300 Motorola Incorporated 174,800
400 Tellabs Incorporated 22,350
------
2,418,291
TEXTILE & APPAREL 0.1%
1,500 CVS Corporation 76,875
100 VF Corporation 8,475
-----
85,350
TRUCKING 0.1%
3,200 Ryder System 105,600
UTILITIES-ELECTRIC 0.9%
1,400 Baltimore Gas & Electric Company 37,363
2,100 Carolina Power & Light Company 75,338
1,700 Consolidated Edison 50,044
3,000 DTE Energy Company 82,875
400 Edison International 9,950
1,800 Houston Industries 38,588
1,000 Ohio Edison 21,813
1,600 PECO Energy Company 33,600
2,800 Pacific Gas & Electric 67,900
6,600 Pacificorp 145,200
1,000 People's Energy Corporation 37,438
1,700 Public Service Enterprises 42,500
-------
642,609
UTILITIES-TELEPHONE 4.7%
1,000 Alltell Corporation 33,438
4,300 AT&T Corporation 150,769
17,900 Ameritech Corporation 1,216,081
4,300 Bell Atlantic Corporation 326,263
6,400 Bell South Corporation 296,800
9,700 GTE Corporation 425,588
8,560 SBC Communication Incorporated 529,650
2,000 Sprint Corporation 105,250
6,600 US West Incorporated 248,738
-------
3,332,577
The accompanying notes to the financial statements are an integral part of
this schedule.
21
<PAGE>
DIVERSIFIED EQUITY PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
MISCELLANEOUS 0.8% ------------
-------------
300 3 Com Corporation $ 13,500
5,700 PP&L Resources Incorporated 113,644
2,400 Unilever 523,179
-------
650,323
TOTAL COMMON STOCK (COST $53,049,467) 69,258,105
SHORT-TERM OBLIGATIONS 1.9%
DEMAND NOTES 1.9%
American Family Demand Note
$ 619,699 5.256% 12/31/31 619,699
Johnson Controls Demand Note
508,228 5.276% 12/31/31 508,228
Wisconsin Electric Demand Note
229,068 5.296% 12/31/31 229,068
-------
TOTAL SHORT-TERM OBLIGATIONS
(AMORTIZED COST $1,356,995) 1,356,995
---------
TOTAL INVESTMENTS
(COST BASIS $54,406,462) 100.0% 70,615,100
CASH AND OTHER ASSETS, LESS
LIABILITIES (0.0%) (24,702)
------
TOTAL NET ASSETS 100.0%$ 70,590,398
----------
----------
* NON-INCOME PRODUCING STOCKS.
The accompanying notes to the financial statements are an integral part of this
schedule.
22
<PAGE>
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
SHARES OR
PRINCIPAL
EQUITIES 68.0% MARKET VALUE
AEROSPACE & DEFENSE 0.7% ------------
-------------------
2,000 Boeing $ 106,125
1,800 Textron Incorporated 119,475
1,600 United Technologies Corporation 132,800
-------
358,400
AUTOMOTIVE 2.8%
12,000 Ford Motor Company 453,000
22,700 Lear Seating Corporation * 1,007,313
---------
1,460,313
BANKS 3.6%
4,400 Bank of New York 191,400
3,000 Citicorp361,688
33,000 Corp Bancaria Espana ADR 936,375
1,400 First Union Corporation 129,500
2,200 Mellon Bank Corporation 99,275
2,600 Nations Bank Corporation 167,700
-------
1,885,938
BUSINESS SERVICES 1.8%
2,100 Ceridian Corporation 88,725
1,900 Cisco Systems Incorporated* 127,538
24,000 Wallace Computer Services Incorporated
721,500
937,763
CAPITAL GOODS 0.7%
1,200 Caterpillar Incorporated 128,850
1,400 Parker Hannifin 84,963
6,600 Philip Services Corporation 104,775
900 Reynolds Metals 64,125
------
382,713
CHEMICALS 0.3%
2,100 E.I. duPont de Nemours and Company 132,038
COMMUNICATION 1.4%
13,000 New York Times 643,500
1,900 Time Warner Incorporated 91,675
------
735,175
The accompanying notes to the financial statements are an integral part of
this schedule.
23
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
COMPUTERS & OFFICE EQUIPMENT 4.2% ------------
----------------------------
39,999 Astra ADR $ 759,981
600 Dell Computer Corporation 70,463
7,000 International Business
Machines Corporation 631,313
9,000 Xerox Corporation 709,875
-------
2,171,632
CONSTRUCTION 1.5%
1,800 Cooper Cameron Corporation 84,150
17,000 Masco Corporation 709,750
-------
793,900
CONSUMER DURABLES 0.8%
2,800 Colgate Palmolive Company 182,700
2,500 Gillette Company 236,875
-------
419,575
CONSUMER NON-DURABLES 4.4%
19,000 American Greetings Company 705,375
1,400 Armstrong World 102,725
13,000 Bandag Incorporated 637,000
1,900 Corning Corporation 105,688
40,000 Nellcor Puritan Bennett, Incorporated 725,000
-------
2,275,788
CONTAINER 2.5%
12,700 Crown Cork & Seal 678,656
20,000 Owens Illinois Incorporated * 620,000
-------
1,298,656
ELECTRONICS 3.6%
17,500 AMP Incorporated 730,625
3,100 General Electric Company 202,663
28,875 Vishay Intertechnology Incorporated 835,570
600 Intel Corporation 85,088
------
1,853,946
The accompanying notes to the financial statements are an integral part of
this schedule.
24
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
ENERGY & RELATED ------------
ENERGY & RELATED (DOMESTIC) 1.8%
---------------------------
2,000 Amoco Corporation $ 173,875
38,000 Western Gas Resources, Incorporated 741,000
-------
914,875
ENERGY & RELATED
(INTERNATIONAL) 1.7%
1,800 Texaco 195,750
23,000 YPF S.A. ADR 707,250
-------
903,000
ENERGY & RELATED (SERVICES) 1.9%
1,200 Diamond Offshore Drilling* 93,750
900 Schlumberger 112,500
11,000 Transocean Offshore, Incorporated 798,875
-------
1,005,125
ENERGY & RELATED
(RAW MATERIALS) 0.3%
3,500 Baker Hughes Incorporated 135,406
FINANCIAL SERVICES 3.5%
2,500 Conseco Incorporated 92,500
17,200 Fannie Mae 750,350
1,200 Franklin Resources Incorporated 87,075
12,000 Student Loan Corporation 509,250
2,000 Student Loan Marketing Association 254,000
2,433 Travelers Group Incorporated 153,431
-------
1,846,606
FOOD, BEVERAGES & TOBACCO 2.7%
15,000 Anheuser-Busch Companies,
Incorporated 629,063
25,500 McCormick and Company 643,875
3,800 Sysco Corporation 138,700
-------
1,411,638
The accompanying notes to the financial statements are an integral part of
this schedule.
25
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
GOLD & PRECIOUS METALS 0.1% ------------
----------------------
1,600 Freeport McMoran Copper $ 49,800
HEALTH CARE 6.2%
10,000 Abbott Labs 667,500
2,700 Alza Corporation 78,300
15,000 Baxter International Incorporated 783,750
2,800 Bristol Meyer/ Squibb 226,800
3,300 Columbia/HCA Healthcare Corporation 129,731
5,800 Healthsouth Corporation* 144,638
15,000 Pharmacia & Upjohn Incorporated 521,250
10,500 St. Jude Medical* 409,500
2,100 Warner Lambert Company 260,925
-------
3,222,394
INSURANCE 3.2%
1,500 AETNA Life & Casualty Company 153,563
1,510 Allstate Corporation 110,230
5,900 American International Group Incorporated 881,313
6,000 Progressive Corporation Ohio 522,000
-------
1,667,106
LODGING 0.2%
2,200 HFS Incorporated 127,600
METAL & MINERAL 1.8%
2,100 Applied Materials Incorporated 148,706
2,800 Federal Mogul Corporated 98,000
15,300 Minerals Technologies, Incorporated 573,750
3,000 USX US Steel 105,188
-------
925,644
PAPER & FOREST PRODUCTS 1.6%
50,000 Asia Pulp & Paper Company * 756,250
2,800 James River of Virgina 103,600
-------
859,850
The accompanying notes to the financial statements are an integral part of
this schedule.
26
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
PETROLEUM 1.4% ------------
---------
4,300 USX Marathon $ 124,163
23,000 Reading and Bates Corporation* 615,250
-------
739,413
REAL ESTATE 0.1%
2,400 Public Storage Incorporated 70,200
RESTAURANTS 1.4%
20,000 Darden Restaurants, Incorporated 181,250
65,000 Ryan's Family Steak Houses Incorporated * 556,563
-------
737,813
RETAIL STORES 4.4%
2,400 Dayton Hudson Corporation 127,650
2,000 Home Depot 137,875
47,500 Office Depot 923,281
3,100 Safeway Incorporated * 142,988
3,800 TJX Companys Incorporated 100,225
34,000 The Limited LTD 688,500
4,900 Wal-Mart Stores Incorporated 165,681
-------
2,286,200
SERVICES 0.4%
2,050 Stewart Enterprises Incorporated 86,100
3,500 U.S.A. Waste Services Incorporated* 135,188
-------
221,288
SOFTWARE 0.6%
1,600 Microsoft Corporation 202,000
2,600 Sun Microsystems* 96,769
------
298,769
TELECOMMUNICATION 3.8%
33,300 Airtouch Communications 911,588
12,220 Ascent Entertainment Group 111,508
25,000 COMSAT Corporation 595,313
5,200 Deutsche Telecom 125,450
1,500 Lucent Technologies 108,094
1,400 Motorola Incorporated 106,400
-------
1,958,353
The accompanying notes to the financial statements are an integral part of
this schedule.
27
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
EQUITIES (CONTINUED) MARKET VALUE
TEXTILE & APPAREL 0.1% ------------
-----------------
1 CVS Corporation $ 50
1,000 Liz Claiborne Incorporated 46,625
------
46,675
TRANSPORTATION 0.3%
1,400 Burlington Northern Incorporated 125,825
1,100 Caliber Systems, Incorporated 40,975
------
166,800
UTILITIES -ELECTRIC 0.2%
1,900 Public Service Company of Colorado 78,850
UTILITIES -ENERGY 0.2%
2,200 Sonat Incorporated 112,750
UTILITIES -TELEPHONE 1.8%
10,000 Ameritech Corporation 679,375
2,800 Bell South Corporation 129,850
2,200 GTE Corporation 96,525
2,000 Teleport Communications* 68,250
------
974,000
TOTAL COMMON STOCK (COST $26,842,821) 35,465,992
The accompanying notes to the financial statements are an integral part of
this schedule.
28
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
TOTAL LONG-TERM OBLIGATIONS 25.6% MARKET VALUE
U.S. GOVERNMENT AND ------------
AGENCY OBLIGATIONS 18.9%
------------------
United States Treasury Bonds
$ 1,290,000 6.500% 11/15/26 $ 1,236,789
2,515,000 6.625% 02/15/27 2,460,771
United States Treasury Notes
2,390,000 6.375% 04/30/99 2,399,710
320,000 6.500% 05/31/02 319,600
Federal Home Loan Mortgage Corporation
185,077 6.500% 03/01/26 177,726
Federal National Mortgage Association
1,004,728 7.000% 03/01/27 986,623
503,391 7.000% 03/01/27 494,058
399,800 7.000% 06/01/27 401,299
580,000 7.000% 07/01/27 581,995
390,995 7.000% 08/01/27 408,191
Government National Mortgage Association
147,506 10.000% 12/15/20 161,285
172,398 7.125% 08/20/23 177,901
-------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 9,805,948
ASSET BACKED OBLIGATIONS 2.6%
Chase Commingled Mortgage Security
287,000 7.370% 02/19/07 295,036
Chevy Chase Home Loan
200,000 7.150% 05/15/15 Series 1996-1 201,188
Ford Motor Company
180,000 7.700% 05/15/97 182,102
Merrill Lynch Mortgage Investors
100,000 6.960% 11/21/28 Series 1996-C2 99,391
The accompanying notes to the financial statements are an integral part of
this schedule.
29
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
TOTAL LONG-TERM OBLIGATIONS (CONTINUED) MARKET VALUE
ASSET BACKED OBLIGATIONS (CONTINUED) ------------
------------------------------------
Nomura Asset Securities Corporation
$ 70,000 7.120% 04/13/36 Series 1996-M $ 70,405
Resolution Trust Corporation
262,369 6.651% 04/25/22 Series 1992-9 259,569
250,012 6.903% 06/25/24 251,262
-------
TOTAL ASSET BACKED OBLIGATIONS 1,358,953
CORPORATE OBLIGATIONS 4.1%
COMMUNICATION 0.2%
Continental Cabelvision Incorporated
100,000 9.000% 09/01/08 112,159
FINANCIAL 2.5%
British Aerospace Financial
350,000 7.500% 07/01/27 345,947
General Electric Capital Corporation
260,000 8.200% 10/30/03 282,048
General Motors Acceptance Corporation
250,000 0.000% 06/15/15 effective yield 6.54% 65,080
Green Tree Financial Corporation
171,944 6.900% 02/15/04 171,297
130,411 7.850% 07/15/04 132,143
JPM Capital Trust
20,000 7.950% 02/01/27 19,998
Zurich Capital Trust
300,000 8.376% 06/01/37 310,855
-------
1,327,368
The accompanying notes to the financial statements are an integral part of
this schedule.
30
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
TOTAL LONG-TERM OBLIGATIONS (CONTINUED) MARKET VALUE
CORPORATE OBLIGATIONS (CONTINUED) ------------
TELECOMMUNICATION 0.2%
-----------------
TCI Communications Incorporated
$ 20,000 8.750% 08/01/15 $ 21,030
100,000 9.250% 01/15/23 102,681
-------
123,711
UTILITIES 0.7%
Long Island Lighting
240,000 9.625% 07/01/24 247,270
System Energy
138,717 7.430% 01/15/11 135,578
-------
382,848
MISCELLANEOUS 0.5%
News American Holdings
200,000 8.875% 04/26/23 215,087
-------
TOTAL CORPORATE OBLIGATIONS 2,161,173
TOTAL LONG-TERM OBLIGATIONS
(COST $13,177,010) 13,326,074
----------
SHORT-TERM OBLIGATIONS 7.6%
U.S. GOVERNMENT AND AGENCY OBLIGATIONS 3.5%
United States Treasury Bills
(A) 1,680,000 5.550% 07/24/97 1,674,618
100,000 5.240% 08/21/97 99,269
50,000 0.000% 10/16/97 49,241
---------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 1,823,128
The accompanying notes to the financial statements are an integral part of
this schedule.
31
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
SHARES OR
PRINCIPAL
SHORT-TERM OBLIGATIONS (CONTINUED) MARKET VALUE
DEMAND NOTES 4.1% ------------
-----------------------------------
American Family Demand Note
$ 591,484 5.256% 12/31/31 $ 591,484
General Mills Demand Note
332,884 5.245% 12/31/31 332,884
Johnson Controls Demand Note
695,728 5.276% 12/31/31 695,728
Pitney Bowes Demand Note
126,033 5.255% 12/31/31 126,033
Warner Lambert Demand Note
260,000 5.226% 12/31/31 260,000
Wisconsin Electric Demand Note
123,196 5.296% 12/31/31 123,196
-------
TOTAL DEMAND NOTES 2,129,325
TOTAL SHORT-TERM OBLIGATIONS
(AMORTIZED COST $3,952,453) 3,952,453
---------
TOTAL INVESTMENTS
(COST BASIS $43,972,284) 101.2% 52,744,519
CASH AND OTHER ASSETS, LESS
LIABILITIES (1.2%) (607,281)
---------
TOTAL NET ASSETS 100.0% $ 52,137,238
----------
----------
* Non-income producing stocks.
The accompanying notes to the financial statements are an integral part of
this schedule.
32
<PAGE>
BALANCED PORTFOLIO (CONTINUED)
PORTFOLIO OF INVESTMENTS
(A) $100,000 OF U.S. TREASURY BILLS PLEDGED AS MARGIN FOR FUTURES CONTRACTS.
THE PORTFOLIO HAD THE FOLLOWING OPEN FUTURES CONTRACTS AT JUNE 30, 1997:
OPEN FUTURES CONTRACTS:
<TABLE>
<CAPTION>
UNREALIZED
NUMBER OF PRINCIPAL GAINS (LOSSES)
TYPE CONTRACTS AMOUNT POSITION EXPIRATION JUNE 30, 1997
- ---- --------- ------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
5 Year Treasury Note 17 17,000 Long September 1997 ($8,284)
10 Year U.S. Treasury Notes 1 1,000 Short September 1997 586
Bond Futures 23 23,000 Long September 1997 5,859
-----
($1,839)
------
------
</TABLE>
The accompanying notes to the financial statements are an integral part of this
schedule.
33
<PAGE>
AHA INVESTMENT FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
AS OF JUNE 30, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FULL LIMITED
MATURITY MATURITY DIVERSIFIED
FIXED INCOME FIXED INCOME EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at market value $ 52,503,864 $ 138,994,072 $ 70,615,100 $ 52,744,519
Receivable for investments sold 538,855 0 582,871 887,294
Cash 27,895 28,607 1,953 3,237
Dividends and interest receivable 717,504 2,063,036 77,883 184,030
Futures variation margin 17,094 0 0 9,031
------------- ------------- ------------- -------------
Total Assets $ 53,805,212 $ 141,085,715 $ 71,277,807 $ 53,828,111
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES:
Payable for investments purchased $ 2,986,219 $ 0 $ 674,775 $ 1,668,066
Payable for shares redeemed 9,427 0 0 0
Payable for dividends 0 31,290 0 0
Accrued expenses and other liabilities 13,281 31,050 12,634 22,807
------------- ------------- ------------- -------------
Total Liabilities 3,008,927 62,340 687,409 1,690,873
------------- ------------- ------------- -------------
NET ASSETS $ 50,796,285 $ 141,023,375 $ 70,590,398 $ 52,137,238
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net Assets consist of:
Capital Stock ($0.01 par value
and 200 million shares
authorized) and Paid-in Capital $ 52,676,412 $ 144,436,440 $ 46,360,908 $ 38,546,124
Undistributed
net investment income 0 0 45,723 770,140
Accumulated net realized gain
(loss) on investments sold (1,834,044) (3,730,698) 7,975,129 4,050,578
Net unrealized appreciation
of investments and futures (46,083) 317,633 16,208,638 8,770,396
------------- ------------- ------------- -------------
Total Net Assets $ 50,796,285 $ 141,023,375 $ 70,590,398 $ 52,137,238
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Number of Shares Outstanding
at the end of year 5,190,424 13,873,900 3,407,458 3,507,529
------------- ------------- ------------- -------------
NET ASSET VALUE
Per Share $ 9.79 $ 10.16 $ 20.72 $ 14.86
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
- --------------------------------------------------------------------------------
34
<PAGE>
AHA INVESTMENT FUNDS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FULL LIMITED
MATURITY MATURITY DIVERSIFIED
FIXED INCOME FIXED INCOME EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest income $ 3,758,283 $ 9,422,387 $ 57,276 $ 907,520
Dividends 0 0 1,131,063 515,437
------------- ------------- ------------- -------------
Total investment income $ 3,758,283 $ 9,422,387 $ 1,188,339 $ 1,422,957
EXPENSES:
Custodian fees $ 25,142 $ 35,963 $ 18,002 $ 30,389
Accounting fees 40,597 58,455 32,255 31,993
Transfer agent fees 7,496 20,508 8,115 6,375
Legal fees 8,395 8,395 8,395 8,395
Audit and tax return fees 12,175 12,175 12,175 12,175
Director fees and expenses 5,687 5,687 5,687 5,687
Officers and directors insurance 7,520 28,379 7,975 6,287
Administrative and other fees 6,922 8,353 6,201 5,667
------------- ------------- ------------- -------------
Total Expenses $ 113,934 $ 177,915 $ 98,805 $ 106,968
NET INVESTMENT INCOME $ 3,644,349 $ 9,244,472 $ 1,089,534 $ 1,315,989
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Net realized gain (loss)
on investments sold 232,557 (497,904) 9,896,588 6,303,436
Net realized gain (loss) on
closed futures and options contracts 207,191 0 0 (100,742)
Net change in unrealized appreciation
of investments, futures and options 246,747 1,347,681 6,641,228 2,988,361
------------- ------------- ------------- -------------
NET GAIN ON INVESTMENTS 686,495 849,777 16,537,816 9,191,055
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS
$ 4,330,844 $ 10,094,249 $ 17,627,350 $ 10,507,044
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
- -------------------------------------------------------------------------------
35
<PAGE>
AHA INVESTMENT FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FULL MATURITY LIMITED MATURITY
FIXED INCOME PORTFOLIO FIXED INCOME PORTFOLIO
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income $ 3,286,328 $ 3,644,349 $ 11,653,180 $ 9,244,472
Net realized gain (loss) on investments
sold and closed futures and
options contracts 328,668 439,748 657,870 (497,904)
Net change in unrealized appreciation
(depreciation) of investments,
futures and options (1,600,342) 246,747 (2,783,917) 1,347,681
------------- ------------- ------------- -------------
Net increase in net assets resulting
from operations 2,014,654 4,330,844 9,527,133 10,094,249
------------- ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (3,286,328) (3,644,349) (11,653,180) (9,244,472)
Capital gains distribution -- -- -- --
------------- ------------- ------------- -------------
Net decrease in net assets
resulting from distributions $ (3,286,328) $ (3,644,349) $ (11,653,180) $ (9,244,472)
SHARE TRANSACTIONS:
Subscriptions of fund shares 17,301,502 7,167,137 54,975,361 41,527,272
Investment income dividends
reinvested 2,653,135 3,194,795 9,241,385 7,817,387
Capital gains distribution
reinvested -- -- -- --
------------- ------------- ------------- -------------
Gross increase in fund shares 19,954,637 10,361,932 64,216,746 49,344,659
Redemptions of fund shares (5,265,318) (13,544,206) (47,750,515) (110,367,401)
------------- ------------- ------------- -------------
Net increase (decrease) from
share transactions 14,689,319 (3,182,274) 16,466,231 (61,022,742)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets $ 13,417,645 $ (2,495,779) $ 14,340,184 $ (60,172,965)
TOTAL NET ASSETS:
Beginning of period 39,874,419 53,292,064 186,856,156 201,196,340
------------- ------------- ------------- -------------
End of period $ 53,292,064 $ 50,796,285 $ 201,196,340 $ 141,023,375
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Undistributed net investment income $ 0 $ 0 $ 0 $ 0
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
- -------------------------------------------------------------------------------
36
<PAGE>
AHA INVESTMENT FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
DIVERSIFIED EQUITY PORTFOLIO BALANCED PORTFOLIO
------------ --------------- ------------ ----------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income $ 1,043,023 $ 1,089,534 $ 1,329,333 $ 1,315,989
Net realized gain on investments
sold and closed futures and
options contracts 5,931,111 9,896,588 4,867,720 6,202,694
Net change in unrealized appreciation
of investments, futures and options 4,737,172 6,641,228 1,636,437 2,988,361
------------- ------------- ------------- -------------
Net increase in net assets resulting
from operations 11,711,306 17,627,350 7,833,490 10,507,044
------------- ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (1,045,999) (1,087,240) (1,344,443) (1,333,326)
Capital gains distribution (2,212,939) (6,206,933) (3,650,612) (3,710,927)
------------- ------------- ------------- -------------
Net decrease in net assets
resulting from distributions $ (3,258,938) $ (7,294,173) $ (4,995,055) $ (5,044,253)
SHARE TRANSACTIONS:
Subscriptions of fund shares 8,994,364 11,595,747 1,576,359 10,056,065
Investment income dividends
reinvested 1,046,655 1,087,240 1,287,967 1,139,292
Capital gains distribution
reinvested 2,212,939 6,206,933 3,409,871 3,180,507
------------- ------------- ------------- -------------
Gross increase in fund shares 12,253,958 18,889,920 6,274,197 14,375,864
Redemptions of fund shares (5,905,325) (13,067,587) (12,628,112) (10,831,841)
------------- ------------- ------------- -------------
Net increase (decrease) from
share transactions 6,348,633 5,822,333 (6,353,915) 3,544,023
------------- ------------- ------------- -------------
Net increase (decrease) in net assets $ 14,801,001 $ 16,155,510 $ (3,515,480) $ 9,006,814
TOTAL NET ASSETS:
Beginning of period 39,633,887 54,434,888 46,645,904 43,130,424
------------- ------------- ------------- -------------
End of period $ 54,434,888 $ 70,590,398 $ 43,130,424 $ 52,137,238
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Undistributed net investment income $ 43,429 $ 45,273 $ 787,475 $ 770,140
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
- -------------------------------------------------------------------------------
37
<PAGE>
AHA INVESTMENT FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1.
SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting policies of Full Maturity Fixed
Income, Limited Maturity Fixed Income, Diversified Equity and Balanced
Portfolios (the "Portfolios"), each a series of AHA Investment Funds, Inc., a
Maryland corporation, ("Fund").
SECURITY VALUATIONS
All securities are recorded at fair market value as of June 30, 1997. Securities
traded on national securities exchanges are valued at last reported sales prices
or, if there are no sales, at the latest bid quotation. Each over-the-counter
security for which the last sale price is available from NASDAQ is valued at
that price. All other over-the-counter securities for which reliable quotations
are available are valued at the latest bid quotation. Securities convertible
into equity securities are valued at the greater of latest bid valuation or net
conversion value. Other assets and securities are valued by a method that the
Board of Directors believes represents a fair value.
ACCOUNTING FOR FUTURES
The Fund may enter into long or short positions in futures contracts in order to
hedge against the effect of changing values on portfolio securities held. When
the Fund enters into a futures contract, it is required to deposit, into a
segregated account at its custodian bank, U.S. Government securities as a
guarantee that it will meet the futures commitment. Each day the Fund receives
or pays cash, called "variation margin," equal to the daily change in the market
value of the futures contracts. Such receipts and payments are recorded as
unrealized gains or losses until the futures contracts expire or are closed out.
Risks of entering into futures contracts include the possibility that there may
be an illiquid market at the time the Portfolios seek to close out a contract
and changes in the value of the futures contract may not correlate with changes
in the value of the portfolio securities being hedged. The Full Maturity Fixed
Income and Balanced Portfolios had open futures contracts as of June 30, 1997.
ACCOUNTING FOR OPTIONS
The Fund may purchase and write (sell) put and call options on U.S. securities,
stock indices, and futures contracts that are traded on U.S. securities
exchanges and over-the-counter markets.
38
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTING FOR OPTIONS (CONTINUED)
The risk associated with purchasing an option is that the Fund pays a premium
whether or not the option is exercised. Additionally, the Fund bears the risk of
loss of premium and change in market value should the counterparty not perform
under the contract. Put and call options purchased are accounted for in the same
manner as portfolio securities. The cost of securities acquired through the
exercise of call options is increased by premiums paid. The proceeds from
securities sold through the exercise of put options are decreased by the
premiums paid.
When the Fund writes an option, the premium received by the Fund is recorded as
a liability and is subsequently adjusted to the current market value of the
option written. Premiums received from writing options which expire unexercised
are recorded by the Fund on the expiration date as realized gains from option
transactions. The difference between the premium and the amount paid on
effecting a close purchase transaction, including brokerage commissions, is also
treated as a realized gain, or if the premium is less than the amount paid for
the closing purchase transaction, as a realized loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
security or currency in determining whether the Fund has realized a gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security or currency purchased by the Fund. In writing an option, the Fund bears
the market risk of an unfavorable change in the price of the security or
currency underlying the written option. Exercise of an option written by the
Fund could result in the Fund selling or buying a security or currency at a
price different from the current market value. Transactions in put options
written for the year ending June 30, 1997 for the Fund were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FULL MATURITY
FIXED INCOME BALANCED
------------------------ ------------------------
NUMBER OF PREMIUMS NUMBER OF PREMIUMS
CONTRACTS (000'S) CONTRACTS (000'S)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options Outstanding at 28 $ 25,438 9 $ 8,438
Beginning of Year
Options Written 215 $ 95,622 67 $ 33,245
Option Terminated in Closing 110 $ 57,126 42 $ 22,535
Purchase Transaction
Options Expired 133 $ 36,122 34 $ 10,933
Options Outstanding at 0 $ 0 0 $ 0
06/30/97
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The Limited Maturity and Diversified Equity Portfolios did not purchase or hold
any options during the fiscal year.
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT OBJECTIVES
FULL MATURITY FIXED INCOME PORTFOLIO
Seeks over the long term the highest level of income consistent with
preservation of capital. Invests primarily in high quality fixed income
securities. There is no restriction on the maximum maturity of the securities
purchased. The average dollar-weighted maturity will vary and may exceed 20
years.
LIMITED MATURITY FIXED INCOME PORTFOLIO
Seeks a high level of current income, consistent with preservation of capital
and liquidity. Invests primarily in high quality fixed income securities and
maintains an average dollar-weighted portfolio maturity of five years or less.
DIVERSIFIED EQUITY PORTFOLIO
Seeks long-term capital growth. Invests primarily in equity securities and
securities having equity characteristics.
BALANCED PORTFOLIO
Seeks a combination of growth of capital and income. Invests varying proportions
of its assets in equity and fixed income securities, with not less than 25
percent of total assets invested in fixed income securities.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to any of the types
of securities in which they are authorized to invest without regard to the
maturity of the underlying security. Repurchase agreements will be effected only
with banks, savings institutions and broker-dealers. They involve the purchase
by a Portfolio of a debt security with the condition that, after a stated period
of time, the original seller will buy back the same security at a predetermined
price or yield. Repurchase agreements are used to enhance liquidity and to earn
income for periods as short as overnight. To minimize risk, the securities
underlying each repurchase agreement will be maintained with the Fund's
custodian, or a subcustodian, in an amount at least equal in value to the
repurchase price under the agreement (including accrued interest thereunder),
and such agreements will only be effected with parties that meet certain
creditworthiness standards. However, in the event the other party to the
repurchase agreement fails to repurchase the securities subject to such
agreement, a Portfolio could suffer a loss to the extent it is precluded from
selling the securities or, if due to delays, proceeds from the sale are less
than the repurchase price. The Fund had no outstanding repurchase agreements as
of June 30, 1997.
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES
No provision is made for Federal Income Taxes since the Portfolios elect to be
taxed as "regulated investment companies" and make such distributions to their
shareholders as to be relieved of all Federal income taxes under provisions of
current Federal tax law. At June 30, 1997, the Funds' most recent fiscal year
end, the approximate capital loss carryforwards for U.S. Federal income tax
purposes for the Full Maturity Fixed Income Portfolio and the Limited Maturity
Fixed Income Portfolio were approximately $1,800,000 and $3,700,000
respectively. This capital loss carryforward expires beginning in the year
ending June 30, 2003 and is available to offset future capital gains.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
OTHER INFORMATION
The accounts of the Fund are kept on the accrual basis of accounting. Securities
transactions are recorded on the trade date. Realized gains or losses from sales
of securities are determined on the specific identification cost basis. Dividend
income is recognized on the ex-dividend date.
NOTE 2.
FUND DISTRIBUTIONS
The Full Maturity Fixed Income Portfolio and the Limited Maturity Fixed Income
Portfolio declare income dividends from net investment income daily and pay
these dividends monthly, on the last day of every month.
In the Diversified Equity Portfolio and Balanced Portfolio, dividends from net
investment income are declared on the thirteenth day of the last month of each
quarter; the ex-dividend date is the fourteenth; and payment is made on the
fifteenth. The aggregate distributions of net investment income for the
Diversified Equity Portfolio and Balanced Portfolio were $0.34 and $0.39 per
share, respectively, during the year ended June 30, 1997.
During the year ended June 30, 1997, the Diversified Equity and Balanced
Portfolios made a long-term capital gain distribution of $1.3355 and $0.8111 per
share, respectively.
During the year ended June 30, 1997, the Diversified Equity and Balanced
Portfolios made a short-term capital gain distribution of $0.7162 and $0.3417
per share, respectively.
41
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3.
DIRECTORS' FEES AND TRANSACTIONS WITH AFFILIATES
Directors not affiliated with Hewitt Associates LLC ("Hewitt") or American
Hospital Association ("AHA") receive $1,000 for each quarterly meeting and $500
for each special meeting of the Board of Directors, or committee thereof, (plus
travel expenses). No remuneration has been paid to any principal or employee of
the Fund's investment consultant, Hewitt, or any director or officer of AHA. The
investments of the Portfolios are managed by various advisory organizations
which serve as the investment managers. The Fund pays no fees to Hewitt or to
the investment managers.
Hewitt is compensated for its services by the shareholders pursuant to The
Program Services Agreement it has with each shareholder, under which Hewitt
provides asset allocation consulting and certain other services. Fees of the
investment managers are paid by Hewitt.
Hewitt has voluntarily undertaken to pay certain expenses of the Portfolios (or
to reimburse the Portfolios for certain expenses) as may be necessary to limit
total expenses of the Portfolios to specified amounts. American Hospital
Association Services, Inc. has, in this regard, agreed to reimburse Hewitt for
one-half of the amounts incurred by Hewitt pursuant to this undertaking. The
maximum expense as a percent of average net assets for the Full Maturity Fixed
Income Portfolio, the Limited Maturity Fixed Income Portfolio, the Diversified
Equity Portfolio, and the Balanced Portfolio is 0.50% (annual percentage). The
Portfolios have reached asset levels which allow the reduction of expenses to
percentage amounts below that set forth above. The Portfolios may reimburse
Hewitt for the expenses of the Portfolios it voluntarily has absorbed on or
after September 1, 1989, provided that such reimbursement does not cause the
percentage expense limitations set forth above to be exceeded and is approved by
the Board of Directors of the Fund. There is no commitment, however, by the Fund
to make any such reimbursement. As of June 30, 1997, approximate expenses paid
on behalf of or reimbursed to the Portfolio by Hewitt since September 1, 1989
were: $101,400 for the Full Maturity Fixed Income Portfolio; $41,000 for the
Limited Maturity Fixed Income Portfolio; $116,000 for the Diversified Equity
Portfolio; and $10,900 for the Balanced Portfolio.
NOTE 4.
SHORT-TERM DEBT
To facilitate portfolio liquidity, each Portfolio is authorized to borrow
against portfolio securities. During the year ended June 30, 1997, there were no
borrowings.
42
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5.
INVESTMENT TRANSACTIONS
The aggregate cost of purchases and proceeds from sales of securities (exclusive
of short-term obligations) for the year ended June 30, 1997, is presented below:
- --------------------------------------------------------------------------------
PORTFOLIO PURCHASES SALES
- --------------------------------------------------------------------------------
Full Maturity Fixed Income $ 165,788,324 $ 165,054,529
Limited Maturity Fixed Income $ 184,359,083 $ 223,310,523
Diversified Equity $ 39,099,939 $ 40,207,229
Balanced $ 74,318,606 $ 74,758,884
- --------------------------------------------------------------------------------
At June 30, 1997, gross unrealized appreciation and depreciation of investments
and futures on a tax basis and the cost of investments for financial reporting
purposes and for Federal income tax purposes were as follows:
- --------------------------------------------------------------------------------
COST OF INVESTMENTS
------------------------
FINANCIAL FEDERAL
PORTFOLIO APPRECIATION DEPRECIATION REPORTING INCOME TAX
- --------------------------------------------------------------------------------
Full Maturity
Fixed Income $ 360,050 $ 406,133 $ 52,541,639 $ 52,541,639
Limited Maturity
Fixed Income $ 510,937 $ 193,304 $138,676,439 $ 138,676,439
Diversified Equity $16,695,129 $ 486,491 $ 54,406,462 $ 54,406,462
Balanced $ 9,033,844 $ 263,448 $ 43,972,284 $ 43,972,284
- --------------------------------------------------------------------------------
43
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6.
TRANSACTIONS IN CAPITAL STOCK SHARES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 1997
-----------------------------------------------------------
FULL LIMITED
MATURITY MATURITY DIVERSIFIED
FIXED INCOME FIXED INCOME EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transactions in capital stock shares
were as follows:
Subscriptions of fund shares 728,559 4,085,237 626,127 749,529
Investment income dividends
reinvested 328,533 770,472 57,517 81,362
Capital gains distribution
reinvested 0 0 354,075 238,777
------------- ------------- ------------- -------------
Gross increase in fund shares 1,057,092 4,855,709 1,037,719 1,069,668
Redemptions of fund shares (1,402,731) (10,872,326) (724,547) (784,519)
------------- ------------- ------------- -------------
Net increase (decrease) in fund shares (345,639) (6,016,617) 313,172 285,149
Beginning of Year 5,536,063 19,890,517 3,094,286 3,222,380
------------- ------------- ------------- -------------
End of Year 5,190,424 13,873,900 3,407,458 3,507,529
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED JUNE 30, 1996
----------------------------------------------------------
FULL LIMITED
MATURITY MATURITY DIVERSIFIED
FIXED INCOME FIXED INCOME EQUITY BALANCED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transactions in capital stock shares
were as follows:
Subscriptions of fund shares 1,752,269 5,384,961 563,437 121,597
Investment income dividends
reinvested 269,138 904,877 62,641 97,469
Capital gains distribution
reinvested 0 0 139,442 273,885
------------- ------------- ------------- -------------
Gross increase in fund shares 2,021,407 6,289,838 765,520 492,951
Redemptions of fund shares (520,065) (4,674,879) (355,860) (963,559)
------------- ------------- ------------- -------------
Net increase (decrease) in fund shares 1,501,342 1,614,959 409,660 (470,608)
Beginning of Year 4,034,721 18,275,558 2,684,626 3,692,988
------------- ------------- ------------- -------------
End of Year 5,536,063 19,890,517 3,094,286 3,222,380
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7:
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
FULL MATURITY FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30
----------------------------------------------------------------------------------------
1989 (A) 1990 1991 1992 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.30 $10.01 $10.03 $10.58 $10.76 $9.48 $9.88 $9.63
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.55* 0.78* 0.79* 0.75 0.72 0.59 0.65 0.65 0.65
Net realized and unrealized
gain (loss) on investments
and futures 0.30 (0.29) 0.02 0.64 0.53 (0.64) 0.40 (0.25) 0.16
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from Investment
Operations 0.85 0.49 0.81 1.39 1.25 (0.05) 1.05 0.40 0.81
LESS DISTRIBUTIONS:
Net investment income (0.55) (0.78) (0.79) (0.75) (0.72) (0.59) (0.65) (0.65) (0.65)
Net realized capital gains (0.00) (0.00) (0.00) (0.09) (0.35) (0.64) (0.00) (0.00) (0.00)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions (0.55) (0.78) (0.79) (0.84) (1.07) (1.23) (0.65) (0.65) (0.65)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.30 $10.01 $10.03 $10.58 $10.76 $9.48 $9.88 $9.63 $9.79
------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN ON NET ASSET VALUE(B) 8.60% 4.62% 7.87% 13.66% 11.98% -1.43% 10.99% 3.58% 8.09%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period
(in thousands) $1,422 $11,134 $19,893 $47,500 $52,094 $48,752 $39,874 $53,292 $50,796
Ratio of Expenses to Average
Net Assets 0.50%* 0.50%* 0.50%* 0.42% 0.27% 0.24% 0.21% 0.21% 0.21%
Ratio of Net Investment Income to
Average Net Assets 8.12%* 8.44%* 8.06%* 7.37% 6.77% 5.67% 6.88% 6.52% 6.63%
Ratio of Expenses to Average Net
Assets(C) 1.94% 1.36% 0.89% 0.42% 0.27% 0.24% 0.21% 0.21% 0.21%
Ratio of Net Investment Income to
Average Net Assets(C) 6.67% 7.56% 7.68% 7.37% 6.77% 5.67% 6.88% 6.52% 6.63%
Portfolio turnover rate 234.20% 203.83% 411.24% 252.89% 266.03% 331.63% 279.42% 283.13% 304.93%
</TABLE>
- ---------------------------------
* Reflects the waiver of certain management fees and reimbursement of certain
other expenses by the Investment Advisor.
(A) Commencement date for the Full Maturity Fixed Income Portfolio was October
20, 1988.
(B) Total Return on Net Asset Value is net of the management fee of 0.50% per
annum.
(C) Ratios include all management fees and expenses.
- -------------------------------------------------------------------------------
45
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7:
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
LIMITED MATURITY FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30
----------------------------------------------------------------------------------------
1989 (A) 1990 1991 1992 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.07 $9.98 $10.11 $10.48 $10.52 $10.09 $10.22 $10.12
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.43* 0.77* 0.74* 0.64 0.49 0.49 0.62 0.62 0.61
Net realized and unrealized
gain (loss) on investments
and futures 0.07 (0.09) 0.13 0.45 0.12 (0.32) 0.13 (0.10) 0.04
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from Investment Operations 0.50 0.68 0.87 1.09 0.61 0.17 0.75 0.52 0.65
LESS DISTRIBUTIONS:
Net investment income (0.43) (0.77) (0.74) (0.64) (0.49) (0.49) (0.62) (0.62) (0.61)
Net realized capital gains (0.00) (0.00) (0.00) (0.08) (0.08) (0.11) (0.00) (0.00) (0.00)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions (0.43) (0.77) (0.74) (0.72) (0.57) (0.60) (0.62) (0.62) (0.61)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.07 $9.98 $10.11 $10.48 $10.52 $10.09 $10.22 $10.12 $10.16
------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN ON NET ASSET VALUE(B) 5.01% 6.52% 8.49% 10.46% 5.49% 1.14% 7.19% 4.66% 6.03%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period
(in thousands) $6,284 $18,522 $30,151 $101,881 $162,694 $189,542 $186,856 $201,196 $141,023
Ratio of Expenses to Average Net
Assets 0.50%* 0.50%* 0.50%* 0.29% 0.17% 0.14% 0.12% 0.10% 0.12%
Ratio of Net Investment Income to
Average Net Assets 8.49%* 8.04%* 7.49%* 6.02% 4.66% 4.73% 6.17% 6.03% 6.04%
Ratio of Expenses to Average
Net Assets(C) 1.97% 0.88% 0.55% 0.29% 0.17% 0.14% 0.12% 0.10% 0.12%
Ratio of Net Investment Income to
Average Net Assets(C) 7.01% 7.66% 7.45% 6.02% 4.66% 4.73% 6.17% 6.03% 6.04%
Portfolio turnover rate 0.00% 137.50% 279.16% 99.86% 167.38% 178.01% 155.12% 132.75% 121.70%
</TABLE>
- --------------------------------------------
* Reflects he waiver of certain management fees and reimbursement of certain
other expenses by the Investment Advisor.
(A) Commencement date for the Limited Maturity Fixed Income Portfolio was
December 22, 1988.
(B) Total Return on Net Asset Value is net of the management fee of 0.50% per
annum.
(C) Ratios include all management fees and expenses.
- --------------------------------------------------------------------------------
46
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7:
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
DIVERSIFIED EQUITY PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30
----------------------------------------------------------------------------------------
1989 (A) 1990 1991 1992 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $11.16 $11.42 $11.47 $12.95 $13.95 $13.90 $14.76 $17.59
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.35* 0.43* 0.35* 0.31* 0.25* 0.26 0.29 0.35 0.34
Net realized and unrealized gain
on investments 1.12 0.52 0.08 1.52 1.70 0.45 2.34 3.57 5.18
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from Investment Operations 1.47 0.95 0.43 1.83 1.95 0.71 2.63 3.92 5.52
LESS DISTRIBUTIONS:
Net investment income (0.31) (0.44) (0.34) (0.31) (0.25) (0.26) (0.29) (0.35) (0.34)
Net realized capital gains (0.00) (0.25) (0.04) (0.04) (0.70) (0.50) (1.48) (0.74) (2.05)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions (0.31) (0.69) (0.38) (0.35) (0.95) (0.76) (1.77) (1.09) (2.39)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $11.16 $11.42 $11.47 $12.95 $13.95 $13.90 $14.76 $17.59 $20.72
------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN ON NET ASSET VALUE(B) 14.45% 7.76% 3.24% 15.14% 14.47% 4.21% 20.11% 26.42% 32.97%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period
(in thousands) $3,556 $7,920 $10,725 $13,878 $21,087 $22,547 $39,634 $54,435 $70,590
Ratio of Expenses to Average
Net Assets 0.50%* 0.50%* 0.50%* 0.50%* 0.50%* 0.40% 0.31% 0.18% 0.17%
Ratio of Net Investment Income to
Average Net Assets 4.88%* 4.45%* 3.37%* 2.13%* 1.90%* 1.83% 2.30% 2.09% 1.83%
Ratio of Expenses to
Average Net Assets(C) 2.68% 1.33% 1.08% 0.66% 0.53% 0.40% 0.31% 0.18% 0.17%
Ratio of Net Investment Income to
Average Net Assets(C) 2.70% 3.61% 2.80% 1.97% 1.87% 1.83% 2.30% 2.09% 1.83%
Portfolio turnover rate 29.99% 33.57% 72.49% 65.89% 45.87% 100.45% 68.12% 57.76% 67.31%
Average commission rate(D) N/A N/A N/A N/A N/A N/A N/A N/A 0.0368
</TABLE>
- -------------------------------------------------------------------------------
* Reflects the waiver of certain management fees and reimbursement of certain
other expenses by the Investment Advisor.
(A) Commencement date for the Diversified Equity Portfolio was October 20, 1988.
(B) Total Return on Net Asset Value is net of the management fee of 0.75% per
annum.
(C) Ratios include all management fees and expenses.
(D) Disclosure not applicable to prior periods.
- -------------------------------------------------------------------------------
47
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7:
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
BALANCED PORTFOLIO
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED JUNE 30
----------------------------------------------------------------------------------------
1989 (A) 1990 1991 1992 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.68 $10.69 $10.87 $12.03 $12.76 $11.66 $12.63 $13.38
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.39* 0.56* 0.54* 0.44 0.44 0.42 0.32 0.41 0.37
Net realized and unrealized
gain (loss) on investments
and futures 0.64 0.11 0.21 1.16 1.18 (0.26) 1.44 1.98 2.65
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from Investment Operations 1.03 0.67 0.75 1.60 1.62 0.16 1.76 2.39 3.02
LESS DISTRIBUTIONS:
Net investment income (0.35) (0.56) (0.57) (0.44) (0.44) (0.42) (0.32) (0.41) (0.39)
Net realized capital gains (0.00) (0.10) (0.00) (0.00) (0.45) (0.84) (0.47) (1.23) (1.15)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions (0.35) (0.66) (0.57) (0.44) (0.89) (1.26) (0.79) (1.64) (1.54)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.68 $10.69 $10.87 $12.03 $12.76 $11.66 $12.63 $13.38 $14.86
------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN ON NET ASSET VALUE(B) 9.96% 5.34% 6.62% 13.99% 13.02% 0.29% 14.97% 19.20% 23.23%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period
(in thousands) $13,545 $34,565 $33,547 $34,853 $41,313 $46,523 $46,646 $43,130 $52,137
Ratio of Expenses to
Average Net Assets 0.50%* 0.50%* 0.50%* 0.38% 0.31% 0.26% 0.21% 0.23% 0.23%
Ratio of Net Investment Income to
Average Net Assets 6.06%* 6.12%* 4.92%* 3.73% 3.51% 3.39% 4.12% 3.08% 2.81%
Ratio of Expenses
to Average Net Assets(C) 1.27% 0.52% 0.52% 0.38% 0.31% 0.26% 0.21% 0.23% 0.23%
Ratio of Net Investment Income to
Average Net Assets(C) 5.29% 6.11% 4.89% 3.73% 3.51% 3.39% 4.12% 3.08% 2.81%
Portfolio turnover rate 106.23% 132.60% 201.36% 201.93% 132.14% 208.31% 160.41% 146.69% 173.60%
Average commission rate(D) N/A N/A N/A N/A N/A N/A N/A N/A 0.0571
</TABLE>
- -------------------------------------------------------------------------------
* Reflects the waiver of certain management fees and reimbursement of certain
other expenses by the Investment Advisor.
(A) Commencement date for the Balanced Portfolio was October 20, 1988.
(B) Total Return on Net Asset Value is net of the management fee of 0.75% per
annum.
(C) Ratios include all management fees and expenses.
(D) Disclosure not applicable to prior periods.
- --------------------------------------------------------------------------------
48
<PAGE>
To the Shareholders and
Board of Directors of
AHA Investment Funds, Inc.-
Full Maturity Fixed Income Portfolio
Limited Maturity Fixed Income Portfolio
Diversified Equity Portfolio
Balanced Portfolio:
In planning and performing our audit of the financial statements of AHA
INVESTMENT FUNDS, INC. (a Maryland corporation, comprising the Full Maturity
Fixed Income Portfolio, Limited Maturity Fixed Income Portfolio, Diversified
Equity Portfolio and Balanced Portfolio) for the year ended June 30, 1997, we
considered its internal control, including control activities for safeguarding
securities, in order to determine our auditing procedures for the purpose of
expressing our opinion on the financial statements and to comply with the
requirements of Form N-SAR, not to provide assurance on internal control.
The management of AHA Investment Funds, Inc. is responsible for establishing and
maintaining internal control. In fulfilling this responsibility, estimates and
judgments by management are required to assess the expected benefits and related
costs of control activities. Generally, control activities that are relevant to
an audit pertain to the entity's objective of preparing financial statements for
external purposes that are fairly presented in conformity with generally
accepted accounting principles. Those control activities include the
safeguarding of assets against unauthorized acquisition, use or disposition.
Because of inherent limitations in internal control, errors or irregularities
may occur and not be detected. Also, projection of any evaluation of internal
control to future periods is subject to the risk that it may become inadequate
because of changes in conditions or that the effectiveness of the design and
operation may deteriorate.
Our consideration of internal control would not necessarily disclose all matters
in internal control that might be material weaknesses under standards
established by the American Institute of Certified Public Accountants. A
material weakness is a condition in which the design or operation of any
specific internal control components does not reduce to a relatively low level
the risk that errors or irregularities in amounts that would be material in
relation to the financial statements being audited may occur and not be detected
within a timely period by employees in the normal course of performing their
assigned functions. However, we noted no matters involving internal control,
including control activities for safeguarding securities, that we consider to be
material weaknesses as defined above as of June 30, 1997.
This report is intended solely for the information and use of management and the
Securities and Exchange Commission.
/s/ Arthur Andersen L.L.P.
Arthur Andersen L.L.P.
Chicago, Illinois
August 8, 1997
49
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
For each of the investment managers of AHA Investment Funds, Inc., a performance
discussion is provided on its segment of the Portfolio. Each of the investment
managers' discussions includes an analysis of investment performance during the
fiscal year ended June 30, 1997, and a description of the principal factors,
including market conditions, investment strategies and techniques that affected
performance. Past performance is not predictive of future performance.
Also included are graphs comparing the performance of the Portfolios to the
performance of broad based securities market indices. These graphs show the
growth of $100,000.00 invested in each Portfolio and the growth of the same
amount invested in a comparable index since inception of the Portfolio through
June 30, 1997. The graph of each of the Portfolios is shown, net of all fees and
expenses. These fees include the program services fee of the AHA Program. The
graphs assume the reinvestment of all dividends/interest for both the Portfolios
and indices. Listed below is additional information related to the Portfolios.
FULL MATURITY FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STARING PERCENT OF
INVESTMENT MANAGER DATE PORTFOLIO
- ----------------------------------------- ---------- ----------
Western Asset Management Company 07/01/95 50%
Firstar Investment Research & Mgmt. Co., LLC 12/01/96 50%
- --------------------------------------------------------------------------------
LIMITED MATURITY FIXED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STARTING PERCENT OF
INVESTMENT MANAGER DATE PORTFOLIO
- ----------------------------------------- ---------- ----------
The Patterson Capital Corporation 12/22/88 100%
- --------------------------------------------------------------------------------
DIVERSIFIED EQUITY PORTFOLIO
- -------------------------------------------------------------------------------
STARTING PERCENT OF
INVESTMENT MANAGER DATE PORTFOLIO
- ----------------------------------------- ---------- ----------
Cambiar Investors, Inc. 10/20/88 50%
Investment Research Company 12/01/93 50%
- --------------------------------------------------------------------------------
BALANCED PORTFOLIO
- -------------------------------------------------------------------------------
STARTING PERCENT OF
INVESTMENT MANAGER DATE PORTFOLIO
- ----------------------------------------- ---------- ----------
Avatar Investors Associates Corporation 10/20/88 20%
Cambiar Investors, Inc. 12/01/93 50%
Western Asset Management Company 07/01/95 30%
50
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
FULL MATURITY FIXED INCOME PORTFOLIO
Western Asset Management Company (manages 50% of the Portfolio)
During the fiscal year ended June 30, 1997, the total return of the Full
Maturity Fixed Income Portfolio, net of all fees and expenses, was 8.09%,
compared to the Lehman Brothers Aggregate Bond Index ("LB Aggregate Index"),
which had a total return of 8.14% for the same period. The gross return of the
segment of the Portfolio managed by Western Asset Management Company ("WAMCO")
was 9.36%. The principal factors which affected performance during the fiscal
year are discussed below.
The past year was characterized by relatively volatile interest rates which
ended the period somewhat lower than they began, a reasonably robust economy,
and a significant decline in measured inflation. Investors' concerns were
centered mainly around the strength of the economy, in the belief that excessive
growth would eventually generate rising inflation pressures. Perhaps the most
significant event of the past year was the surprising conclusion to the
growth/inflation drama: even as growth accelerated, inflation continue to fall,
reaching levels we have not seen since the 1950s.
For the 12-month period ending June 30, 1997, the Portfolio outperformed its
benchmark, with a total return of 9.36% vs. 8.14% for the Lehman Aggregate
Index. These results were achieved through a variety of successful strategies.
Performance was positively impacted by the fact that the Portfolio held a long
duration posture throughout the period and interest rates fell on balance.
WAMCO felt that inflation fundamentals were solid, and that the secular
disinflation observed over the course of the current business cycle was likely
to continue. This created an environment conducive to a gradual decline in
interest rates, which appeared high relative to prospective inflation. Indeed,
inflation in the first half of 1997 fell to levels not seen since the 1950s,
when bonds yielded 4% and mortgages were available at 5%. Consistent with
WAMCO's desire to avoid excessive risk, the Portfolio's duration ranged from
110% to 120% of its benchmark duration.
Yield curve positioning also contributed to results, as yield curve exposure
successfully anticipated all three major shifts in the shape of the yield curve.
The yield curve steepened throughout the summer and into early fall of 1996 as
the economy weakened, and this benefitted the Portfolio's bullet exposure to
maturities. By November, the manager had reversed course and adopted a barbell
exposure to maturities, which benefitted as the economy strengthened and the
yield curve flattened. The second quarter of 1997 saw a replay of the first
period, as a slowing economy led to a steeper curve and this benefitted the
Portfolio's emphasis on intermediate maturities.
Mortgage overweighting throughout the past year was a positive contributor to
performance as well, as mortgages outperformed all other sectors. Emphasis
within the mortgage sector was focused on lower coupon issues, seasoned issues
and commercial mortgage-backed securities, as all of these were less likely than
others to suffer from prepayment risk in a declining interest rate environment.
Moderate corporate overexposure throughout the past year also added to returns,
particularly the manager's emphasis on the lower end of the investment quality
scale where returns generally exceeded market returns. Corporate exposure was
overweighted on average throughout the period, but relatively light compared to
the managers' historical preference for the sector. The decision to minimize
corporate exposure was driven by the historically low level of spreads
available, and by the manager's
51
<PAGE>
determination that the economy was likely to be somewhat weaker on balance than
the market seemed to be expecting. Lately, disinflation trends have continued
to the point where deflation risks are beginning to surface, and this could pose
problems for corporate earnings going forward.
52
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
FULL MATURITY FIXED INCOME PORTFOLIO
Firstar Investment Research & Management Company, LLC (manages 50% of the
Portfolio)
During the fiscal year ended June 30, 1997, the total return of the Full
Maturity Fixed Income Portfolio, net of all fees and expenses, was 8.09%
compared to the Lehman Brothers Aggregate Bond Index (LB Aggregate Index) which
had a total return of 8.14% for the same period. The gross return of the segment
of the Portfolio, managed by Firstar Investment Research & Management Company,
LLC ("FIRMCO") was 3.28% for the first six months 1997. FIRMCO began managing
the Full Maturity Portfolio in December, 1996. The principal factors which
affected performance during this period are discussed below.
FIRMCO seeks to provide an annual rate of total return comparable to that of the
Lehman Brothers Aggregate Bond Index ("the Benchmark"), before expenses. The
Benchmark is a widely accepted composite of securities representing the bond
market in its entirety.
In order to achieve this objective, FIRMCO must first match the performance of
the Benchmark. They do this by keeping the assets of the Portfolio "DURATION
NEUTRAL" to the assets of the Benchmark, whereas many fixed income managers
lengthen (shorten) a portfolio's average maturity or duration when they expect
interest rates to decline (rise), FIRMCO does not. Regardless of their interest
rate forecast, FIRMCO holds the duration of the Portfolio equivalent to that of
the Benchmark. This ensures that the Portfolio has the same sensitivity to
changes in interest rates as the Benchmark. They have found that even
professional fixed income managers cannot consistently, over long periods of
time, add value to portfolios by implementing interest rate forecasts as
duration bets.
FIRMCO tracks the performance of the Benchmark, then focuses on adding value in
the Portfolio using three broad-based investment decision strategies:
YIELD CURVE POSITIONING
Selecting the "maturity mix" of securities in the Portfolio which may overweight
or underweight certain maturity segments versus their Benchmark weightings.
This is done while maintaining the overall portfolio duration equivalent to that
of its Benchmark.
SECTOR ALLOCATION
Selecting sectors of the bond market to overweight or underweight in the
Portfolio versus the Benchmark weightings. The various sectors include U.S.
Treasury, U.S. Government Agency, Mortgage-Backed Securities, Asset-Backed
Securities, Cash Equivalents, and various corporate sectors such as:
Industrials, Utilities, Finance, and International.
ISSUE SELECTION
Selecting securities for the Portfolio is the "basic building block" of all of
our added value work. Every security that is evaluated for purchase in the
Portfolio is thoroughly researched and tested. With just 43 securities in the
Portfolio, (compared to the Benchmark which has over 6,000), FIRMCO is very
opinionated about each and every security that they choose to buy and hold.
Duration is a mathematical measure of a bond or bond portfolio's potential
sensitivity to changes in interest rates. It is similar to "average maturity"
in that it is a measure in years, but it is more precise. Whereas a bond's
average maturity takes into account only its final
53
<PAGE>
principal cash flow, duration takes into account a bond's periodic coupon
payments and it's principal cash flow, weighting each of these by the time until
their receipt.
FIRMCO has been an investment manager for a portion of the Portfolio since
December 1996. During the last six months, ON THE PORTION OF THE PORTFOLIO THAT
FIRMCO MANAGES, THE PORTFOLIO HAD A GROSS RETURN OF +3.28% VERSUS THE BENCHMARK
RETURN OF +3.09%. During this time, yields on U.S. Treasury Bonds and Notes
increased slightly. For example, the 10 year U.S. Treasury Note yielded 6.4% on
12/31/96 and yielded 6.5% on 6/30/97. Thus, the Benchmark's total return of
+3.09% consists mostly of coupon income for half a year, partially offset by a
modest amount of price depreciation due to the slight rise in interest rates.
The Portfolio's duration is the single most significant determinant of its total
return. In attempting to achieve its objective, the Portfolio may invest in
securities with very long remaining maturities, (30 years or longer), in
addition to shorter bonds and notes. As of June 30, 1997, the FIRMCO-managed
portion of this Portfolio has an overall AVERAGE PORTFOLIO MATURITY OF 10.2
YEARS, and a DURATION OF 4.6 YEARS. This duration is equivalent to that of the
Lehman Brothers Aggregate Bond Index.
In the FIRMCO-managed portion of the Portfolio, they track the return of the
Benchmark and added 19 basis points of incremental value, before Portfolio
expenses. FIRMCO attributes this added value to successful implementation of
our three broad investment strategies: yield curve positioning, sector
allocation, and issue selection.
YIELD CURVE POSITIONING: In terms of the Portfolio's maturity structure, FIRMCO
UNDER-weighted bonds with two years and less remaining to maturity. This
strategy has worked well, during the past six months, as shorter maturities
underperformed longer maturities on a relative basis. This performance
advantage was somewhat offset by the Portfolio's OVERweighted position in assets
with three-to-four year maturities which also suffered from being on the short
end of the yield curve. Positive performance was also attributable to the
Portfolio's holdings in the 15-20 year maturity area. This sector performed
particularly well during the last six months. Overall, we believe the portfolio
maturity structure will continue to generate a modest performance benefit for
the balance of 1997.
SECTOR ALLOCATION: The Portfolio is over-weighted in several sectors: Within
the asset-backed sector, we utilize securities backed by credit card receivables
and auto loan receivables as a substitute for other non-U.S. Treasury
securities. The asset-backed securities that we own tend to be very highly
rated (Aaa/AAA), and very liquid. FIRMCO believes they have contributed
favorably to the Portfolio's performance. Other sectors that have helped the
Portfolio are finance, banking, and brokerage issues, international securities
(all are denominated in U.S. dollars), and mortgage-backed securities. GIVEN
THE HEALTHY U.S. ECONOMIC OUTLOOK, WE ANTICIPATE THAT OUR NON-TREASURY HOLDINGS
WILL CONTINUE TO ADD VALUE TO THE PORTFOLIO.
IN TERMS OF QUALITY, TWO-THIRDS OF THE PORTFOLIO IS INVESTED IN OBLIGATIONS
RATED "AAA" OR HIGHER. These obligations are primarily composed of U.S.
Treasury bonds, agency mortgage-backed obligations and asset-backed securities.
While the majority of the assets are of the highest quality, the Portfolio has
significant exposure to "A" and "Baa" rated securities. These investment-grade
bonds contributed favorably to the Portfolio's outperformance during the last
six months.
Since beginning their work on behalf of the AHA Full Maturity Portfolio in
December of 1996, FIRMCO has adhered to the same investment management
discipline. They have been
54
<PAGE>
managing fixed income portfolios using this approach for more than eleven years.
THE HALLMARK OF THEIR APPROACH HAS BEEN CONSISTENT PERFORMANCE IN ALL MARKET
ENVIRONMENTS. FIRMCO'S goal is to continue to deliver consistent performance.
55
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $100,000 INVESTMENT IN THE FULL MATURITY FIXED
INCOME PORTFOLIO AND THE LEHMAN BROTHERS AGGREGATE BOND INDEX FOR THE YEARS
ENDED JUNE 30,
Average Annual Total Return
1 Year 8.09%
Since Inception 7.73%
AHA FULL MATURITY PORTFOLIO
Full Maturity LB Aggregate
Qtr Value Value
- --- ----- -----
1988 $100,000 $100,000
1989 $108,602 $110,010
1990 $113,624 $118,641
1991 $122,561 $131,321
1992 $139,302 $149,778
1993 $155,986 $167,442
1994 $153,756 $165,249
1995 $170,647 $185,987
1996 $176,763 $195,313
1997 $191,072 $211,220
[GRAPH]
INCEPTION DATE FOR THE FULL MATURITY FIXED INCOME PORTFOLIO WAS OCTOBER 20,
1988.
56
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
LIMITED MATURITY FIXED INCOME PORTFOLIO
The Patterson Capital Corporation (manages 100% of the Portfolio)
During the fiscal year ended June 30, 1997, the total return of the Limited
Maturity Fixed Income Portfolio, net of all fees and expenses, was 6.03%
compared to 90-Day U.S. Treasury Bills, which had a total return of 5.06% and
the Lehman Brothers 1-3 Year Government bond Index, which had a total return of
6.58% for the same period. The gross return of the Portfolio,
managed by The Patterson Capital Corporation ("Patterson) was 6.72%. The
principal factors which affected performance during the fiscal year are
discussed below.
The twelve-month period has been marked by a multitude of economic and global
cross currents and very low volatility. Interest rates have remained quite
stable due to minimal activity by the Federal Reserve in adjusting short-term
interest rates. During this period of time, the AHA Limited Maturity Portfolio
managed by Patterson Capital Corporation has posted positive gross returns in
excess of its stated Benchmark.
On the economic front, continued growth (5.9% in 1Q '97) has been met with
benign inflation as measured by the Consumer Price Index and Producer Price
Index. Despite the positive coupling of healthy growth and low inflation, there
remain a few areas of concern. The unemployment rate is currently at only 4.8%,
and low unemployment has historically given way to wage and price pressures,
which eventually led to a pick up in inflation. Other measures of economic
strength, too, suggest that the economy is robust. As evidence, the stock market
continues to soar well beyond most expectations.
Interest rates have been more stable over the last year than in the prior
several years. While 1994 and 1995 were characterized by numerous rate
adjustments by the Federal Reserve, only once in the last twelve months did the
Fed change rates. In March of 1997, the Fed Funds rate was raised from 5.25% to
5.50%. With the Fed virtually on hold, yields had little impetus to trend either
up or down. On 6/30/96, 90-day T-bills yielded 5.15%, 2-year Treasuries yielded
6.11% and 5-year Treasuries yielded 6.46%. One year later, those levels stood at
5.17%, 6.06% and 6.37%, respectively. Also helping to keep a lid on interest
rates has been the explosive growth over the last few years of foreign
participation in the U.S. bond market. Without this support, interest rates
would certainly be higher.
In this sort of environment, taking any maturity/duration risk would not have
been rewarded. We, therefore, moved maturities only slightly during the last
twelve months. The one exception to this approach was in December of 1996, when
Patterson Capital became the sole fixed income manager for the AHA Limited
Maturity Fund. At that time, we received an additional $69 MM in assets whose
maturities were considerably longer than we felt was prudent at the time.
Therefore, we reduced the interest rate risk of the Portfolio by swapping the
longer dated securities for shorter maturity securities. This had a positive
effect on the Portfolio's performance, as longer maturities underperformed
shorter maturities over the next several months.
In terms of the maturity structure of the Portfolio, maturities were kept
primarily in the 1-3 year range, with the overall weighted average maturity of
the entire portfolio at approximately 2-years. This is the maturity of the
Benchmark (2-year Treasury) for the Patterson segment of the Portfolio. In order
to maintain this maturity range, we employed a continual process of extending
maturities that shortened to under one year. This process of
57
<PAGE>
"rolling" short maturities benefitted the Portfolio in that over the course of
the year, an additional 40-50 basis points in yield was available in 5-year
maturities as compared to 1-year maturities.
Without relying on maturity/duration to enhance the Portfolio's return, we
instead focussed on adding yield product and on keeping the Portfolio's coupon
income high. Over the last year, we have maintained a 35-40% position in a
combination of corporates, government agencies, asset backed securities and
mortgages. While these securities are trading at the thinnest yield advantage to
Treasuries in recent years, they continue to outperform. Corporate yield spreads
began to widen at the end of the first quarter of 1997. We, therefore,
discontinued new purchases in this sector until spreads began to stabilize in
the second quarter. A small percentage of high coupon mortgage securities, which
were inherited in December 1996, were held during the first few months of 1996
as mortgages were outperforming Treasuries. Ultimately they were sold very near
the high prices of the year. Lastly, we avoided some spread widening in the
asset-backed sector by selling our holdings of a Banc One security (another
inherited asset), just prior to its being downgraded.
All of the above strategies were employed with the use of domestic, investment
grade securities, thereby keeping the quality and liquidity of the Portfolio
extremely high. We expect that the corporate sector of the fixed income market
will continue to perform well, as stock valuations continue to climb.
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<PAGE>
COMPARISON OF CHANGE IN VALUE OF $100,000 INVESTMENT IN THE LIMITED MATURITY
FIXED INCOME PORTFOLIO, 90 DAY T-BILLS AND LEHMAN BROTHERS 1-3 YEAR GOVERNMENT
BOND INDEX FOR THE YEARS ENDED JUNE 30,
Average Annual Total Return
1 Year 6.03%
Since Inception 6.43%
AHA LIMITED MATURITY PORTFOLIO
Limited Maturity 90-Day T-Bills LB Gov't 1-3 Year
Qtr Value Value Value
- --- ----- ----- -----
1988 $100,000 $100,000 $100,000
1989 $105,014 $104,515 $106,346
1990 $111,860 $112,875 $115,243
1991 $121,362 $120,518 $127,050
1992 $134,059 $125,978 $140,173
1993 $141,425 $129,889 $149,344
1994 $143,031 $134,334 $151,614
1995 $153,312 $141,602 $163,238
1996 $160,454 $148,911 $172,183
1997 $170,125 $156,441 $183,507
[GRAPH]
INCEPTION DATE FOR THE LIMITED MATURITY FIXED INCOME PORTFOLIO WAS DECEMBER 22,
1988.
59
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
DIVERSIFIED EQUITY PORTFOLIO
INVESTMENT RESEARCH COMPANY (MANAGES 50% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1997, the total return of the Diversified
Equity Portfolio, net of all fees and expenses, was 32.97%, compared to the S&P
500 Stock Index, which had a total return of 34.68% for the same period. The
gross return of the segment of the Portfolio, managed by Investment Research
Company ("IRC"), was 32.34% The principal factors which affected the performance
during the fiscal year are discussed below.
As a disciplined fundamental manager, IRC's failure to keep pace with the market
is attributable to the continued stellar performance of growth stocks. As an
indication of the market's recent clear preference for growth stocks, the recent
twelve month return for the S&P/BARRA Growth index was 38.34% while the
S&P/BARRA Value index lagged behind at 30.81%. While clearly a difficult market
for value managers, the clustering of superior returns among a relatively small
set of growth stocks has made this a difficult market for growth managers as
well.
IRC's investment process, while biased toward the value style of investing, did
over the course of the last 12 months capture more of the dominant growth and
large capitalization trends in the market with successive rebalancings of the
AHA Diversified Equity Portfolio, as evidenced by the changes in the Portfolio's
underlying characteristics. From June 30, 1996 to June 30, 1997, the 5 year
earnings growth rate of the Portfolio rose from 7.3% to 14.3%, in comparison
with an increase from 8.3% to 13.4% for the capitalization-weighted S&P 500.
During this period, the weighted average market capitalization of the Portfolio
climbed from $25.3 billion to $43.8 billion (a 73% increase) whereas, the
capitalization weighted S&P 500 rose from $34.0 billion to $51.2 billion (a 47%
increase).
While the Portfolio captured more of the stronger growth and large
capitalization factor trends in the market over the past year, it nevertheless
remained value-biased, as measured in part by its price/earnings ratio. At the
end of June, 1996, the price/earnings ratio of the Portfolio was 17.0 in
comparison with 19.7 for the capitalization weighted S&P 500 at 22.7. While
remaining fully invested, IRC continued to avoid those growth stocks selling at
inflated premiums relative to their industry cohorts, as an integral component
of IRC's strategy to control the risk of significant under-performance in the
event of a market downturn.
IRC's approach to valuation and portfolio management centers around diversified
positions in stable, fundamentally attractive securities. Portfolios are kept as
fully invested as practicable and the economic sector weights of all portfolios
closely reflect the weights of the benchmark index. Typically, performance will
be strongest when investors link securities' prices to underlying fundamentals.
Over this past year, the return on the Portfolio, gross of fees, exceeded the
return of the S&P 500 in 7 of the 12 months. The two months of greatest
underperformance were experienced in November, 1996 and May, 1997, during which
the market experienced some of its most explosive growth.
It is worthwhile to note the extreme asymmetry of stock performance. During the
last year, nearly 300 of the S&P500's constituents lagged the index return by
more than 5.0% while only 155 outperformed the index by 5.0% or more. To further
demonstrate the narrowness of this market, failure to own just thirty specific
S&P 500 stocks (including Microsoft, GE, Intel,
60
<PAGE>
Coca-Cola) would have cost over 10% in portfolio returns during the last twelve
months. The extraordinary performance of a small group of very large
capitalization growth stocks is a double whammy for IRC since fundamentally
attractive stocks are being neglected and portfolio diversification provided
less of a cushion than would be expected in a broader market move.
It is interesting to note that BARRA's (a quantitative investment consulting
firm) sophisticated 68 factor performance attribution system has had little to
offer in the way of explanation of recent performance. Among the thirteen BARRA
fundamental factors, only the volatility factor has a return appreciably
different than zero over the past twelve months. This factor's solidly negative
return would tell us that, all things being equal, higher volatility companies
have not done as well as low volatility companies on a risk adjusted basis. We
can confirm this result by looking at the return to risk profiles of the two
S&P/BARRA indexes. The Growth Index returned 38% with an annual volatility of
17% while the Value Index earned 31% with an annual volatility of only 13%. So
we see that while Growth investors appear to be having their day in the sun,
Value investors are achieving excellent returns with much lower levels of risk.
We watch the soaring multiples on large capitalization growth stocks, IRC
remains more committed than ever to our objective of long term capital growth
through well diversified, disciplined fundamental investing.
61
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
DIVERSIFIED EQUITY PORTFOLIO
CAMBIAR INVESTORS, INC. (MANAGES 50% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1997, the total return of the Diversified
Equity Portfolio, net of all fees and expenses, was 32.97%, compared to the S&P
500 Stock Index, which had a total return of 34.68% for the same period. The
gross return for the segment of the Portfolio, managed by Cambiar Investors,
Inc. ("Cambiar") was 35.27% . The principal factors which affected performance
during the fiscal year are discussed below.
The economic backdrop, although frequently giving mixed readings, has generally
provided a positive environment for stocks. With the exception of a close-to
10% correction in mid-April related to concerns that the Federal Reserve might
raise interest rates due to the possibility of an overheating economy, market
indices have continued to advance strongly. Presently, inflation trends seem to
be moderate and the threat of increased interest rates has abated - at least
temporarily. Subdued inflation, low interest rates, and healthy economic
fundamentals have contributed to continued strong overall corporate earnings.
Cambiar will continue the practice of building portfolios company-by-company.
They believe this methodology allows them to maintain their focus on
valuation and protects their investments on the downside when overall market
conditions and expectations become inflated. Cambiar screens for
attractively valued stocks based on the following characteristics: low
relative price/earnings, price/book, price/sales, and price/cash flow ratios.
Cambiar investment analysts following specific industries evaluate the
stocks, looking for internal improvements or strategic developments which
will trigger, in their opinion, above average price appreciation. The
portfolios are not restricted by capitalization, although they generally fall
into the medium-to-large capitalization range. Portfolios tend to hold 30 to
40 stocks.
Cambiar attempts to minimize risk by purchasing stocks at the lower end of their
relative valuation range. They also use a multifaceted sell discipline. Stocks
become candidates for sale if price appreciation results in overweighing or a
target price based on relative valuation has been reached. In addition, if the
positive developments they were looking for fail to develop, and they see no
potential improvement on the near horizon, the stock will be sold.
The stocks in the Portfolio participated nicely with the general market
appreciation, but in addition, more than 25% of the Portfolio holdings saw price
appreciation in the fiscal year in excess of 50%. The relative outperformance
was not in any particular industry but fits the pattern of looking for
undervalued stocks with an unrecognized catalyst that Cambiar has used for
years. Two of the best performing names this year were IBM and Owens-Illinois
Corporation.
IBM is the largest supplier of advanced information processing technology in the
world and had traditionally been known for its powerful mainframe computer
technology. When information processing technology evolved more toward the
personal computer and networking systems, IBM was left unprepared. The Company
found itself bloated with the prospect of slowing sales in its primary mainframe
product line. The Company has spent the past two years restructuring - primarily
through an increased focus on sales of software and services and through cost
reduction. When IBM was purchased for the AHA Portfolio, the stock was selling
at less than 10 times 1996 estimated earnings with double digit earnings
62
<PAGE>
growth anticipated for the next few years.
In addition, the Company was generating significant free cash flow which is
being used in a stock repurchase program in which shares outstanding are
actually declining (versus offsetting stock options granted). The shares
appreciated 82% during the fiscal year.
Owens-Illinois is a slightly different story in that the Company's operations
were not the major issue, but a potential legal liability related to asbestos.
Owens-Illinois is one of the dominant glass and plastic container manufacturers
in the world. Cambiar saw an opportunity when the investment community
perceived the asbestos liability risk as overwhelming when in actuality, the
Company had largely quantified their exposure and had taken significant
reserves. In addition, the operating trends were accelerating so that stronger
earnings growth was visible. Shares were purchased at approximately $12/share -
around a 10 times earnings multiple and a 30% discount to other container
companies. The stock now trades in the low $30/share area.
Another interesting situation that fund shareholders are participating in - and
one that is becoming more frequent for shareholders today - is the proxy contest
waged by opposing potential management slates at The Student Loan Marketing
Corporation (Sallie Mae). As a result of a proxy battle two years ago, the
initial 1997 proxy solicitation was extremely unfriendly to shareholders,
calling for super-majority voting, loss of cumulative voting, a staggered board
and no opportunity to vote separately on the issue of Sallie Mae's privatization
from government enterprise status and the reorganized Company Board of Directors
make-up. Although the final outcome of the Board make-up and Company direction
has not been finalized, shareholders, including the AHA portfolio vote, were
active in defeating unfriendly provisions which could entrench management, and
in pushing for alternatives which appear to be positive no matter what the final
proxy outcome. The share price has positively reflected these activities as
well.
Although it was difficult to find many disappointments this year, the theme that
was most prominent in underperforming stocks was either disappointing earnings
(usually for more than one quarter) or a lackluster earnings growth picture.
Pharmacia Upjohn and Ryan's Family Steakhouse fit these criteria respectively.
The stocks both are solid holdings from a valuation perspective, but the
investment thesis in both cases is changing and we are re-evaluating whether a
catalyst for appreciation still exists.
Going forward into fiscal 1998, Cambiar intends to use the same, time-proven
stock selection methodology used in years past. They believe our bottoms-up
selection process works well in various market conditions over longer periods of
time. They anticipate no change in investment strategy or style and focus our
efforts on continuing to provide superior results going forward.
63
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $100,000 INVESTMENT IN THE DIVERSIFIED EQUITY
PORTFOLIO AND THE S&P 500 STOCK INDEX FOR THE YEARS ENDED JUNE 30,
Average Annual Total Return
1 Year 32.97%
Since Inception 15.61%
AHA DIVERSIFIED EQUITY PORTFOLIO
Diversified S&P 500
Qtr Value Return
- --- ----- ------
1988 $100,000 $100,000
1989 $114,455 $117,967
1990 $123,340 $137,325
1991 $127,334 $147,445
1992 $146,610 $167,384
1993 $167,830 $190,174
1994 $174,894 $192,732
1995 $210,071 $242,974
1996 $265,563 $306,332
1997 $353,123 $412,566
[GRAPH]
INCEPTION DATE FOR THE DIVERSIFIED EQUITY PORTFOLIO WAS OCTOBER 20, 1988.
64
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
BALANCED PORTFOLIO
AVATAR INVESTORS ASSOCIATES CORP. (MANAGES 20% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1997, the total return of the Balanced
Portfolio, net of all fees and expenses, was 23.23%, compared to a total return
for the same period of 21.41% for a mix of 50% Lehman Brothers Aggregate Bond
Index and 50% S&P 500 Stock Index. The gross return of the segment of the
Portfolio, managed by Avatar Investors Associates Corp. ("Avatar") was 15.59%
compared to S&P 500 Stock Index which had a total return of 34.68% for the same
period. The principal factors which affected performance during the fiscal year
are discussed below.
As the above numbers demonstrate, it was a difficult year for any defensive
style to post superior returns given both the magnitude of the gains
(particularly in the most recent quarter) and the capitalization bias associated
with those gains. As an asset allocator, Avatar's exposure to the market had
the greatest impact on performance. What follows is a review of the asset
allocation moves made over the past twelve months, and the reasons behind these
moves.
Avatar began the fiscal year (June 1996) at about 70% invested in equities. The
rise in interest rates and the deterioration of the market's momentum during
last summer's correction caused them to reduce exposure to about 50% by the end
of July. This move helped ease the pain of the correction which caused some
more aggressive investment styles to lose over 20% of their value. As market
momentum improved in August, Avatar began moving back into the market. During
the latter part of 1996, bond yields broke through the low side of their trading
range due to a moderation in wage pressures. As the consensus view toward the
Fed shifted back to a "hold" policy and the Dow broke through 6000, Avatar
continued to move up in exposure. Avatar ended 1996 positioned to take
advantage of an upward trending market at 80% equities. In late February this
year, signs of continued economic strength pushed long-term interest rates
higher. This raised the possibility of a hike in the Fed Funds rate. Strong
employment growth and wage gains Avatar reported in early March provided the
catalyst for the Fed policy shift to higher rates later in the month. Avatar
gradually reduced equity exposure and by early April 50% invested. The
market experienced a near-ten percent correction during March and into April as
it digested the prospects for higher interest rates. The correction turned out
to be limited in magnitude and short in duration and the market rallied 19%
through the end of the fiscal year. One of the key factors responsible was the
decline in long-term interest rates due to rising unemployment claims, slowing
retail and auto sales, and benign inflation reports. As our research closely
tracks long-term rates, the decline, coupled with positive market momentum
conditions (most notably improving market breadth), caused us to re-commit much
of the cash back into equities. Avatar ended the fiscal year at 70% invested.
The other piece of the performance equation is clearly stock selection, where
our results Avatar a bit better than the overall portfolio's. Dramatic
sector rotations have been characteristic of the market over the last year,
making it difficult to emphasize the right sectors in a consistent fashion.
Nonetheless, Avatar saw some benefits from our traditional emphasis on the
larger cap segment of the market. Avatar always had a need to be
positioned in these stocks due to the requirement that stocks be liquid
enough to allow asset allocation moves to be implemented in an expeditious
65
<PAGE>
manner. The greatest benefit to Avatar's portfolios over the 12 month period
was the above-market weights in key areas of the energy and technology
sectors. Oil and gas drilling stocks and semiconductor stocks topped the
list of performers over the period, and Avatar heavily weighted these two
throughout the year. There was no particular industry group that hurt us
over the year. In fact, the equity only under-performance can be most
directly tied to an under-representation in large cap stocks relative to the
S&P. Most small-to-mid cap stocks simply never had a chance. Though, their
bias is toward larger cap issues, Avatar also have a consistent need for
diversification (among not only industries, but also along the cap spectrum).
Therefore, most diversified management styles will have difficulty over any
period that sees performance generated from a very narrow segment of the
market.
On a more macro level, Avatar's style tends to under-perform bull market
periods and sees its best relative performance during bear market periods.
Over the four full market cycles during which Avatar has been managing
assets, their performance has exceeded the S&P 500's with less risk.
Needless to say, Avatar are in the midst of one of the greatest bull markets
of all time, and one should expect to see a lag in performance versus the S&P
500. This has been an unprecedented period of time for the stock market, not
only regarding the performance, but the risk (standard deviation) associated
with this performance. Historically the market has returned about 10% with a
nearly 20% standard deviation. In the last five years, however, Avatar had
close to a mirror image of this, 50% more returns with less than half the
standard deviation.
In sum, long-term investment plans chose Avatar Associates for their ability
to participate in rising markets and preserve capital in market declines.
Clearly the key to their long-term success is loss limitation in falling
markets. In this current bull market, declines of any type have been rare.
As Avatar inevitably returns to more normal levels of market volatility,
their disciplined asset allocation style will bring added benefits to the
long-term investment plan.
66
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
BALANCED PORTFOLIO
WESTERN ASSET MANAGEMENT COMPANY (MANAGES 30% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1997, the total return, net of all fees
and expenses, of the Balanced Portfolio was 23.23%, compared to 21.41% for a mix
of 50% Lehman Brothers Aggregate Bond Index ("LB Aggregate Index") and 50% S&P
500 Stock Index. The gross return for the segment of the Portfolio, managed by
WAMCO was 8.72%, compared to the LB Aggregate Index , which had a total return
of 8.14% for the same period. The principal factors which affected performance
during the fiscal year are discussed below. WAMCO manages the fixed income
portion of the Balanced Portfolio.
The past year was characterized by relatively volatile interest rates which
ended the period somewhat lower than they began, a reasonably robust economy,
and a significant decline in measured inflation. Investors' concerns were
centered mainly around the strength of the economy, in the belief that excessive
growth would eventually generate rising inflation pressures. Perhaps the most
significant event of the past year was the surprising conclusion to the
growth/inflation drama. Even as growth accelerated, inflation continue to fall,
reaching levels we have not seen since the 1950s.
For the 12-month period ending June 30, 1997, the Portfolio outperformed its
benchmark, with a total return of 8.72% vs. 8.14% for the Lehman Aggregate Bond
Index. These results were achieved through a variety of successful strategies.
Performance was positively impacted by the fact that the portfolio held a long
duration posture throughout the period and interest rates fell on balance. The
manager felt that inflation fundamentals were solid, and that the secular
disinflation observed over the course of the current business cycle was likely
to continue. This created an environment conducive to a gradual decline in
interest rates, which appeared high relative to prospective inflation. Indeed,
inflation in the first half of 1997 fell to levels not seen since the 1950s,
when bonds yielded 4% and mortgages were available at 5%. Consistent with the
manager's desire to avoid excessive risk, the Portfolio's duration ranged from
110% to 120% of its benchmark duration.
Yield curve positioning also contributed to results, as yield curve exposure
successfully anticipated all three major shifts in the shape of the yield curve.
The yield curve steepened throughout the summer and into early fall of 1996 as
the economy weakened, and this benefitted the Portfolio's bullet exposure to
maturities. By November, the manager had reversed course and adopted a barbell
exposure to maturities, which benefitted as the economy strengthened and the
yield curve flattened. The second quarter of 1997 saw a replay of the first
period, as a slowing economy led to a steeper curve and this benefitted the
Portfolio's emphasis on intermediate maturities.
Mortgage overweighting throughout the past year was a positive contributor to
performance as well, as mortgages outperformed all other sectors. Emphasis
within the mortgage sector was focused on lower coupon issues, seasoned issues
and commercial mortgage-backed securities, as all of these were less likely than
others to suffer from prepayment risk in a declining interest rate environment.
Moderate corporate overexposure throughout the past year also added to returns,
particularly the manager's emphasis on the lower end of the investment quality
scale where returns generally exceeded market returns. Corporate exposure was
overweighted on average throughout the period, but relatively light compared to
the managers' historical preference for the sector. The decision to minimize
corporate
67
<PAGE>
exposure was driven by the historically low level of spreads available, and by
the manager's determination that the economy was likely to be somewhat weaker on
balance than the market seemed to be expecting. Lately, disinflation trends
have continued to the point where deflation risks are beginning to surface, and
this could pose problems for corporate earnings going forward.
68
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE:
BALANCED PORTFOLIO
CAMBIAR INVESTORS, INC. (MANAGES 50% OF THE PORTFOLIO)
During the fiscal year ended June 30, 1997, the total return of the Balanced
Portfolio, net of all fees and expenses, was 23.23%, compared to a total return
for the same period of 21.41% for a mix of 50% Lehman Brothers Aggregate Bond
Index and 50% S&P 500 Stock Index. The gross return for the segment of the
Portfolio, managed by Cambiar's was 34.98%, compared to the S&P 500 Stock Index
of 34.68% for the same period. The principal factors which affected performance
are discussed below. Cambiar manages only equity securities and accounts for 50%
of the Balanced Portfolio.
The economic backdrop, although frequently giving mixed readings, has generally
provided a positive environment for stocks. With the exception of a close-to
10% correction in mid-April related to concerns that the Federal Reserve might
raise interest rates due to the possibility of an overheating economy, market
indices have continued to advance strongly. Presently, inflation trends seem to
be moderate and the threat of increased interest rates has abated, at least
temporarily. Subdued inflation, low interest rates, and healthy economic
fundamentals have contributed to continued strong overall corporate earnings.
Cambiar will continue their practice of building portfolios
company-by-company. They believe this methodology allows them to maintain
focus on valuation and protects our investments on the downside when overall
market conditions and expectations become inflated. Cambiar screens for
attractively valued stocks based on the following characteristics: low
relative price/earnings, price/book, price/sales, and price/cash flow ratios.
Cambiar investment analysts following specific industries evaluate the
stocks, looking for internal improvements or strategic developments which
will trigger, in their opinion, above average price appreciation. The
portfolios are not restricted by capitalization, although they generally fall
into the medium-to-large capitalization range. Portfolios tend to hold 30 to
40 stocks.
Cambiar attempts to minimize risk by purchasing stocks at the lower end of their
relative valuation range. They also use a multifaceted sell discipline. Stocks
become candidates for sale if price appreciation results in overweighing or a
target price based on relative valuation has been reached. In addition, if the
positive developments they were looking for fail to develop, and they see no
potential improvement on the near horizon, the stock will be sold.
The stocks in the Portfolio participated nicely with the general market
appreciation, but in addition, more than 25% of the portfolio holdings saw price
appreciation in the fiscal year in excess of 50%. The relative outperformance
was not in any particular industry but fits the pattern of looking for
undervalued stocks with an unrecognized catalyst that Cambiar has used for
years. Two of the best performing names this year were IBM and Owens-Illinois
Corporation.
IBM is the largest supplier of advanced information processing technology in the
world and had traditionally been known for its powerful mainframe computer
technology. When information processing technology evolved more toward the
personal computer and networking systems, IBM was left unprepared. The Company
found itself bloated with the prospect of slowing sales in its primary mainframe
product line. The Company has spent the past two years restructuring - primarily
through an increased focus on sales of software and
69
<PAGE>
services and through cost reduction. When IBM was purchased for the AHA
Portfolio, the stock was selling at less than 10 times 1996 estimated earnings
with double digit earnings growth anticipated for the next few years. In
addition, the Company was generating significant free cash flow which is being
used in a stock repurchase program in which shares outstanding are actually
declining (versus offsetting stock options granted). The shares appreciated 82%
during the fiscal year.
Owens-Illinois is a slightly different story in that the Company's operations
were not the major issue, but a potential legal liability related to asbestos.
Owens-Illinois is one of the dominant glass and plastic container manufacturers
in the world. Cambiar saw an opportunity when the investment community
perceived the asbestos liability risk as overwhelming when in actuality, the
Company had largely quantified their exposure and had taken significant
reserves. In addition, the operating trends were accelerating so that stronger
earnings growth was visible. Shares were purchased at approximately $12/share -
around a 10 times earnings multiple and a 30% discount to other container
companies. The stock now trades in the low $30/share area.
Another interesting situation that fund shareholders are participating in, and
one that is becoming more frequent for shareholders today, is the proxy contest
waged by opposing potential management slates at The Student Loan Marketing
Corporation (Sallie Mae). As a result of a proxy battle two years ago, the
initial 1997 proxy solicitation was extremely unfriendly to shareholders,
calling for super-majority voting, loss of cumulative voting, a staggered board
and no opportunity to vote separately on the issue of Sallie Mae's privatization
from government enterprise status and the reorganized Company Board of Directors
make-up. Although the final outcome of the Board make-up and Company direction
has not been finalized, shareholders, including the AHA Portfolio vote, were
active in defeating unfriendly provisions which could entrench management, and
in pushing for alternatives which appear to be positive no matter what the final
proxy outcome. The share price has positively reflected these activities as
well.
Although difficult to find many disappointments this year, the theme that was
most prominent in underperforming stocks was either disappointing earnings
(usually for more than one quarter) or a lackluster earnings growth picture.
Pharmacia Upjohn and Ryan's Family Steakhouse fit these criteria respectively.
The stocks both are solid holdings from a valuation perspective, but the
investment thesis in both cases is changing and we are re-evaluating whether a
catalyst for appreciation still exists.
Going forward into fiscal 1998, Cambiar intends to use the same, time-proven
stock selection methodology used in years past. They believe our bottoms-up
selection process works well in various market conditions over longer periods of
time. They anticipate no change in investment strategy or style and focus
their efforts on continuing to provide superior results going forward.
70
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $100,000 INVESTMENT IN THE BALANCED PORTFOLIO,
S&P 500 STOCK INDEX AND LEHMAN BROTHERS AGGREGATE BOND INDEX
FOR THE YEARS ENDED JUNE 30,
Average Annual Total Return
1 Year 23.23%
Since Inception 12.07%
AHA BALANCED PORTFOLIO
Balanced S&P 500 LB Aggregate
Qtr Value Return Value
- --- ----- ------ -----
1988 $100,000 $100,000 $100,000
1989 $109,964 $117,967 $110,010
1990 $115,831 $137,325 $118,641
1991 $123,503 $147,445 $131,321
1992 $140,777 $167,384 $149,778
1993 $159,110 $190,174 $167,442
1994 $159,569 $192,732 $165,249
1995 $183,449 $242,974 $285,987
1996 $218,672 $306,332 $195,313
1997 $269,465 $412,566 $211,220
[GRAPH]
INCEPTION DATE FOR THE BALANCED PORTFOLIO WAS OCTOBER 20, 1988.
71
