<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- -------------------
Commission File Number 0-18702
THE S.E.C.T.O.R. STRATEGY FUND/SM/ L.P.
-----------------------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3568563
- --------------------------------------- ---------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
(formerly ML Futures Investment Partners Inc.)
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
-----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
212-236-4161
--------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____
-----
This document contains 13 pages.
There are no exhibits and no exhibit index filed with this document.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE S.E.C.T.O.R. STRATEGY FUND/SM/ L.P.
--------------------------------------------------------
(a Delaware limited partnership)
STATEMENTS OF FINANCIAL CONDITION
----------------------------------------
March 31, December 31,
1996 1995
----------- ------------
Accrued interest (Note 2) $ 128,810 $ 144,134
Equity in commodity futures trading accounts:
Cash and option premiums 32,705,542 34,432,565
Net unrealized gain on open contracts 1,173,035 882,382
-----------
TOTAL $34,007,387 $35,459,081
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ----------------------------------------
LIABILITIES:
Redemptions payable $ 332,293 $ 303,823
Brokerage commissions payable (Note 2) 247,938 265,934
Profit shares payable 44,235 205,277
Administrative expense payable (Note 2) 7,084 -
----------- -----------
Total liabilities 631,550 775,034
----------- -----------
PARTNERS' CAPITAL:
General Partner (2,518 and 2,518 Units) 435,704 435,363
Limited Partners (190,230 and 197,942 Units) 32,940,133 34,248,684
----------- -----------
Total partners' capital 33,375,837 34,684,047
----------- -----------
TOTAL $34,007,387 $35,459,081
=========== ===========
NET ASSET VALUE PER UNIT $ 173.16 $ 173.02
=========== ===========
(Based on 192,748 and 200,460 Units outstanding)
See notes to financial statements.
2
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND/SM/ L.P.
--------------------------------------------------------
(a Delaware limited partnership)
STATEMENTS OF OPERATIONS
------------------------
For the three For the three
months ended months ended
March 31, March 31,
1996 1995
----------- -----------
REVENUES:
Trading profits:
Realized $ 196,195 $ 3,073,073
Change in unrealized 290,653 1,209,080
----------- -----------
Total trading results 486,848 4,282,153
----------- -----------
Interest income (Note 2) 387,772 545,500
----------- -----------
Total revenues 874,620 4,827,653
----------- -----------
EXPENSES:
Profit shares 44,235 370,186
Brokerage commissions (Note 2) 767,486 945,297
Administrative expense (Note 2) 21,928 -
----------- -----------
Total expenses 833,649 1,315,483
----------- -----------
NET INCOME $ 40,971 $ 3,512,170
=========== ===========
NET INCOME PER UNIT
Weighted average number of units
outstanding (Note 4) 197,717 275,541
=========== ===========
Weighted average net income
per unit $.21 $12.75
=== =====
See notes to financial statements.
3
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND/SM/ L.P.
--------------------------------------------------------
(a Delaware limited partnership)
STATEMENTS OF CHANGES IN
PARTNERS' CAPITAL
----------------------------------------
For the three months ended March 31, 1996 and 1995
----------------------------------------
<TABLE>
<CAPTION>
Limited General
Units Partners Partner Total
--------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1994 283,248 40,564,659 531,886 41,096,545
Net income - 3,464,639 47,531 3,512,170
Redemptions (26,878) (4,089,793) - (4,089,793)
--------- -------------- ----------- ------------
PARTNERS' CAPITAL,
MARCH 31, 1995 256,370 $ 39,939,505 $ 579,417 $ 40,518,922
========= ============== =========== ============
PARTNERS' CAPITAL,
DECEMBER 31, 1995 200,460 34,248,684 435,363 34,684,047
Net income - 40,630 341 40,971
Redemptions (7,712) (1,349,181) - (1,349,181)
--------- -------------- ----------- -------------
PARTNERS' CAPITAL,
MARCH 31, 1996 192,748 $ 32,940,133 $ 435,704 $ 33,375,837
========= ============== =========== ============
</TABLE>
See notes to financial statements.
4
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND/SM/ L.P.
--------------------------------------------------------
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The S.E.C.T.O.R. Strategy Fund/SM/ L.P. (the "Partnership" or the "Fund") was
organized under the Delaware Revised Uniform Limited Partnership Act on April
30, 1990 and commenced trading activities on July 16, 1990. The Partnership
engages in the speculative trading of futures, options and forward contracts
on a wide range of commodities. Merrill Lynch Investment Partners Inc.
(formerly ML Futures Investment Partners Inc.) ("MLIP" or the "General
Partner"), a wholly-owned subsidiary of Merrill Lynch Group, Inc., which in
turn is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch",) is the general partner of the Partnership, and Merrill Lynch Futures
Inc. ("MLF"), also a Merrill Lynch affiliate, is its commodity broker. The
General Partner has agreed to maintain a general partner's interest of at
least 1% of the total Capital in the Partnership. The General Partner and
each Limited Partner share in the profits and losses of the Partnership in
proportion to the respective interest in the Partnership owned by each.
The financial information included herein has been prepared by management
without audit by independent certified public accountants who do not express
an opinion thereon. The statement of financial condition as of December 31,
1995 has been derived from but does not include all the disclosures contained
in the audited financial statements for the year ended December 31, 1995. The
information furnished includes all adjustments which are, in the opinion of
management, necessary for a fair statement of results for the interim period.
The results of operations as presented, however, should not be considered
indicative of the results to be expected for the entire year.
MLIP selects independent advisors (the "Advisors" or the "Trading Advisors")
to manage the Partnership's assets, and allocates and reallocates the
Partnership's trading assets among existing, replacement and additional
Advisors.
MLIP also determines what percentage of the Partnership's total capital to
allocate to trading from time to time, attempting to balance the desirability
of reducing the opportunity costs of the Partnership's "principal protection"
structure by allocating 100% (or more) of the Partnership's assets to trading
against the necessity of preventing Merrill Lynch & Co., Inc. from ever being
required to make any payments to the Partnership under the Merrill Lynch &
Co., Inc. guarantee (see Note 5).
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
-------------------
Commodity futures, options and forward contract transactions are recorded on
the trade date and open contracts are reflected in the financial statements at
their fair value on the last business day of the reporting period. The
difference between the original contract amount and fair value is reflected in
income as an unrealized gain or loss. Fair value is based on quoted market
prices. All commodity futures, options and forward contracts are reflected at
fair value in the financial statements.
Operating Expenses
------------------
The General Partner pays for all routine operating costs (including legal,
accounting, printing, postage and similar administrative expenses) of the
Partnership and receives a fee for such cost as described in Note 2.
5
<PAGE>
Income Taxes
------------
No provision for income taxes has been made in the accompanying financial
statements as each partner is individually responsible for reporting income or
loss based on their respective share of the Partnership's income and expenses
as reported for income tax purposes.
Distributions
-------------
The Unitholders are entitled to receive, equally per Unit, any distribution
which may be made by the Partnership. No such distributions have been made as
of March 31, 1996.
Redemptions
-----------
A Limited Partner may require the Partnership to redeem some or all of their
Units at the Net Asset Value as of the close of business on the last business
day of any month upon ten calendar days' notice.
Dissolution of the Partnership
------------------------------
The Partnership will terminate on December 31, 2010 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
All of the Partnership's assets are deposited with MLF. As a means of
approximating the interest rate which would be earned by the Partnership had
100% of its Net Assets on deposit with MLF been invested in 91-day Treasury
bills, MLF pays the Partnership interest on its account equity on deposit with
MLF at a rate of 0.5 of 1% per annum below the prevailing 91-day Treasury bill
rate. In the case of its trading in certain foreign futures contracts, the
Partnership deposits margin in foreign currency denominated instruments or
cash and earns interest generally at a rate of 0.5 of 1% per annum below the
prevailing short-term government interest rate in the country in question. Any
additional economic benefit derived from possession of the Fund's assets
accrues to MLF or its affiliate.
The Partnership pays brokerage commissions to MLF at a flat monthly rate equal
to 0.75 of 1% (a 9% annual rate) of the Partnership's month-end assets
allocated to trading. Assets allocated to trading are not reduced, for
purposes of calculating brokerage commissions, by any accrued but unpaid
brokerage commissions, profit shares or other fees or charges. Effective
January 1, 1996, the brokerage commission the Partnership pays to the
Commodity Broker was reduced to .729% of 1% (a 8.75% annual rate), and the
Partnership began to pay the General Partner an administrative fee of .020833
of 1% (a .25% annual rate). The General Partner estimates that the round-turn
equivalent commission rate charged to the Partnership during the quarters
ended March 31, 1996 and 1995 was approximately $96.92 and $18, respectively
(not including, in calculating round-turn equivalents, forward contracts on a
futures-equivalent basis).
MLF pays the Advisors annual Consulting Fees ranging from 2% to 4% of the
Partnership's average month-end assets allocated to them for management, after
reduction for a portion of the brokerage commissions.
The Partnership trades forward contracts through a Foreign Exchange Desk (the
"F/X Desk") established by MLIP that contacts at least two counterparties,
along with Merrill Lynch International Bank ("MLIB") for all of the
Partnership's currency trades. All counterparties other than MLIB are
unaffiliated with any Merrill Lynch entity. The F/X Desk charges a service
fee equal (at current exchange rates) to approximately $5.00 to $12.50 on each
purchase or sale of a futures-contract equivalent face amount of a foreign
currency. No service fees are charged on trades awarded to MLIB (which
receives a "bid-ask" spread on such trades). MLIB is awarded trades only if
its price (which includes no service fee) is equal to or better than the best
price (including the service fee) offered by any of the other counterparties
contacted.
The F/X Desk trades on the basis of credit lines provided by a Merrill Lynch
entity. The Partnership is not required to margin or otherwise guarantee its
F/X Desk trading.
Certain of the Partnership's currency trades are executed in the form of
"exchange of futures for physical" ("EFP") transactions involving MLIB and
MLF. In these transactions, a spot or forward (collectively referred to as
"cash") currency position is acquired and exchanged for an equivalent futures
position on the Chicago Mercantile Exchange's International Monetary Market.
In its EFP trading, the Partnership acquires cash currency positions through
the F/X Desk in the same manner and on the same terms as in the case of the
Partnership's other F/X Desk trading. When the Partnership exchanges these
positions for futures, there is a "differential" between the prices of these
two positions. This "differential" reflects, in part, the different
settlement dates of
6
<PAGE>
the cash and the futures contracts as well as prevailing interest rates, but
also includes a pricing spread in favor of MLIB or another Merrill Lynch
entity.
The Partnership's F/X Desk service fee and EFP differential costs have, to
date, totaled no more than 0.25 of 1% per annum of the Partnership's average
month-end Net Assets.
3. AGREEMENTS
The Partnership and the Advisors have each entered into Advisory Agreements.
These Advisory Agreements generally terminate one year after they are entered
into, subject to certain renewal rights exercisable by the Partnership. The
Advisors determine the commodity futures and forward contract trades to be
made on behalf of their respective Partnership accounts, subject to certain
Partnership trading policies and to certain rights reserved for the General
Partner.
Profit shares, generally ranging from 15% to 25% of any New Trading Profit, as
defined, recognized by each Advisor considered individually irrespective of
the overall performance of the Partnership, as of the end of each calendar
quarter are paid by the Partnership to each Advisor. Such payments are also
made in respect of Units redeemed as of the end of interim months during a
calendar quarter, to the extent of the applicable percentage of any New
Trading Profit attributable to such Units.
4. WEIGHTED AVERAGE UNITS
The weighted average number of Units outstanding was computed for purposes of
disclosing net income or loss per weighted average Unit. The weighted average
number of Units outstanding at March 31, 1996 and 1995 equals the Units
outstanding as of such date, adjusted proportionately for Units redeemed based
on the respective length of time each was outstanding during the preceding
period.
5. MERRILL LYNCH & CO., INC. GUARANTEE
Merrill Lynch & Co., Inc. has guaranteed to the Partnership that it will have
sufficient Net Assets as of the second Principal Assurance Date, as defined,
that the Net Asset Value per Unit as of such Principal Assurance Date will
equal, after adjustment for all liabilities to third parties, not less than
$133.80.
6. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades futures, options and forward contracts in interest
rates, stock indices, commodities, currencies, energy and metals. The
Partnership's revenues by reporting category for the quarter ended March 31,
1996 were as follows:
1996
----------
[S] [C]
Interest rate and
stock indices $(431,320)
Commodities 61,630
Currencies 795,850
Energy 169,300
Metals (108,612)
---------
$ 486,848
=========
Market Risk
-----------
Derivative instruments involve varying degrees of off-balance sheet market
risk, and changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the financial instruments or
commodities underlying such derivative instruments frequently result in
changes in the Partnership's unrealized gain or loss on such derivative
instruments as reflected in the Statements of Financial Condition. The
Partnership's exposure to market risk is influenced by a number of factors,
including the relationships among the derivative instruments held by the
Partnership as well as the volatility and liquidity of the markets in which
the derivative instruments are traded.
The General Partner has procedures in place intended to control market risk,
although there can be no assurance that they will, in fact, succeed in doing
so. These procedures focus primarily on monitoring the trading of the
Advisors selected from time to time for the Partnership, adjusting the
percentage of the Partnership's total assets allocated to trading, calculating
the Net Asset Value of the Advisors' respective Partnership accounts as of the
close of business on each day and reviewing outstanding positions for over-
concentration -- both on an Advisor-by-Advisor and on an overall Partnership
basis. While the General Partner will not itself intervene in the markets to
hedge or
7
<PAGE>
diversify the Partnership's market exposure (although the General Partner does
adjust the percentage of the Partnership's total assets allocated to trading),
the General Partner may urge Advisors to reallocate positions, or itself
reallocate Partnership assets among Advisors (although typically only as of
the end of a month) in an attempt to avoid over-concentrations. However, such
interventions are unusual. Except in cases in which it appears that an Advisor
has begun to deviate from past practice or trading policies or to be trading
erratically, the General Partner's basic risk control procedures consist
simply of the ongoing process of Advisor monitoring and selection, with the
market risk controls being applied by the Advisors themselves.
Fair Value
----------
The derivative instruments used in the Partnership's trading activities are
marked to market daily with the resulting unrealized gains or losses recorded
in the Statements of Financial Condition and the related profit or loss
reflected in trading revenues in the Statements of Operations. The
contract/notional values of the Partnership's open derivative instrument
positions as of March 31, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------- ---------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Interest rate
and stock
indices $ 26,903,811 $ 123,769,126 $ 159,971,759 $ 6,823,540
Commodities 7,288,396 4,381,998 11,552,579 922,979
Currencies 26,574,733 29,192,616 14,228,028 37,399,355
Energy 4,531,496 849,019 2,132,766 7,133,421
Metals 3,707,635 7,177,410 5,062,196 8,370,684
------------------- ------------------- ------------------- -------------------
$ 69,006,071 $ 165,370,169 $ 192,947,328 $ 60,649,979
================== =================== =================== ===================
</TABLE>
Substantially all of the Partnerships derivative instruments outstanding as of
March 31, 1996 expire within one year.
The contract/notional value of the Trading Partnership's exchange-traded and
non-exchange-traded derivative instrument positions as of March 31, 1996 and
December 31, 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------- ---------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Exchange
traded $ 46,555,650 $ 139,401,328 $ 175,191,914 $ 26,840,562
Non-Exchanged
traded 22,450,421 25,968,841 17,755,414 33,809,417
------------------- ------------------- ------------------- -------------------
$ 69,006,071 $ 165,370,169 $ 192,947,328 $ 60,649,979
=================== =================== =================== ===================
</TABLE>
The average fair value of the Partnership's derivative instrument positions
which were open as of the end of each calendar month during the quarter ended
March 31, 1996 and the year ended December 31, 1995 was as follows:
8
<PAGE>
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------- ---------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Interest rate
and Stock
indices $ 74,983,550 $ 92,721,488 $ 110,354,738 $ 12,248,672
Commodities 9,254,618 4,868,042 12,185,481 2,455,052
Currencies 40,135,875 47,361,903 65,653,991 67,746,615
Energy 3,169,696 2,788,719 4,522,825 3,331,428
Metals 7,397,541 6,553,174 7,184,139 13,570,221
------------------- ------------------- ------------------- -------------------
$ 134,941,280 $ 154,293,326 $ 199,901,174 $ 99,351,988
=================== =================== =================== ===================
</TABLE>
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and sell the same derivative instrument on
the same date in the future. These commitments are economically offsetting
but are not, as a technical matter, offset in the forward market until the
settlement date.
Credit Risk
-----------
The risks associated with exchange-traded contracts are typically perceived to
be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases
limited in amount, in some cases not) of the members of the exchange is
pledged to support the financial integrity of the exchange. In over-the-
counter transactions, on the other hand, traders must rely solely on the
credit of their respective individual counterparties. Margins, which may be
subject to loss in the event of a default, are generally required in exchange
trading, and counterparties may also require margin in the over-the-counter
markets.
The fair value amounts in the above tables represent the extent of the
Partnership's market exposure in the particular class of derivative instrument
listed, but not the credit risk associated with counterparty nonperformance.
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized gain, if any, included in the Statements
of Financial Condition. The Partnership also has credit risk because the sole
counterparty or broker with respect to most of the Partnership's assets is
MLF.
As of March 31, 1996 and December 31, 1995, $31,425,959 and $21,422,384 of the
Partnership's assets, respectively, were held in segregated accounts at MLF in
accordance with Commodity Futures Trading Commission regulations.
The gross unrealized gain and the net unrealized gain on the Partnership's
open derivative instrument positions as of March 31, 1996 and December 31,
1995 were as follows:
1996 1995
----------------------- -----------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Gain Gain (Loss) Gain Gain (Loss)
---------- ----------- ---------- -----------
Exchange
traded $1,416,226 $1,166,335 $1,733,452 $1,035,168
Non-Exchanged
traded 171,478 6,700 259,593 (152,786)
-------------------------------------------------
$1,587,704 $1,173,035 $1,993,045 $ 882,382
=================================================
The Partnership controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
9
<PAGE>
Operational Overview: Advisor Selections
- ----------------------------------------
Due to the nature of the Fund's business, its results of operations
depend on MLIP's ability to select Advisors and determine the appropriate
percentage of each series' assets to allocate to them for trading, as well as
the Advisors' ability to recognize and capitalize on trends and other profit
opportunities in different sectors of the world commodity markets. MLIP's
Advisor selection procedure and leveraging analysis, as well as the Advisors'
trading methods, are confidential, so that substantially the only information
that can be furnished regarding the Fund's results of operations is contained in
the performance record of its trading. Unlike operating businesses, general
economic or seasonal conditions do not directly affect the profit potential of
the Fund, and its past performance is not necessarily indicative of future
results. Because of the speculative nature of its trading, operational or
economic trends have little relevance to the Fund's results. MLIP believes,
however, that there are certain market conditions, for example, markets with
strong price trends, in which the Fund has a better likelihood of being
profitable than in others.
As of April 1, 1996, the Partnership's assets were allocated as
follows:
<TABLE>
<CAPTION>
TRADING ADVISOR MARKETS TRADED % ALLOCATION
- --------------------------------- -------------------------------- -------------
<S> <C> <C>
John W. Henry & Co., Inc. Financial Instruments (including
currencies) and Metals 28.78%
Graham Capital Management L.P. Diversified Program 13.61%
AIS Futures Management, Inc. Diversified Program 13.14%
Chescor Limited Currencies 12.01%
Fundamental Futures Inc. Agriculture 11.54%
AIB Investment Managers Limited Currencies 11.20%
Blenhiem Investments, Inc. Diversified Program 9.72%
------
100.00%
</TABLE>
MLIP expects to continue to change both allocations and Advisors from
time to time without advance notice to existing investors.
Results of Operations - General
- -------------------------------
MLIP believes that multi-Advisor futures funds should be regarded as
medium- to long-term investments but, unlike an operating business, it is
difficult to identify "trends" in the Fund's operations and virtually impossible
to make any predictions regarding future results based on results to date.
Markets in which sustained price trends occur with some frequency tend
to be more favorable to managed futures investments than "whipsaw," "choppy"
markets, but (i) this is not always the case, (ii) it is impossible to predict
when trending markets will occur and (iii) different Advisors are affected
differently by trends in general as well as by particular types of trends.
The Fund controls credit risk in its trading in the derivatives markets
by trading only through Merrill Lynch entities which MLIP believes to be
creditworthy. The Fund attempts to control the market risk inherent in its
derivatives trading by utilizing a multi-advisor, multi-strategy structure.
This structure purposefully attempts to diversify the Fund's Advisor group among
different strategy types and market sectors in an effort to reduce risk
(although the Fund's portfolio currently emphasizes technical and trend-
following approaches).
Performance Summary
- -------------------
During the first quarter of 1995, the Fund's average month-end Net
Assets equalled $40,293,393, and the Fund recognized gross trading gains
$4,282,153 or 10.63% of such average month-end Net Assets. Brokerage
commissions of $945,297 or 2.35% and Profit Shares of $370,186 or 2.35% of
average month-end Net Assets were paid. Interest income of $545,500 or 1.35% of
average month-end Net Assets resulted in a net income of $3,512,170 or 8.72% of
average month-end Net Assets, which resulted in a 8.93% increase in the Net
Asset Value per Unit since December 31, 1994.
During the first quarter of 1996, the Fund's average month-end Net
Assets equalled $34,442,652, and the Fund recognized gross trading gains of
$486,848 or 1.41% of such average month-end Net Assets. Brokerage commissions
of $767,486 or 2.23% per Unit, Administrative expenses of $21,928 or 0.06% and
Profit Shares of $44,235 or 0.13% of average month-end Net Assets were paid.
Interest income of $387,772 or 1.13% of average month-end Net Assets resulted in
net income of $40,971 or 0.12% of average month-end Net Assets which resulted in
a 0.08% increase in the Net Asset Value per Unit since December 31, 1995.
During the first quarters of 1996 and 1995, the Fund experienced 4
profitable months and 2 unprofitable months.
10
<PAGE>
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER UNIT
Jan. Feb. Mar.
---------
<S> <C> <C> <C>
1995 $143.16 $151.75 $158.05
- ------------------------------------
1996 $181.96 $170.88 $173.16
- ------------------------------------
</TABLE>
Importance of Market Factors
- ----------------------------
Comparisons between the Fund's performance in a given period in one
fiscal year to the same period in a prior year are unlikely to be meaningful,
given the uncertainty of price movements in the markets traded by the Fund. In
general, MLIP expects that the Fund is most likely to trade successfully in
markets which exhibit strong and sustained price trends. The current Advisor
group emphasizes technical and trend-following methods. Consequently, one would
expect that in trendless, "choppy" markets the Fund would likely be
unprofitable, while in markets in which major price movements occur, the Fund
would have its best profit potential (although there could be no assurance that
the Fund would, in fact, trade profitably). However, trend-followers not
infrequently will miss major price movements, and market corrections can result
in rapid and material losses (sometimes as much as 5% in a single day).
Although MLIP monitors market conditions and Advisor performance on an ongoing
basis in overseeing the Fund's trading, MLIP does not attempt to "market
forecast" or to "match" trading styles with predicted market conditions.
Rather, MLIP concentrates on quantitative and qualitative analysis of
prospective Advisors, as well as on statistical studies of the historical
performance parameters of different Advisor combinations in selecting Advisors
and allocating and reallocating Fund assets among them.
Because managed futures advisors' strategies are proprietary and
confidential and market movements unpredictable, selecting advisors to implement
speculative trading strategies involves considerable uncertainty. Furthermore,
the concentration of the Fund's current Advisor portfolio, both in terms of the
number of managers retained and the common emphasis of their strategies on
technical and trend-following methods, increases the risk that unexpectedly bad
performance, turbulent market conditions or a combination of the two will result
in significant losses.
MLIP's Advisor Selections
- -------------------------
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally intends to make a medium- to long-term commitment
to all Advisors selected. However, there can be no assurance as to the
frequency or number of the Advisor changes which may take place in the future,
or as to how long any of the current Advisors will continue to manage assets for
the Fund.
Liquidity
- ---------
Most of the Partnership's assets are held as cash which, in turn, is
used to margin its futures positions and earns interest income and is withdrawn,
as necessary, to pay redemptions and fees.
The futures contracts in which the Partnership trades may become illiquid
under certain market conditions. Commodity exchanges limit fluctuations in
futures prices during a single day by regulations referred to as "daily limits."
During a single day no trades may be executed at prices beyond the daily limit.
Once the price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
generally neither be taken nor liquidated unless traders are willing to effect
trades at or within the limit. Futures contracts have occasionally moved to the
daily limit for several consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly liquidating its futures
(including its options) positions. There are no limitations on the daily price
moves in trading foreign currency forward contracts through banks, although
illiquidity may develop in the forward markets due to large spreads between
"bid" and "ask" prices quoted. (Forward contracts are the bank version of
currency futures contracts and are not traded on exchanges.)
Capital Resources
- -----------------
The Partnership does not have, nor does it expect to have, any capital
assets and has no material commitments for capital expenditures. The
Partnership uses its assets to supply the necessary margin or premiums for, and
to pay any losses incurred in connection with, its trading activity and to pay
redemptions and fees.
Inflation is not a significant factor in the Fund's profitability,
although inflationary cycles can give rise to the type of major price movements
which can have a materially favorable or adverse impact on the Fund's
performance.
Changes in the level of prevailing interest rates (a factor generally
associated with inflation) could have a material effect on the percentage of the
total capital attributable to various series of Units which is committed to
trading, as interest rates affect the calculation of the discounted minimum Net
Asset Value per Unit which Merrill Lynch & Co., Inc. has guaranteed to
investors.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits required to be filed with this document.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the first quarter of
fiscal 1996.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE S.E.C.T.O.R STRATEGY FUND/SM/ L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: May 13, 1996 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: May 13, 1996 By /s/JAMES M. BERNARD
-------------------
James M. Bernard
Chief Financial Officer,
Treasurer and Senior Vice President
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SUMMARY CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS OF OPERATIONS,
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 0 0
<RECEIVABLES> 34,007,387 42,674,419
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 34,007,387 42,674,419
<SHORT-TERM> 0 0
<PAYABLES> 631,550 2,155,496
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 33,375,837 49,518,923
<TOTAL-LIABILITY-AND-EQUITY> 34,007,387 42,674,419
<TRADING-REVENUE> 486,848 4,282,153
<INTEREST-DIVIDENDS> 387,772 545,500
<COMMISSIONS> 833,649 1,315,483
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 40,971 3,512,170
<INCOME-PRE-EXTRAORDINARY> 40,971 3,512,170
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 40,971 3,512,170
<EPS-PRIMARY> .21 12.75
<EPS-DILUTED> .21 12.75
</TABLE>