SUITE 450
6610 ROCKLEDGE DRIVE
BETHESDA, MARYLAND 20817
(301) 493-4600
1-800-443-3036
The
TORRAY
FUND
ANNUAL REPORT
DECEMBER 31, 1996
<PAGE>
THE TORRAY FUND
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF PERFORMANCE
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
February 14, 1997
Dear Fellow Shareholders:
I am pleased to have this opportunity to tell you about The Torray Fund's
results last year. Before doing so, however, I want to thank each of you for the
confidence you have placed in us, and to extend a warm welcome to our many new
shareholders.
Your fund's value, including dividends, increased 29.09% during 1996, and
over the last six years it has compounded at 20.56% annually. A comparison of
these results to the Standard & Poor's 500 Stock Index appears in charts on
pages 8 and 9 of this report.
As I have mentioned before, one of our goals is to defer tax liability on
your investment. So far, things have worked out well in meeting this objective.
Assuming the maximum rates on capital gains and ordinary income, your fund's
after-tax return for 1996 was 27.88%, and for the last six years it was 19.18%,
compounded annually. No clever tactics were employed; we simply held onto our
investments as opposed to trading them.
In the 1995 Annual Report, we confessed surprise at our fund's 50% return
that year, and said we didn't expect a rerun soon. Although last year was no
match for '95, it far exceeded our expectations. Moreover, stock prices are
still rising as I write, and people ask, "How long can this go on?" No one
knows. It is evident, though, that current economic conditions favor investment
in common stocks and the public has certainly embraced equities
enthusiastically. If neither factor changes, the market may continue on its
current track for the foreseeable future. We are not counting on it, however. In
fact, we are not even thinking about the stock market. Instead, our attention is
focused on the businesses in which The Torray Fund owns stock, and on the search
for new opportunities.
The fund's return last year was positively affected by above-market
advances on seven of its ten largest holdings: IBM +65.2%, Citicorp +53.2%,
Loral Space & Communications +46.4%, Student Loan Marketing (Sallie Mae) +41.1%,
Liberty Bancorp (Okla.) +33.6%, Salomon, Inc. +33.2% and Mellon Bank +32.1%.
Also contributing to results was a 119.6% rise in the shares of Interstate
Bakeries Corp., the fund's twelfth largest investment. Even though these stocks
and many of the fund's other holdings have appreciated significantly, we believe
the companies are excellent values and that the shares will continue to reflect
that fact in the long run. We have bought more stock in AT&T, IBM, Loral Space,
Sallie Mae and Salomon
1
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THE TORRAY FUND
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MANAGEMENT'S DISCUSSION OF PERFORMANCE
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
since year end, and are adding to other current investments depending upon the
prices at which they are available.
I am also pleased to tell you that on December 31, 1996, Bank One, the
tenth largest bank in America, agreed to exchange 1.175 shares of its stock for
each share of Liberty Bancorp of Oklahoma in a transaction valued at $546
million, or approximately $52 per Liberty share. In response, Liberty's stock
rose $8, and our 96,000-share position became the fund's fifth largest
investment. I have served as a Director of Liberty since 1988, when I joined a
small group of Oklahoma businessmen to help refinance the bank. While its
acquisition marks the close of an era, it also represents an opportunity for The
Torray Fund as a new investor in Bank One.
The revival of Liberty Bancorp is an interesting story, but one which never
would have been told were it not for the foresight, determination and generosity
of Admiral John E. Kirkpatrick of Oklahoma City, Oklahoma. I am dedicating this
1996 Annual Report of The Torray Fund to Admiral Kirkpatrick -- not only for the
role he played in Liberty's rescue, but, more importantly, for the example his
life sets for all those with whom he comes in contact.
I met John in the late 1980's in connection with Liberty's
recapitalization. Although many share credit for its success, he deserves the
most. His personal investment of $20 million in the face of great uncertainty
was motivated by a desire to help not only the bank and its employees, but the
community and the state of Oklahoma as well. It had nothing to do with making
money. In fact, John says that he has never entered into a business arrangement
just to make money. His selfless commitment in this case inspired others, and,
in the end, $75 million was raised -- the majority within Oklahoma -- to launch
what the Admiral called "The Oklahoma Plan". Today, he is Liberty's Chairman
Emeritus and largest shareholder. He is also a towering benefactor of the State
of Oklahoma. The 200,000 square-foot Omniplex Kirkpatrick Center for the arts
and sciences attracts over 350,000 visitors annually, and the Kirkpatrick
Foundation supports countless Oklahoma charities. A determined, yet gentle man,
John is a loving husband to his wife, Eleanor, father to Joan and grandfather to
Christian. Not given to formalities or paper shuffling, the Admiral favors the
direct approach. When he looks you in the eye and shakes your hand, you need ask
no more. I admire him greatly, and wish that each of you could know him.
You are aware, I'm sure, that money is pouring into mutual funds. The
Torray Fund has received its share, helping boost assets to more than $170
million in early February. This is neither necessarily good nor bad from your
perspective. It depends on what we do with the
2
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THE TORRAY FUND
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MANAGEMENT'S DISCUSSION OF PERFORMANCE
AS OF DECEMBER 31, 1996
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money, and how we manage our business. On both counts, we are determined to do
the right thing. As far as the money is concerned, it will always be invested in
accordance with the principles we have espoused all along. Recently, as noted,
we have added to existing holdings. We have also invested in other sound
businesses, which for one reason or another may have hit a bump in the road,
causing investors to run for cover. For example, a few years ago, a speculative
bubble developed in telecommunications stocks. Wall Street believed at the time
the industry would experience limitless growth. That view has now faded and the
bubble has burst. Cable TV stocks are off sharply over fears that satellite
systems may eventually put them out of business. AT&T shares have slumped,
reflecting competition from British Telecom/MCI, Sprint and the so-called "dial
around" independents. There is also concern that under deregulation the regional
Bell operating companies will become aggressive competitors in the long distance
market. Although Wall Street is negative on cable companies and AT&T, we are
not. AT&T is now your fund's second largest investment after Salomon, Inc. We
have also invested in three cable companies, Cox Communications,
Tele-Communications, Inc. and, since year end, U.S. West Media Group. Finally,
the satellite company, Loral Space and Communications, has been added to the
portfolio. It is currently our third largest position.
Now, I want to tell you about our plans for the future. We think it is
likely The Torray fund's shareholder base and assets will continue to grow. If
the recent pace continues, the fund could become very large in a short
time -- billions of dollars in a few years, for instance. This scenario has
played out many times in the fund industry, often ending in disappointment for
shareholders. We are not going down that road. Explosive growth of assets has
never been our objective. Instead, we have focused on making sure you get what
you deserve. In order to protect our mutual investment from spinning out of
control, we plan to close The Torray Fund to new investors at some point in the
future, though just when is hard to say. We are contemplating visiting the issue
if the fund's assets are in the range of $500 million to $1 billion. The
decision will depend upon a number of factors, the most important being the
fund's size and cash flow relative to the supply of investments meeting our
criteria. As long as we can effectively invest new money, we will remain open.
If the cash becomes unmanageable, the fund will close, although additional
investments from existing shareholders would still be welcomed.
Beyond controlling The Torray Fund's external growth, we want to make sure
that shareholders are well-informed on all matters affecting their investment.
We realize that while
3
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THE TORRAY FUND
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MANAGEMENT'S DISCUSSION OF PERFORMANCE
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
many of you may not need assistance, others surely do. The average person is
simply not well-equipped by education and experience to fully understand
complicated issues of finance and accounting, or to evaluate the overwhelming
number of investment products on the market and the claims of those promoting
them. As a result, many are forced to rely on brokerage firms, financial
publications, market letters, mutual fund evaluation services, televised
business shows, and so on. Unfortunately, though well-intentioned, these
sources, on balance, are not doing the best job of helping their customers,
subscribers and viewers. When the buzz words and background noise are filtered
out, their message often boils down to little more than a prediction of the
market's direction and which stocks and mutual funds are most likely to
outperform it. We are not interested in these subjects. There are others,
however, we think are important, and I would like to discuss two of them. One
relates to the market capitalization of a company's shares and its bearing, if
any, on future corporate performance and stock returns. The other involves the
risks of investing in stocks and mutual funds, and whether they are a function
of macro economics, stock market dynamics or business fundamentals.
As many of you know, the term "market capitalization" refers to the
combined value of a company's outstanding shares. IBM, for example, has roughly
500 million shares selling at about $150 each. Its capitalization is therefore
$75 billion (500 million x $150). Liberty Bank has 10 million shares selling at
$50, so its capitalization is only $500 million. Wall Street and the fund
industry have convinced many people that returns can be enhanced and risks
reduced by diversifying investments into various capitalization categories. They
also have pushed the strategy of periodically changing the percentage committed
to each category so as to always overweight the market sector thought to have
the best immediate prospects. The fairly wide acceptance of this concept has
spawned countless funds specializing in every conceivable market segment. In
addition to those confined to specific industries like real estate, technology,
natural resources, health care and finance, there are literally hundreds focused
on "small cap growth", "small cap value", "mid cap growth", "mid cap value",
"large cap growth", "large cap value", "small cap blend", "mid cap blend",
"large cap blend", "domestic hybrid", and more. There are funds emphasizing
yield. These incorporate "income" in their name -- "small cap growth and
income", "mid cap growth and income", and so on. It's enough to give you the
flu. No one should invest on this basis, but, unfortunately, many people do.
They not only divide their assets among funds based upon meaningless
capitalization classes, but jump from one fund to another, trying to catch the
market sector just about to take off. Unfortunately, this activity, while
popular with Wall Street, load fund sponsors and commission-based financial
4
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THE TORRAY FUND
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MANAGEMENT'S DISCUSSION OF PERFORMANCE
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
planners, is an expensive waste of time for investors. IBM may or may not be a
better investment than Liberty Bank. The way to find out is to analyze the
companies' economic fundamentals, not compare the size of their respective
market capitalizations. The Torray Fund owns a number of large capitalization
stocks. General Electric's market value, for example, is $165 billion, (1.65
billion shares outstanding at $100 each). AT&T's is $62 billion, (1.6 billion
shares trading at $39). We also hold a few medium and smaller sized issues. In
each case the investment reflects our confidence in the business. It has nothing
to do with the value the combined shares command on the stock exchanges.
On the other subject, a lot has been written on the risks of investing in
stocks and mutual funds. We think much of it is off-base. Our concept of risk is
simple. We see three types: "systemic", "market", and "business". The first two
should not worry investors unduly. In an investment context, "systemic risk"
refers to the possibility of a widespread financial collapse which would likely
ruin the value of most investments. You will probably agree this is a long shot,
and, in any event, there is no practical defense against it, so why worry?
"Market risk", in plain English, is the chance that when you want to sell, you
won't like the price. This experience is not unique to investors in stocks, as
many homeowners, art collectors and others have learned. In order to be
successful, investors must accept the fact that although stocks rise over long
periods, they can sell at virtually any price in the short run. Those who have a
low tolerance for fluctuating prices should probably limit their investment in
stocks and mutual funds. Investors able to ignore the market's ups and downs,
however, can be confident they are not risking permanent loss when they buy
shares in quality companies, or mutual funds which do the same. Finally, there
is "business risk". This one should be taken seriously. It is the chance that
something permanent goes wrong with a company. When it does, shareholders lose
money every time. How much, depends on how big the problem is. The same goes for
mutual funds except that their riskiness depends on the fortunes not of a single
company, but many. Funds comprised of high quality businesses should entail
little, if any, overall risk except for shareholders who choose to sell in a
down market. Those holding lesser companies involve risks proportionate to the
weaknesses in the various businesses. In order to avoid business risk, investors
should simply steer clear of inferior companies and funds which invest in them.
Shifting gears, I want to comment on a January 24, 1997 Wall Street Journal
article headed "Best Fund Managers Have Lowest Ages and Highest SATs,
Researchers Find". As my partner, Doug Eby, says -- "Just when you think you've
seen it all." The researchers are
5
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THE TORRAY FUND
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MANAGEMENT'S DISCUSSION OF PERFORMANCE
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
an associate professor at MIT and an assistant professor at the University of
Chicago graduate school. Their study appeared in a National Bureau of Economic
Research paper titled "Are Some Mutual Fund Managers Better Than Others". We
tend to think so. The study found that younger managers earn higher returns than
older ones, and managers who attend undergraduate schools with higher average
Scholastic Assessment Test scores produce better performance than those from
less selective schools. As one of the professors summed it up, "Guys from better
schools are doing better." Whoa! It went on to say that a manager from Princeton
is "expected to outperform a manager from the University of Florida by
about" -- hold your breath -- "one percentage point per year." The professors
aren't sure why. They say maybe the graduates of top schools are just smarter,
better educated and more connected; or perhaps they end up at better fund
companies with resources to help them beat the competition. MBA's only enhance
results by 60 basis points over non-MBA's (a basis point is one one-hundredth of
one percent). The article doesn't say whether a manager from a lower SAT college
who later gets an MBA would perform only 40 basis points a year worse than a
Princeton grad; or whether a Princetonian with an MBA from another school should
make 160 basis points (1.60%) a year more than the graduate from Florida. The
bad news for Torray Fund shareholders is that lower performance is expected from
older managers. The professors say that a 26 year-old is expected to generate
returns annually that are 4.6 percentage points higher than an 80 year-old. I'm
not 80, but I know someone who is. Actually he's 89. His name is John
Kirkpatrick. I believe I'll ask him what he thinks about this. His $20 million
investment in Liberty Bank, made at the age of 82, is now worth over $100
million.
Unfortunately, academic studies like this one are but a flake in the
blizzard of crazy ideas causing educational white-out for the average investor.
Among other things, they promote the notion, much beloved by fund complexes and
portfolio managers, but nevertheless false, that investment success is
associated with brilliance, cleverness, and special insights. Looking around, I
see none of these qualities in our company. Yet, according to the fund rating
service, Morningstar, your fund ranks number 6 out of all 325 growth funds for
the last five years, and number 5 of 571 for three years. We think experience,
common sense and patience are what count in the investment business. According
to the Investment Company Institute, though, the average mutual fund manager is
29 years old and has just 3.7 years of experience; moreover, fund industry
turnover approaches 100% annually. These statistics hardly suggest experience,
common sense and patience. The truth is that too many fund managers are locked
in a contest to outguess each other; and now comes a study claiming that age and
SAT scores will tell us in
6
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THE TORRAY FUND
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MANAGEMENT'S DISCUSSION OF PERFORMANCE
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
advance which ones should make the best guessers. Well, they can guess all they
want for as long as they choose. In the end, no fund, regardless of how clever
its manager, or how much its investments are swapped with other funds, will ever
create enduring financial values exceeding those accumulating in the businesses
they own. Since mutual funds own virtually every stock in America, they are
collectively, one giant index fund which can only realize the values building in
all of the companies in the market, minus the expenses they impose on investors.
Interestingly, while these charges average 1.43% annually for domestic stock
funds, the funds underperformed the market by 1.60% per year over the last five
years. Perhaps we need a study to tell us where the other 17 basis points went.
I have left the most important message for last. The Torray Fund, as noted,
has compounded at more than 20% per year for six years. ANY INVESTMENT CAPABLE
OF PRODUCING SUCH A RESULT CAN ALSO GO DOWN -- not long term, but at least for a
while. Please remember this. Also, believe me when I tell you that most stock
prices today are ahead of economic fundamentals. In plain language, that means
they are expensive. We would not even consider buying some of the stocks in our
fund at their current levels. However, we are not selling them, either.
Remember, VALUE DERIVES FROM THE BUSINESS, NOT FROM THE STOCK. We like the
businesses we own. Even those which may be overpriced today should be worth more
in three to five years. Why sell them, pay taxes on the profit, and run the risk
that we can't find good replacements? Doing so gets investors in trouble every
time.
We thank you again for your investment in our fund. It is deeply
appreciated. I also want to express gratitude to our trustees, officers and
employees. They continue to do an outstanding job on our mutual behalf.
Sincerely,
/s/ Robert E. Torray
Robert E. Torray
President
The Torray Corporation
7
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THE TORRAY FUND
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PERFORMANCE DATA
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
TOTAL RATES OF RETURN ON HYPOTHETICAL $10,000 INVESTMENT VS. S&P 500
FOR YEAR ENDED DECEMBER 31:
Rates of Return - %
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 6 YEARS
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
THE TORRAY FUND 19.98% 21.04% 6.37% 2.41% 50.41% 29.09% 207.16%
S&P 500 30.48% 7.66% 10.09% 1.30% 37.54% 22.98% 164.98%
</TABLE>
[GRAPH]
Fund returns are after all expenses. Returns of both the Torray Fund and the
S&P 500 assume reinvestment of all dividends.
Past performance is not predictive of future results.
SEE MANAGEMENT'S DISCUSSION OF PERFORMANCE.
8
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THE TORRAY FUND
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PERFORMANCE DATA
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
CHANGE IN VALUE OF $10,000 INVESTED ON DECEMBER 31, 1990 (COMMENCEMENT OF
OPERATIONS)
(ASSUMING REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS)
<TABLE>
<CAPTION>
12/31/90 1991 1992 1993 1994 1995 1996
-------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
THE TORRAY FUND $10,000 $11,999 $14,523 $15,448 $15,821 $23,796 $30,719
S&P 500 $10,000 $13,048 $14,047 $15,465 $15,666 $21,547 $26,499
</TABLE>
[GRAPH]
Fund returns are after all expenses. Past performance is not predictive of
future results.
AVERAGE ANNUAL TOTAL RETURNS
(FOR PERIODS ENDED DECEMBER 31, 1996)
<TABLE>
<CAPTION>
1 Year 2 Years 3 Years 4 Years 5 Years 6 Years
------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
TORRAY FUND 29.09 % 39.35% 25.75% 20.60% 20.69% 20.56%
S&P 500 22.98 % 30.06% 19.66% 17.19% 15.21% 17.62%
</TABLE>
SEE MANAGEMENT'S DISCUSSION OF PERFORMANCE.
9
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THE TORRAY FUND
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SCHEDULE OF INVESTMENTS
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OR SHARES MARKET VALUE
- ----------------------- ------------
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS 1.18%
700,000 U.S. Treasury Bill $ 689,556
5.11% due 04/17/97
600,000 U.S. Treasury Bill 577,770
5.57% due 09/18/97
110,000 U.S. Treasury Bill 105,488
5.34% due 10/16/97
------------
TOTAL U.S . GOVERNMENT OBLIGATIONS 1,372,814
------------
(amortized cost 1,373,637)
COMMON STOCK 99.53%
15.35% CONSUMER PRODUCTS
70,000 Dreyer's Grand Ice Cream, Inc. 2,030,000
68,000 Interstate Bakeries Corporation 3,340,500
42,000 Kimberly-Clark Corporation 4,000,500
84,000 Mattel, Inc. 2,331,000
27,000 Philip Morris Companies, Inc. 3,040,875
43,000 Ralston Purina Group 3,155,125
------------
17,898,000
11.99% HEALTHCARE
12,000 American Home Products Corporation 703,500
10,000 Bristol-Myers Squibb Company 1,087,500
70,000 Chiron Corporation* 1,303,750
46,000 Guidant Corporation 2,622,000
34,000 Johnson & Johnson 1,691,500
40,000 Lilly (Eli) and Company 2,920,000
45,000 St. Jude Medical, Inc.* 1,918,125
79,000 Tenet Healthcare Corporation* 1,728,125
------------
13,974,500
4.16% MEDIA & ENTERTAINMENT
50,000 Cox Communications, Inc. Class A* 1,156,250
23,000 Disney (Walt) Company 1,601,375
160,000 Tele-Communications, Inc. Class A* 2,090,000
------------
4,847,625
</TABLE>
10
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THE TORRAY FUND
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SCHEDULE OF INVESTMENTS
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<C> <S> <C>
2.94% DEPARTMENT STORES
60,000 Federated Department Stores, Inc.* 2,047,500
30,000 Harcourt General, Inc. 1,383,750
------------
3,431,250
9.74% AEROSPACE/DEFENSE/ELECTRONICS
10,000 Boeing Company, The 1,063,750
51,000 General Dynamics Corporation 3,595,500
13,000 General Electric Company 1,285,375
32,000 Lockheed Martin Corporation 2,928,000
30,000 Northrop Grumman Corporation 2,482,500
------------
11,355,125
6.72% COMPUTER SYSTEMS & INTEGRATION
80,000 Electronic Data Systems Corporation 3,460,000
29,000 IBM Corporation 4,379,000
------------
7,839,000
9.74% COMMUNICATIONS EQUIPMENT
38,000 Hughes Electronics Corporation 2,137,500
260,000 Loral Space & Communications Ltd.* 4,777,500
23,009 Lucent Technologies, Inc. 1,064,166
55,000 Motorola, Inc. 3,375,625
------------
11,354,791
6.58% LONG DISTANCE/TELECOMMUNICATIONS
175,000 AT&T Corporation 7,669,200
2.58% PACKAGING
55,300 Crown Cork & Seal Co., Inc. 3,006,938
1.59% CONSTRUCTION AGGREGATES
80,000 Martin Marietta Materials, Inc. 1,860,000
4.36% CHEMICALS
45,000 Eastman Chemical Company 2,486,250
63,800 Morton International, Inc. 2,599,850
------------
5,086,100
12.82% BANKING
32,000 Citicorp 3,296,000
27,184 First American Corp. (Tenn) 1,566,478
96,000 Liberty Bancorp Inc. (Okla) 4,776,000
55,000 Mellon Bank Corporation 3,905,000
103,736 Southern Financial Bancorp, Inc. 1,400,436
------------
14,943,914
</TABLE>
11
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THE TORRAY FUND
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SCHEDULE OF INVESTMENTS
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<C> <S> <C>
10.96% MISCELLANEOUS FINANCIAL
33,000 American Express Company 1,864,500
125,000 Salomon, Inc. 5,890,625
54,000 Student Loan Marketing (New VTG) 5,028,750
------------
12,783,875
TOTAL COMMON STOCK 99.53%
(cost 86,372,839) 116,050,318
------------
TOTAL PORTFOLIO SECURITIES 100.71% 117,423,132
(amortized cost 87,746,476)
OTHER ASSETS LESS LIABILITIES (0.71%) (830,111)
------------
NET ASSETS 100.00% $116,593,021
------------
------------
FIVE LARGEST HOLDINGS
AT&T Corporation
Salomon, Inc.
Student Loan Marketing (VTG)
Loral Space & Communications Ltd.*
Liberty Bancorp (Okla)
</TABLE>
* Non-Income Producing Security
SEE NOTES TO THE FINANCIAL STATEMENTS.
12
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THE TORRAY FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments in securities at value
(amortized cost $87,746,476) $117,423,132
Cash 34,566
Receivable for securities sold 15,281
Subscriptions receivable 281,132
Interest and dividends receivable 185,135
------------
TOTAL ASSETS 117,939,246
------------
LIABILITIES
Payable for securities purchased 1,259,918
Redemptions payable 86,307
------------
TOTAL LIABILITIES 1,346,225
------------
NET ASSETS $116,593,021
------------
------------
Shares of beneficial interest
($1 stated value, 4,623,502 shares
outstanding, unlimited shares authorized) $ 4,623,502
Paid-in-capital in excess of par 82,296,499
Undistributed net investment income (80)
Undistributed net realized gains (3,556)
Net unrealized appreciation of investments 29,676,656
------------
NET ASSETS $116,593,021
------------
------------
PER SHARE $ 25.220
------------
------------
</TABLE>
SEE NOTES TO THE FINANCIAL STATEMENTS.
13
<PAGE>
THE TORRAY FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest income $ 61,232
Dividend income 1,501,147
-----------
Total income 1,562,379
EXPENSES
Management fees 732,902
Other expenses:
Legal fees $ 30,457
Transfer agent fees 33,004
Audit fees 25,476
Registration & filing
fees 53,308
Custodian's fees 21,447
Trustees' fees 13,400
Printing 19,314
Insurance 2,475
Miscellaneous 64
--------
Total 198,945
Expense reimbursement (15,537) 183,408
-------- -----------
Total expenses 916,310
-----------
NET INVESTMENT INCOME 646,069
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS
Net realized gain on
investments 2,377,790
Net change in unrealized
gain 16,868,896
-----------
Net gain on
investments 19,246,686
-----------
NET INCREASE IN NET ASSETS
FROM OPERATIONS $19,892,755
-----------
-----------
</TABLE>
SEE NOTES TO THE FINANCIAL STATEMENTS.
14
<PAGE>
THE TORRAY FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
12/31/96 12/31/95
------------ -----------
<S> <C> <C>
INCREASE IN NET ASSETS FROM
OPERATIONS:
Net investment income $ 646,069 $ 416,197
Net realized gain on
investments 2,377,790 791,792
Net change in unrealized
gain 16,868,896 11,564,512
------------ -----------
Net increase in net
assets from
operations 19,892,755 12,772,501
DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income (647,899) (414,625)
Net realized gains (2,382,500) (790,687)
------------ -----------
Total distributions (3,030,399) (1,205,312)
SHARES OF BENEFICIAL INTEREST
Increase from share
transactions 48,987,063 15,814,356
------------ -----------
Total increase 65,849,419 27,381,545
Net assets -- beginning of period 50,743,602 23,362,057
------------ -----------
Net assets -- end of period $116,593,021 $50,743,602
------------ -----------
------------ -----------
</TABLE>
SEE NOTES TO THE FINANCIAL STATEMENTS.
15
<PAGE>
THE TORRAY FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIODS BELOW:
- --------------------------------------------------------------------------------
PER SHARE DATA($)
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR 14 DAYS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91 12/31/90
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.110 $ 13.755 $ 14.273 $ 13.743 $ 11.514 $ 9.999 $ 10.000
Income From Investment Operations
Net Investment Income 0.186 0.215 0.213 0.122 0.180 0.232 0.005
Net Gains on Securities
(both realized and unrealized) 5.642 6.674 0.130 0.745 2.229 1.728 0.000
-------- -------- -------- -------- -------- -------- --------
Total from Investment Operations 5.828 6.889 0.343 0.867 2.409 1.960 0.005
Less Distributions
Dividends (from Net Investment
Income) (0.187) (0.214) (0.213) (0.122) (0.180) (0.233) (0.006)
Distributions (from Capital Gains) (0.531) (0.320) (0.648) (0.215) 0.000 (0.212) 0.000
-------- -------- -------- -------- -------- -------- --------
Total Distributions (0.718) (0.534) (0.861) (0.337) (0.180) (0.445) (0.006)
NET ASSET VALUE, END OF PERIOD $ 25.220 $ 20.110 $ 13.755 $ 14.273 $ 13.743 $ 11.514 $ 9.999
TOTAL RETURN(3) 29.09% 50.41% 2.41% 6.37% 21.04% 19.98% (0.03%)
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(000's omitted) $116,593 $ 50,744 $ 23,362 $ 19,666 $ 10,298 $ 4,423 $ 200
Ratio of Expenses to Average
Net Assets 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 0.82%(1)
Ratio of Net Income to Average
Net Assets 0.87% 1.31% 1.51% 0.94% 1.54% 2.43% 2.15%(1)
Portfolio Turnover Rate 20.95% 22.56% 36.63% 29.09% 37.09% 21.17% n/a(2)
Average Actual Commissions paid
per share(4) $ 0.0871 $ 0.0813 n/a n/a n/a n/a n/a
</TABLE>
(1) Annualized
(2) Not applicable. During the period December 18, 1990 through December
31, 1990 the Fund invested only in short term investments which are
excluded from this ratio.
(3) Past performance is not predictive of future performance.
(4) Does not include spreads on shares traded on a principal basis.
SEE NOTES TO THE FINANCIAL STATEMENTS.
16
<PAGE>
THE TORRAY FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Torray Fund ("Fund") is registered under the Investment Company Act of
1940 as a no load, diversified, open-end management investment company. The Fund
was organized as a business trust under Massachusetts law. The Torray
Corporation serves as administrator and investment advisor to, and transfer
agent for the Fund.
The initial capitalization of the Fund, $100,000, was provided on November
16, 1990 by Robert E. Torray who is an officer, director and shareholder of The
Torray Corporation. The Fund commenced operations on December 18, 1990. All
organizational expenses of the Fund (approximately $56,000), primarily legal
fees and certain Blue Sky registration fees have been paid by The Torray
Corporation and will not be reimbursed by the Fund. The following is a summary
of accounting policies followed by the Fund in the preparation of its financial
statements.
SECURITIES VALUATION Short-term obligations having remaining maturities of
60 days or less are valued at amortized cost, which approximates market value.
Portfolio securities for which market quotations are readily available are
valued at market value, which is determined by using the last reported sale
price, or, if no sales are reported, the last reported bid price.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME Securities transactions are
recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on the first-in first-out basis. Dividend income is
recorded on the ex-dividend date and interest income, including amortization of
discount on short-term investments, is recorded on the accrual basis.
FEDERAL INCOME TAXES The Fund intends to continue to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income, including any net
realized gain on investments to its shareholders. Therefore, no Federal income
tax provision is required. Cost of securities for tax purposes is substantially
the same as for financial reporting purposes.
NET ASSET VALUE The net asset value per share of the Fund is determined
once on each day that the New York Stock Exchange is open, as of the close of
the Exchange.
17
<PAGE>
THE TORRAY FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
NOTE 2 -- MANAGEMENT CONTRACT, TRANSFER AGENT AND SHAREHOLDER SERVICE AGREEMENTS
The Torray Corporation currently guarantees that the overall annual expense
ratio of the Fund will not exceed 1.25% of net assets. This ratio consists of a
1% management fee plus up to 0.25% of net assets covering all other expenses.
Pursuant to the Management Contract, The Torray Corporation provides
investment advisory and portfolio management services to the Fund. The Fund pays
the Torray Corporation a management fee, computed daily and payable quarterly at
the annual rate of one percent of the Fund's daily net assets. During the twelve
months ended December 31, 1996, The Torray Fund paid management fees of $732,902
(1% of assets).
Excluding the management fee, other expenses incurred by the Fund during
the twelve months ended December 31, 1996 totaled $198,945 of which $16,800
represents fees charged by The Torray Corporation for transfer agent and
shareholder services. Pursuant to its guarantee, however, The Torray Corporation
reimbursed the Fund $15,537 for expenses incurred in excess of $183,408 (.25% of
assets) for the twelve months ended December 31, 1996. The remaining other
expenses of $182,145 were paid to various independent agents, service providers,
and federal and state agencies. These expenses include all costs associated with
the Fund's operations including Independent Trustees' fees ($2,000 per annum and
$100 for each Board meeting attended), taxes, dues, fees and expenses of
registering and qualifying the Fund and its shares for distribution, charges of
custodians, auditing and legal expenses, insurance premiums, supplies, postage,
expenses of issue or redemption of shares, reports to shareholders and Trustees,
expenses of printing and mailing prospectuses, proxy statements and proxies to
existing shareholders, and other miscellaneous expenses.
Certain officers and Trustees of the Fund are also officers and/or
shareholders of The Torray Corporation.
NOTE 3 -- PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments, for the twelve months ended December 31, 1996 aggregated
$64,986,556 and $14,377,889, respectively. Net unrealized appreciation of
investments at December 31, 1996 includes aggregate unrealized gains of
$30,139,414 and unrealized losses of $462,758.
18
<PAGE>
THE TORRAY FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
NOTE 4 -- SHARES OF BENEFICIAL INTEREST TRANSACTIONS
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/96 12/31/95
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Shares issued 2,666,305 $ 60,693,638 937,270 $17,576,747
Reinvestment of dividends
and distributions 109,550 2,717,587 55,960 1,054,067
Shares redeemed (675,296) (14,424,162) (168,667) (2,816,458)
--------- ------------ --------- -----------
2,100,559 $ 48,987,063 824,563 $15,814,356
--------- ------------ --------- -----------
</TABLE>
Officers, Trustees and affiliated persons of The Torray Fund and their
families directly or indirectly control 730,984 shares or 15.81% of the Fund.
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees
The Torray Fund
Bethesda, Maryland
We have audited the accompanying statement of assets and liabilities and
schedule of investments of The Torray Fund, as of December 31, 1996, the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the six years in the period then ended and for the period
from December 18, 1990 (commencement of operations) through December 31, 1990.
These financial statements are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Torray Fund as of December 31, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the six years in the
period then ended and for the period from December 18, 1990 (commencement of
operations) through December 31, 1990 in conformity with generally accepted
accounting principles.
/s/ Johnson Lambert & Co.
JOHNSON LAMBERT & CO.
Bethesda, Maryland
January 22, 1997
20
<PAGE>
This report is not authorized for distribution
to prospective investors unless preceded or
accompanied by a current prospectus.
<PAGE>
INVESTMENT ADVISOR
The Torray Corporation
6610 Rockledge Dr. Suite 450
Bethesda, Maryland 20817
LEGAL COUNSEL
Morgan, Lewis & Bockius, LLP
1800 M Street, N.W.
Washington, D.C. 20036
INDEPENDENT AUDITORS
Johnson Lambert & Co.
7500 Old Georgetown Road
Suite 700
Bethesda, Maryland 20814
CUSTODIAN
Rushmore Trust & Savings FSB
4922 Fairmont Avenue
Bethesda, Maryland 20814
TRANSFER AGENT & ADMINISTRATOR
The Torray Corporation
6610 Rockledge Dr. Suite 450
Bethesda, Maryland 20817
