<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 September 30, 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 0-18944
THE SECTOR STRATEGY FUND II L.P.
----------------------------------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3584544
- ------------------------------- ---------------------------------
(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.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
THE SECTOR STRATEGY FUND II L.P.
-----------------------------------
(a Delaware limited partnership)
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
- ------
Accrued interest $152,249 $ 244,493
Equity in commodity futures trading accounts:
Cash and option premiums 40,017,405 58,223,935
Net unrealized gain on open contracts 2,951,188 2,484,535
------------------ ------------------
TOTAL $43,120,842 $60,952,963
================== ==================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Administration payable (Note 2) $ 8,982 $ -
Redemptions payable 1,316,106 2,747,867
Brokerage commissions payable (Note 2) 337,633 478,555
Profit shares payable 52,084 133,285
------------------ ------------------
Total liabilities 1,714,805 3,359,707
------------------ ------------------
PARTNERS' CAPITAL:
General Partner:
2,145 and 2,145 SECTOR II units outstanding 273,015 268,488
3,905 and 3,905 SECTOR III units outstanding 492,572 500,814
Limited Partners:
112,612 and 162,396 SECTOR II units outstanding 14,364,797 20,324,051
208,288 and 284,576 SECTOR III units outstanding 26,275,653 36,499,903
------------------ ------------------
Total partners' capital 41,406,037 57,593,256
------------------ ------------------
TOTAL $43,120,842 $60,952,963
================== ==================
NET ASSET VALUE PER UNIT
SECTOR II UNITS
(Based on 114,757 and 164,541 Units outstanding) $127.55 $125.15
======= =======
SECTOR III UNITS
(Based on 212,193 and 288,481 Units outstanding) $126.15 $128.26
======= =======
</TABLE>
See notes to financial statements.
2
<PAGE>
THE SECTOR STRATEGY FUNDSM II L.P.
---------------------------------------------
(a Delaware limited partnership)
------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
------------------------
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------- ------------
REVENUES:
<S> <C> <C> <C> <C>
Trading profits (loss):
Realized $49,467 $(1,686,140) $1,061,965 $12,102,390
Change in unrealized 1,858,822 (183,851) 466,653 (4,221,824)
--------------- ----------------- --------------- -----------------
Total trading results 1,908,289 (1,869,991) 1,528,618 7,880,566
--------------- ----------------- --------------- -----------------
Interest income 482,880 849,721 1,640,125 2,835,195
--------------- ----------------- --------------- -----------------
Total revenues 2,391,169 (1,020,270) 3,168,743 10,715,761
--------------- ----------------- --------------- -----------------
EXPENSES:
Profit shares 52,084 28,325 87,125 1,185,809
Brokerage commissions (Note 2) 1,016,929 1,520,465 3,485,689 5,061,868
Administrative expense (Note 2) 27,066 - 92,820 -
--------------- ----------------- --------------- -----------------
Total expenses 1,096,079 1,548,790 3,665,634 6,247,677
--------------- ----------------- --------------- -----------------
NET INCOME (LOSS): $1,295,090 $(2,569,060) $(496,891) $4,468,084
=============== ================= =============== =================
NET INCOME (LOSS) PER UNIT
Weighted average number of units
outstanding 346,469 544,158 395,311 594,351
======== ======== ======== =======
Weighted average net income (loss)
per Limited Partner unit
and General Partner unit $3.74 $(4.72) $(1.26) $7.52
===== ======= ======= =====
</TABLE>
See notes to financial statements.
3
<PAGE>
THE SECTOR STRATEGY FUNDSM II L.P.
----------------------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------
For the nine months ended September 30, 1996 and 1995
-----------------------------------------------------
<TABLE>
<CAPTION>
SECTOR II SECTOR III Limited Partners
----------------
Units Units SECTOR II SECTOR III
----- ----- --------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994 245,400 423,752 $26,691,989 $ 49,057,046
Redemptions (61,437) (96,137) (7,568,958) (11,764,387)
Net income - - 3,421,667 989,209
------------ ------------- --------------- ----------------
PARTNERS' CAPITAL,
SEPTEMBER 30, 1995 183,963 327,615 $22,544,698 $ 38,281,868
============ ============= =============== ================
PARTNERS' CAPITAL,
DECEMBER 31, 1995 164,541 288,481 $20,324,051 $36,499,903
Redemptions (49,784) (76,288) (6,185,763) (9,503,936)
Net loss - - 226,509 (720,314)
------------ ------------- --------------- ----------------
PARTNERS' CAPITAL,
SEPTEMBER 30, 1996 114,757 212,193 $14,364,797 $26,275,653
============ ============= =============== ================
<CAPTION>
General Partner
---------------
SECTOR II SECTOR III Total
--------- ---------- -----
<S> <C> <C> <C>
DECEMBER 31, 1994 $366,106 $668,412 $ 76,783,553
Redemptions - - (19,333,345)
Net income 48,278 8,930 4,468,084
----------- ---------- ---------------
PARTNERS' CAPITAL,
SEPTEMBER 30, 1995 $414,384 $677,342 $ 61,918,292
=========== ========== ===============
PARTNERS' CAPITAL,
DECEMBER 31, 1995 $268,488 $500,814 $ 57,593,256
Redemptions (629) - (15,690,328)
Net loss 5,156 (8,242) (496,891)
------------ -------------- -------------
PARTNERS' CAPITAL, $273,015 $492,572 $ 41,406,037
SEPTEMBER 30, 1996 ============ ============== ==============
</TABLE>
See notes to financial statements.
4
<PAGE>
THE SECTOR STRATEGY FUND/(SM)/ II L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES OF FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly the
financial position of The SECTOR Strategy FundSM II L.P. (the
"Partnership") as of September 30, 1996 and the results of its operations
for the nine months ended September 30, 1996 and 1995. However, the
operating results for the interim periods may not be indicative of the
results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with general accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in the Partnership's Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1995 (the "Annual Report").
2. RELATED PARTY TRANSACTIONS
The Partnership pays brokerage commission to MLF a flat rate monthly
brokerage fee equal to 0.833 of 1% (a 10% annual rate) of the Partnership's
month-end net assets allocated to trading. The percentage was reduced to
0.75 of 1% (a 9% annual rate) with respect to Series II Units of the
Partnership's month-end Net Assets, as defined, on January 1, 1994. 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% (a 8.75% annual rate), and the Partnership began paying an
administrative fee to the General Partner of .020833% (a .25% annual rate).
The General Partner estimates that the round-turn equivalent commission
rate charged to the Partnership during the nine months ended September 30,
1996 and 1995 was approximately $63 and $27.
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.
5
<PAGE>
3. INCOME (LOSS) PER UNIT
The profit and loss of the Sector II and Sector III units for the three and
nine months ended September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------- ------------------------------
Sector II Sector III Sector II Sector III
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profits:
Realized $260,695 $(211,228) $ (498,382) $(1,187,758)
Change in unrealized 667,263 1,191,559 (281,017) 97,166
---------------- --------------- --------------- ----------------
Total trading results 927,958 980,331 (779,399) (1,090,592)
Interest income 172,817 310,063 313,086 536,635
---------------- --------------- --------------- ----------------
Total revenues 1,100,775 1,290,394 (466,313) (553,957)
---------------- --------------- --------------- ----------------
EXPENSES:
Profit shares 35,307 16,777 21,738 6,587
Brokerage commissions 338,223 678,706 545,133 975,332
Administrative expense 9,664 17,402 - -
---------------- --------------- --------------- ----------------
Total expenses 383,194 712,885 566,871 981,919
---------------- --------------- --------------- ----------------
NET (LOSS) INCOME $717,581 $577,509 $(1,033,184) $(1,535,876)
================ =============== =============== ================
NET (LOSS) INCOME PER UNIT:
Weighted average number
of units outstanding 122,136 224,333 192,828 351,330
================ =============== =============== ================
Weighted average net
income (loss) per Limited
Partner unit and General
Partner unit $5.88 $2.57 $(5.36) $(4.37)
================ =============== =============== ================
<CAPTION>
1996 1995
------------------------------- ------------------------------
Sector II Sector III Sector II Sector III
---------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profits:
Realized $168,841 $893,124 $6,177,765 $5,924,625
Change in unrealized 726,625 (259,972) (1,575,966) (2,645,858)
-------------- --------------- ---------------- ---------------
Total trading results 895,466 633,152 4,601,799 3,278,767
Interest income 598,746 1,041,379 1,005,248 1,829,947
-------------- --------------- ---------------- ---------------
Total revenues 1,494,212 1,674,531 5,607,047 5,108,714
-------------- --------------- ---------------- ---------------
EXPENSES:
Profit shares 53,902 33,223 415,572 770,237
Brokerage commissions 1,175,071 2,310,618 1,721,530 3,340,338
Administrative expense 33,574 59,246 - -
-------------- --------------- ---------------- ---------------
Total expenses 1,262,547 2,403,087 2,137,102 4,110,575
-------------- --------------- ---------------- ---------------
NET (LOSS) INCOME $ 231,665 $(728,556) $3,469,945 $998,139
============== =============== ================ ===============
NET (LOSS) INCOME PER UNIT:
Weighted average number
of units outstanding 142,407 252,904 212,845 381,506
============== =============== ================ ===============
Weighted average net
income (loss) per Limited
Partner unit and General
Partner unit $1.63 $(2.88) $16.30 $2.62
============== =============== ================ ===============
</TABLE>
6
<PAGE>
4. 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 nine months ended
September 30, 1996 was as follows:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Interest Rates $520,674
Stock indices (683,099)
Commodities 1,315,314
Currencies (Include F/X) 691,500
Energy (113,337)
Metals (202,434)
-----------------
$1,528,618
=================
</TABLE>
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 C both on an Advisor-by-Advisor and on an
overall Partnership basis. While the General Partner does not itself
intervene in the markets to hedge or 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 September 30, 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 rates $153,104,403 $9,720,191 $292,254,904 $77,509,306
Stock indices 6,567,460 3,017,806 9,378,960 2,754,169
Commodities 13,921,196 14,431,556 33,273,629 17,528,208
Currencies 67,655,702 84,921,590 40,905,041 91,007,028
Energy 1,747,378 1,231,773 9,838,738 2,394,174
Metals 11,758,649 33,282,448 6,194,568 14,595,594
----------------- ----------------- -------------------- -------------------
$254,754,788 $146,605,364 $391,845,840 $205,788,479
================= ================= ==================== ===================
</TABLE>
7
<PAGE>
Substantially all of the Partnership's derivative instruments outstanding
as of September 30, 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 September 30,
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 $181,486,601 $57,820,717 $349,493,443 $136,040,389
Non-Exchange
traded 73,268,187 88,784,647 42,352,397 69,748,090
-------------------- -------------------- --------------------- --------------------
$254,754,788 $146,605,364 $391,845,840 $205,788,479
==================== ==================== ===================== ====================
</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 nine months
ended September 30, 1996 and the year ended 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>
Interest rates $159,733,914 $124,009,170 $224,509,594 $40,878,254
Stock indices 10,358,397 6,611,416 6,305,821 16,376,164
Commodities 19,974,132 10,818,560 22,199,424 10,544,846
Currencies 112,030,254 125,874,820 123,591,622 119,192,407
Energy 1,934,995 1,547,840 3,878,403 4,293,076
Metals 11,672,155 16,027,122 9,417,938 19,517,640
------------------ ----------------- -------------------- -------------------
$315,703,847 $284,888,928 $389,902,802 $210,802,387
================== ================= ==================== ===================
</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 September 30, 1996 and December 31, 1995, $33,594,041 and $34,145,683 of
the Partnership's assets, respectively, were held in segregated accounts at MLF
in accordance with Commodity Futures Trading Commission regulations.
8
<PAGE>
The gross unrealized gain and the net unrealized gain on the Partnership's open
derivative instrument positions as of September 30, 1996 and December 31, 1995
were as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Gain Gain (Loss) Gain Gain (Loss)
---- ----------- ---- -----------
<S> <C> <C> <C> <C>
Exchange
traded $3,412,184 $2,702,065 $4,187,956 $2,841,079
Non-Exchange
traded 1,441,605 249,123 449,710 (356,544)
-------------------- -------------------- --------------------- --------------------
$4,853,789 $2,951,188 $4,637,666 $2,484,535
==================== ==================== ===================== ====================
</TABLE>
The Partnership controls credit risk by dealing almost exclusively with Merrill
Lynch entities as brokers and counterparties.
The Partnership through its normal course of business enters into various
contracts with MLF acting as its commodity broker. Pursuant to the brokerage
arrangement with MLF, such trading which results in receivables from and
payables to MLF will be offset and reported as a net receivable or payable.
Item 2: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
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 October 1, 1996, the Partnership's assets were allocated as follows:
<TABLE>
<CAPTION>
SECTOR II Units:
---------------
%
Trading Advisor Sector Allocation
--------------- ------ ----------
<S> <C> <C>
John W. Henry & Co., Inc. Financial/
Metals 22.66
Hyman Beck & Company, Inc. Diversified 36.32
Dominion Capital Management Inc. Diversified 13.74
Trendstat Capital Management, Inc. Currencies 15.40
Range Wise, Inc. Agriculture 11.88
------
100.00%
<CAPTION>
SECTOR III Units:
----------------
%
Trading Advisor Sector Allocation
--------------- ------ ----------
<S> <C> <C>
John W. Henry & Co., Inc. Financial/
Metals 23.16
Graham Capital Management, L.P. Diversified 19.11
Range Wise, Inc. Agriculture 12.83
Sunrise Capital Management Diversified 9.09
Millburn Ridgefield Corporation Financial/
Metals 11.26
Hyman Beck & Co., Inc. Diversified 12.25
Rabar Market Research, Inc. Diversified 12.30
------
100.00%
</TABLE>
9
<PAGE>
MLIP expects to continue to change both allocations and Advisor
selections 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
- -------------------
SECTOR II Units:
---------------
During the first nine months of 1995, the Fund's average
month-end Net Assets equalled $25,676,455, and the Fund recognized gross trading
gains of $4,601,799 or 17.922% of such average month-end Net Assets. Brokerage
commissions of $1,721,530 or 6.7% and Profit Shares of $415,572 or 1.62% of
average month-end Net Assets were paid. Interest income of $1,005,248 or 3.92%
of average month-end Net Assets resulted in a net gain of $3,469,945 or 13.51%
of average month-end Net Assets, which resulted in a 13.19% increase in the Net
Asset Value per Unit since December 31, 1994.
During the first nine months of 1996, the Fund's average
month-end Net Assets equalled $ 17,395,999, and the Fund recognized gross
trading gain of $895,466 or 5.15% of such average month-end Net Assets.
Brokerage commissions of $1,175,071 or 6.75%, Administrative expenses of $33,574
or .19% and Profit Shares of $53,902 or .31% of average month-end Net Assets
were paid. Interest income of $598,746 or 3.44% of average month-end Net Assets
resulted in net gain of $231,665 or 1.33% of average month-end Net Assets which
resulted in a 1.92% increase in the Net Asset Value of the Fund per Unit since
December 31, 1995.
During the first nine months of 1996 and 1995, the Fund
experienced 7 profitable months and 11 unprofitable months.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SECTOR II UNIT
- ---------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept.
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $108.34 $115.58 $124.97 $127.02 $131.03 $130.14 $127.55 $126.66 $124.80
- ---------------------------------------------------------------------------------------
1996 $129.65 $123.52 $122.45 $124.82 $123.17 $121.68 $124.98 $123.96 $127.55
- ---------------------------------------------------------------------------------------
</TABLE>
SECTOR III Units:
----------------
During the first nine months of 1995, the Fund's average
month-end Net Assets equalled $46,009,292, and the Fund recognized gross trading
gains of $3,278,767 or 7.13% of such average month-end Net Assets. Brokerage
commissions of $3,340,338 or 7.26% and Profit Shares of $770,237 or 1.67% of
average month-end Net Assets were paid. Interest income of $1,829,947 or 3.98%
of average month-end Net Assets resulted in net gain of $998,139 or 2.17% of
average month-end Net Assets, which resulted in a 1.34% increase in the Net
Asset Value per Unit since December 31, 1994.
During the first nine months of 1996, the Fund's average
month-end Net Assets equalled $31,077,384, and the Fund recognized gross trading
gains of $633,152 or 2.04% of such average month-end Net Assets. Brokerage
commissions of $2,310,618 or 7.44%, Administrative expenses of $59,246 or .19%
and Profit Shares of $33,223 or .11% of average month-end Net Assets were paid.
Interest income of $1,041,379 or 3.35% of average month-end Net Assets resulted
in net loss of $728,556 or 2.34% of average month-end Net Assets which resulted
in a 1.65% decrease in the overall Net Asset Value per Unit since December 31,
1995.
10
<PAGE>
During the first nine months of 1996 and 1995, the Fund experienced 8
profitable months and 10 unprofitable months.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SECTOR III UNIT
- ---------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept.
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $114.71 $122.70 $129.65 $128.97 $125.75 $123.17 $118.12 $119.65 $118.92
- ---------------------------------------------------------------------------------------
1996 $132.39 $120.96 $120.08 $127.41 $124.26 $123.53 $125.16 $122.91 $126.15
- ---------------------------------------------------------------------------------------
</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 earn 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 as part of this document.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the first nine months
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 SECTOR STRATEGY FUNDSM II L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: November 11, 1996 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: November 11, 1996 By /s/JAMES M. BERNARD
-------------------
James M. Bernard
Chief Financial Officer
Treasurer and Senior Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE 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>
<CIK> 0000867247
<NAME> SECTOR STRATEGY FUND II L.P.
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 0 0
<RECEIVABLES> 43,120,842 64,878,894
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 43,120,842 64,878,894
<SHORT-TERM> 0 0
<PAYABLES> 1,714,805 2,960,601
<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> 41,406,037 61,918,293
<TOTAL-LIABILITY-AND-EQUITY> 43,120,842 64,878,894
<TRADING-REVENUE> 1,528,618 7,880,566
<INTEREST-DIVIDENDS> 1,640,125 2,835,195
<COMMISSIONS> 3,665,634 6,247,677
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (496,891) 4,468,084
<INCOME-PRE-EXTRAORDINARY> (496,891) 4,468,084
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (496,891) 4,468,084
<EPS-PRIMARY> (1.26) 7.52
<EPS-DILUTED> (1.26) 7.52
</TABLE>
