<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 June 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/SM/ 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
THE SECTOR STRATEGY FUND/SM/ II L.P.
--------------------------------------
(a Delaware limited partnership)
--------------------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
- ------
Accrued interest $ 171,968 $ 244,493
Equity in commodity futures trading accounts:
Cash and option premiums 44,708,909 58,223,935
Net unrealized gain on open contracts 1,092,366 2,484,535
-------------- -------------
TOTAL $45,973,243 $60,952,963
============== =============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Administration payable (Note 2) $ 9,576 $ -
Redemptions payable 1,861,111 2,747,867
Brokerage commissions payable (Note 2) 359,939 478,555
Profit shares payable 24,603 133,285
-------------- -------------
Total Liabilities 2,255,229 3,359,707
-------------- -------------
PARTNERS' CAPITAL:
General Partner:
2,145 and 2,145 SECTOR II units outstanding 261,046 268,488
3,905 and 3,905 SECTOR III units outstanding 482,358 500,814
Limited Partners:
124,023 and 162,396 SECTOR II units outstanding 15,091,368 20,324,051
225,712 and 284,576 SECTOR III units outstanding 27,883,242 36,499,903
-------------- -------------
Total partners' capital 43,718,014 57,593,256
-------------- -------------
TOTAL $45,973,243 $60,952,963
============== =============
NET ASSET VALUE PER UNIT
SECTOR II UNITS
(Based on 126,168 and 164,541 Units outstanding) $121.68 $125.15
======= =======
SECTOR III UNITS
(Based on 229,617 and 288,481 Units outstanding) $123.53 $128.26
======= =======
</TABLE>
See notes to financial statements.
2
<PAGE>
THE SECTOR STRATEGY FUND/SM/ II L.P.
------------------------------------
(a Delaware limited partnership)
--------------------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $1,919,644 $ 6,305,793 $ 1,012,498 $13,796,410
Change in unrealized (356,052) (6,553,848) (1,392,169) (4,046,208)
------------- -------------- -------------- --------------
Total trading results 1,563,592 (248,055) (379,671) 9,750,202
------------- -------------- -------------- --------------
Interest income 551,356 977,868 1,157,245 1,985,829
------------- -------------- -------------- --------------
Total revenues 2,114,948 729,813 777,574 11,736,031
------------- -------------- -------------- --------------
EXPENSES:
Profit shares 24,604 288,845 35,041 1,157,484
Brokerage commissions (Note 2) 1,165,324 1,789,960 2,468,760 3,541,402
Administrative expense (Note 2) 31,032 - 65,754 -
------------- -------------- -------------- --------------
Total expenses 1,220,960 2,078,805 2,569,555 4,698,886
------------- -------------- -------------- --------------
NET INCOME (LOSS): $ 893,988 $(1,348,992) (1,791,981) $ 7,037,145
============= ============== ============== ==============
NET INCOME (LOSS) PER UNIT
Weighted average number of units
outstanding 397,223 588,045 419,732 619,446
============= ============== ============== ==============
Weighted average net income (loss)
per unit $2.25 $(2.29) $(4.27) $11.36
====== ======= ======= =======
</TABLE>
See notes to financial statements.
3
<PAGE>
THE SECTOR STRATEGY FUND/SM/ II L.P.
----------------------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------
For the six months ended June 30, 1996 and 1995
-----------------------------------------------
<TABLE>
<CAPTION>
SECTOR II SECTOR III Limited Partners
----------------
Units Units SECTOR II SECTOR III
----- ----- --------- ----------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1994 245,400 423,752 $26,691,989 $49,057,046
Redemptions (48,589) (62,917) (5,947,737) (7,815,776)
Net income - - 4,437,124 2,500,938
----------- ---------- ------------- --------------
PARTNERS' CAPITAL,
JUNE 30, 1995 196,811 360,835 $25,181,376 $43,742,208
=========== ========== ============= ==============
PARTNERS' CAPITAL,
DECEMBER 31, 1995 164,541 288,481 $20,324,051 $36,499,903
Redemptions (38,373) (58,864) (4,754,209) (7,329,052)
Net loss - - (478,474) (1,287,609)
----------- ---------- ------------- --------------
PARTNERS' CAPITAL,
JUNE 30, 1996 126,168 229,617 $15,091,368 $27,883,242
=========== ========== ============= ==============
<CAPTION>
General Partner
---------------
SECTOR II SECTOR III Total
--------- ---------- -----
<S> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1994 $366,106 $668,412 $ 76,783,553
Redemptions - - (13,763,513)
Net income 66,006 33,077 7,037,145
---------- ---------- --------------
PARTNERS' CAPITAL,
JUNE 30, 1995 $432,112 $701,489 $ 70,057,185
========== ========== ==============
PARTNERS' CAPITAL,
DECEMBER 31, 1995 $268,488 $500,814 $ 57,593,256
Redemptions - - (12,083,261)
Net loss (7,442) (18,456) (1,791,981)
---------- ---------- --------------
PARTNERS' CAPITAL,
JUNE 30, 1996 $261,046 $482,358 $ 43,718,014
========== ========== ==============
</TABLE>
See notes to financial statements.
4
<PAGE>
THE SECTOR STRATEGY FUND(SM) II L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO 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 Fund(SM) II L.P. (the
"Partnership") as of June 30, 1996 and the results of its operations for
the six months ended June 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 six months ended June 30, 1996
and 1995 was approximately $61 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
six months ended June 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Three Months
-----------------------------------------------------------------
1996 1995
------------------------------- --------------------------------
Sector II Sector III Sector II Sector III
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profits:
Realized $(17,350) $1,936,994 $4,145,010 $ 2,160,783
Change in unrealized 162,600 (518,652) (2,610,148) (3,943,700)
-------------- -------------- -------------- ---------------
Total trading results 145,250 1,418,342 1,534,862 (1,782,917)
Interest income 202,696 348,660 341,161 636,707
-------------- -------------- -------------- ---------------
Total revenues 347,946 1,767,002 1,876,023 (1,146,210)
-------------- -------------- -------------- ---------------
EXPENSES:
Profit shares 16,764 7,840 174,725 114,119
Brokerage commissions 392,925 772,399 600,503 1,189,458
Administrative expense 11,227 19,805 - -
-------------- -------------- -------------- ---------------
Total expenses 420,916 800,044 775,228 1,303,577
-------------- -------------- -------------- ---------------
NET (LOSS) INCOME $(72,970) $ 966,958 $1,100,795 $(2,449,787)
============== ============= ============== ===============
NET (LOSS) INCOME PER UNIT:
Weighted average number
of units outstanding 144,447 252,776 208,099 379,946
============== ============= ============== ===============
Weighted average net
(loss) income per unit $(.51) $3.83 $5.29 $(6.45)
============== ============= ============== ===============
<CAPTION>
Six Months
-----------------------------------------------------------------
1996 1995
------------------------------- --------------------------------
Sector II Sector III Sector II Sector III
--------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profits:
Realized $ (91,854) $1,104,352 $6,676,147 $7,120,263
Change in unrealized 59,362 (1,451,531) (1,294,948) (2,751,260)
-------------- -------------- -------------- ---------------
Total trading results (32,492) (347,179) 5,381,199 4,369,003
Interest income 425,929 731,316 692,162 1,293,667
-------------- -------------- -------------- ---------------
Total revenues 393,437 384,137 6,073,361 5,662,670
-------------- -------------- -------------- ---------------
EXPENSES:
Profit shares 18,595 16,446 393,834 763,650
Brokerage commissions 836,848 1,631,912 1,176,396 2,365,006
Administrative expense 23,910 41,844 - -
-------------- ------------- -------------- ---------------
Total expenses 879,353 1,690,202 1,570,230 3,128,656
-------------- ------------- -------------- ---------------
NET (LOSS) INCOME $(485,916) $(1,306,065) $4,503,131 $2,534,014
============== ============= ============== ===============
NET (LOSS) INCOME PER UNIT:
Weighted average number
of units outstanding 152,543 267,189 222,853 396,593
============== ============= ============== ===============
Weighted average net
(loss) income per unit $(3.19) $(4.89) $20.21 $6.39
============== ============= ============== ===============
</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 six months ended June
30, 1996 was as follows:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Interest Rates $(1,756,913)
Stock indices (409,660)
Commodities 491,174
Currencies (Include F/X) 1,913,991
Energy (318,292)
Metals (299,971)
--------------
$ (379,671)
==============
</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 - 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 June 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 $100,570,855 $ 71,982,462 $292,254,904 $77,509,306
Stock indices 11,472,898 6,315,045 9,378,960 2,754,169
Commodities 17,361,914 8,261,755 33,273,629 17,528,208
Currencies 70,583,396 81,613,456 40,905,041 91,007,028
Energy 637,390 - 9,838,738 2,394,174
Metals 7,097,959 22,199,023 6,194,568 14,595,594
------------------- ------------------- ------------------- -------------------
$207,724,412 $190,371,741 $391,845,840 $205,788,479
=================== =================== =================== ===================
</TABLE>
7
<PAGE>
Substantially all of the Partnership's derivative instruments outstanding
as of June 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 June 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 $136,777,105 $105,136,830 $349,493,443 $136,040,389
Non-Exchange
traded 70,947,307 85,234,911 42,352,397 69,748,090
------------------ ----------------- ----------------- -----------------
$207,724,412 $190,371,741 $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 six months ended
June 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)
-------------------- ------------------- ------------------- -------------------
<C> <C> <C> <C>
Interest rates $107,575,286 $164,183,252 $224,509,594 $ 40,878,254
Stock indices 12,431,019 6,013,718 6,305,821 16,376,164
Commodities 22,746,675 9,743,469 22,199,424 10,544,846
Currencies 95,533,140 131,714,864 123,591,622 119,192,407
Energy 2,186,412 1,912,873 3,878,403 4,293,076
Metals 12,895,998 13,822,013 9,417,938 19,517,640
------------------- ------------------ ----------------- ------------------
$253,368,530 $327,390,189 $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 June 30, 1996 and December 31, 1995, $35,553,061 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 June 30, 1996 and December 31, 1995 were
as follows:
<TABLE>
<CAPTION>
June 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 $1,416,912 $ 830,016 $4,187,956 $2,841,079
Non-Exchange
traded 1,480,712 262,350 449,710 (356,544)
------------------- ---------------- ----------------- ------------------
$2,897,624 $1,092,366 $4,637,666 $2,484,535
=================== ================ ================= ==================
</TABLE>
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
---------------------
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 July 1, 1996, the Partnership's assets were allocated as
follows:
SECTOR II UNITS:
---------------
<TABLE>
<CAPTION>
%
TRADING ADVISOR SECTOR ALLOCATION
--------------- ------ ----------
<S> <C> <C>
John W. Henry & Co., Inc. Financial/
Metals 24.48
Hyman Beck & Company, Inc. Diversified 33.32
Dominion Capital Management Inc. Diversified 13.80
Trendstat Capital Management, Inc. Currencies 17.88
Range Wise, Inc. Agriculture 10.52
-------
100.00%
</TABLE>
SECTOR III UNITS:
----------------
<TABLE>
<CAPTION>
%
TRADING ADVISOR SECTOR ALLOCATION
--------------- ------ ----------
<S> <C> <C>
John W. Henry & Co., Inc. Financial/
Metals 23.99
Graham Capital Management, L.P. Diversified 18.35
Range Wise, Inc. Agriculture 11.18
Sunrise Capital Management Diversified 9.66
Millburn Ridgefield Corporation Financial/
Metals 11.89
ITF Management Diversified 11.96
Rabar Market Research, Inc. Diversified 12.97
-------
100.00%
</TABLE>
MLIP expects to continue to change both allocations and Advisor
selections from time to time without advance notice to existing investors.
9
<PAGE>
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 six months of 1995, the Fund's average month-end Net
Assets equalled $26,381,270, and the Fund recognized gross trading gains of
$5,381,198 or 20.40% of such average month-end Net Assets. Brokerage commissions
of $1,176,396 or 4.46% and Profit Shares of $393,834 or 1.49% of average month-
end Net Assets were paid. Interest income of $692,161 or 2.62% of average month-
end Net Assets resulted in a net gain of $4,503,130 or 17.07% of average month-
end Net Assets, which resulted in a 18.03% increase in the Net Asset Value per
Unit since December 31, 1994.
During the first six months of 1996, the Fund's average month-end Net
Assets equalled $18,610,682, and the Fund recognized gross trading loss of
$32,493 or .17% of such average month-end Net Assets. Brokerage commissions of
$836,848 or 4.50%, Administrative expenses of $23,910 or .13% and Profit Shares
of $18,595 or .10% of average month-end Net Assets were paid. Interest income of
$425,929 or 2.29% of average month-end Net Assets resulted in net loss of
$485,916 or 2.61% of average month-end Net Assets which resulted in a 2.77%
decrease in the Net Asset Value of the Fund per Unit since December 31, 1995.
During the first six months of 1996 and 1995, the Fund experienced 6
profitable months and 6 unprofitable months.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SECTOR II UNIT
--------------------------------------------------------------
Jan. Feb. Mar. April May June
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $108.34 $115.58 $124.97 $127.02 $131.03 $130.14
--------------------------------------------------------------
1996 $129.65 $123.52 $122.45 $124.82 $123.17 $121.68
--------------------------------------------------------------
</TABLE>
SECTOR III UNITS:
----------------
During the first six months of 1995, the Fund's average month-end Net
Assets equalled $48,330,604, and the Fund recognized gross trading gains of
$4,369,004 or 9.04% of such average month-end Net Assets. Brokerage commissions
of $2,365,006 or 4.89% and Profit Shares of $763,650 or 1.58% of average month-
end Net Assets were paid. Interest income of $1,293,668 or 2.68% of average
month-end Net Assets resulted in net gain of $2,534,015 or 5.24% of average
month-end Net Assets, which resulted in a 4.97% increase in the Net Asset Value
per Unit since December 31, 1994.
During the first six months of 1996, the Fund's average month-end Net
Assets equalled $32,854,238, and the Fund recognized gross trading losses of
$347,178 or 1.06% of such average month-end Net Assets. Brokerage commissions of
$1,631,912 or 4.97%, Administrative expenses of $41,844 or .13% and Profit
Shares of $16,446 or .05% of average month-end Net Assets were paid. Interest
income of $731,316 or 2.23% of average month-end Net Assets resulted in net loss
of $1,306,065 or 3.98% of average month-end Net Assets which resulted in a 3.69%
decrease in the overall Net Asset Value per Unit since December 31, 1995.
During the first six months of 1996 and 1995, the Fund experienced 4
profitable months and 8 unprofitable months.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SECTOR III UNIT
--------------------------------------------------------------
Jan. Feb. Mar. April May June
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $114.71 $122.70 $129.65 $128.97 $125.75 $123.17
--------------------------------------------------------------
1996 $132.39 $120.96 $120.08 $127.41 $124.26 $123.53
--------------------------------------------------------------
</TABLE>
10
<PAGE>
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 six 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 FUND(SM) II L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: August 9, 1996 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: August 9, 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>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 JUN-30-1995
<CASH> 0 0
<RECEIVABLES> 45,973,243 72,699,975
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 45,973,243 72,699,975
<SHORT-TERM> 0 0
<PAYABLES> 2,255,229 2,642,790
<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> 43,718,014 70,057,185
<TOTAL-LIABILITY-AND-EQUITY> 45,973,243 72,699,975
<TRADING-REVENUE> (379,671) 9,750,202
<INTEREST-DIVIDENDS> 1,157,245 1,985,829
<COMMISSIONS> 2,569,555 4,698,886
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (1,791,981) 7,037,145
<INCOME-PRE-EXTRAORDINARY> (1,791,981) 7,037,145
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,791,981) 7,037,145
<EPS-PRIMARY> (4.27) 11.36
<EPS-DILUTED> (4.27) 11.36
</TABLE>
