{Front Cover]
[State Street Research Logo]
STATE STREET RESEARCH
INTERNATIONAL EQUITY FUND
ANNUAL REPORT
October 31, 1996
[Graphic - Figure carrying umbrella and briefcase
bounding over globe of the world]
WHAT'S INSIDE
From the President
Changes made
at GFM
Portfolio Manager's Review
A difficult year for the
Fund
Fund Information
Facts and figures
Plus, Complete Portfolio Holdings
and Financial Statements
[Dalbar Quality Tested Service Logo]
DALBAR
Honors Commitment To:
Investors
For Excellence
in
Shareholder Service
<PAGE>
FROM THE PRESIDENT
To Our Shareholders:
Thus far, 1996 has been the second consecutive year that the U.S. stock
market has outperformed overseas markets. Of course, this can be frustrating
to an investor in an international fund. However, it is important to remember
that international stock investing provides valuable diversification benefits
to your stock portfolio. It also positions you for years in which the U.S.
stock market trails the rest of the world.
International markets have lagged because their economies have not recovered
as quickly as the U.S. economy. Currently, Japan's economy has just turned
the corner and moved into a strengthening stage. Europe remains slow, forcing
its central banks to lower interest rates to stimulate growth.
As foreign economies pick up speed, their stock markets should rally.
Interest rates are low, allowing overseas companies to borrow cheaply to help
build their businesses. Plus, inflation is just as passive abroad as it has
been in the U.S., which benefits the markets and investors.
Since our last letter, there have been several developments relating to the
Fund's sub-adviser, GFM International Investors Limited ("GFM"), which are
intended to strengthen GFM and better position the Fund. First, GFM has been
working more closely with its sister company, State Street Research &
Management Company ("SSRM"), and we expect that GFM will become a subsidiary
of SSRM in the near future. As a result of this restructuring, GFM can better
use the additional investment resources available through SSRM to leverage
its own expertise. In addition, GFM has added new investment and
administrative personnel in key areas. Finally, Ian Vose has assumed
management of the investment process at GFM since Stephen Bamford left last
spring. Mr. Vose and the Fund's portfolio management team have taken a number
of gradual steps since that time to increase the Fund's investments in stocks
of companies reflective of the Morgan Stanley EAFE Index, a commonly used
measure of international stock market performance. In this connection, the
Fund has reduced its investments in small capitalization companies, and has
also reduced the overall number of issues in the portfolio. We are hopeful
that these changes will improve the Fund's performance going forward.
Thank you for investing in State Street Research International Equity Fund.
Sincerely,
/s/ Jeffrey J. Hodgman
Jeffrey J. Hodgman
President and Chief Executive Officer
December 18, 1996
(1)-1.95% for Class B shares; -1.06 for Class C shares; -2.06% for Class D
shares.
(2)All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in the
Fund will fluctuate and shares, when redeemed, may be worth more or less than
their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Shares of the Fund had no class
designations until March 1, 1994, when designations were assigned based on
the pricing and 12b-1 fees applicable to shares sold thereafter. Performance
for a class include periods prior to the adoption of class designations.
Performance prior to March 1, 1994, does not reflect annual 12b-1 fees of
.25% for "A" shares and 1% for "B" and "D" shares, which will reduce
subsequent performance. "C" shares, offered without a sales charge, are
available only to certain employee benefit plans and large institutions.
(3)Performance reflects maximum 4.5% "A" share front-end sales charge or 5%
"B" share or 1% "D" share contingent deferred sales charges, where
applicable.
(4)Cumulative total returns are not annualized and do not reflect sales
charges, which, if reflected, would reduce performance.
Please note that the discussion throughout this shareholder report is dated
as indicated and, because of possible changes in viewpoint, data and
transactions, should not be relied upon as being current thereafter.
FUND INFORMATION (all data are for periods ended October 31, 1996, except for
SEC average annual compound rates of return)
Total value of $10,000 invested on January 22, 1992(3)
(Class A shares, at maximum applicable sales charge)
[Mountain Chart]
[Data for Mountain Chart]
"1/92" 9550
"10/92" 8389
"10/93" 12430
"10/94" 15213
"10/95" 13635
"10/96" 13460
SEC Average Annual Compound Rates
of Return for periods ended 9/30/96
(at maximum applicable sales charge)(2),(3)
<TABLE>
<CAPTION>
Life of Fund
(since 1/22/92) 1 Year
- ----------- ---------------- ----------------
<S> <C> <C>
A shares +6.97%/+6.03% -6.39%/-6.97%
- ----------- ---------------- ----------------
B shares +7.24%/+6.27% -7.71%/-8.32%
- ----------- ---------------- ----------------
C shares +8.19%/+7.23% -1.76%/-2.37%
- ----------- ---------------- ----------------
D shares +7.56%/+6.61% -3.72%/-4.33%
</TABLE>
Cumulative Total Returns for
periods ended 10/31/96
(do not reflect sales charge)(2),(4)
<TABLE>
<CAPTION>
Life of Fund
(since 1/22/92) 1 Year
- ---------- ---------------- ----------------
<S> <C> <C>
Class A +40.94%/+35.12% -1.28%/-1.90%
- ---------- ---------------- ----------------
Class B +38.23%/+32.50% -1.95%/-2.57%
- ---------- ---------------- ----------------
Class C +41.98%/+36.09% -1.06%/-1.67%
- ---------- ---------------- ----------------
Class D +38.08%/+32.35% -2.06%/-2.68%
</TABLE>
Performance results for the Fund are increased by the voluntary reduction of
fees and expenses related to the Fund. The first figure reflects expense
reduction; the second shows what results would have been without
subsidization.
<PAGE>
PORTFOLIO MANAGER'S REVIEW
International Equity Fund is managed by GFM International Investors Limited,
a London-based money manager and subsidiary of MetLife. Three portfolio
managers manage the Fund, each specializing in a distinct geographic area:
Ian Vose, Steven J. Brunnock, and Rosamunde M. Price. We discussed the
portfolio with Ian Vose, Chief Investment Officer of GFM.
International stocks significantly trailed the returns offered by U.S. stocks
in the past year, in part because the overseas economies have recovered more
slowly than the U.S. economy. International Equity Fund's performance was
disappointing; Class A shares provided a total return of -1.28% (does not
reflect sales charge) for the 12 months ended October 31, 1996.(1) Fund
performance has been essentially flat for most of the past year. However, the
Fund significantly underperformed the +10.73% average return provided by
Lipper Analytical Services' International Funds category (does not reflect
sales charge).
International Equity Fund underperformed because of disappointing results in
certain key markets, such as Japan earlier in the year and France more
recently. In addition, a significant position in raw materials-related stocks
hurt performance in late 1995 and early 1996. Lastly, small-company stocks
underperformed larger-cap stocks, and value stocks underperformed growth-
oriented stocks. Over the past several months, the Fund has been unwinding
many of the positions that hurt performance in an effort to bring Fund
performance back in line.
Portfolio Changes
In terms of sectors of the market, the Fund now has a much larger position in
financial stocks in order to take advantage of declining interest rates
overseas. Another significant change was the reduction of the Fund's
positions in stocks of companies engaged in gold mining. In late 1995, gold
stocks represented approximately 6% of the portfolio; currently they stand at
approximately 1%.
In the past six months, International Equity Fund's portfolio composition has
also changed. At the end of March, 1996, stocks contained in the EAFE Index,
a commonly used index of international stock performance, represented
approximately one-half of the portfolio. Small-company stocks (those with
market capitalizations of $1.2 billion or less) represented about one-half of
the Fund.
Currently, approximately 75% of the stocks in the portfolio are represented
in the EAFE index. Only 17% of the portfolio could be considered small-cap
stocks. The number of holdings has also been trimmed to approximately 150,
with some positions as large as 2% to 3%.
Portfolio Strategy
Over the past year, the Fund has been fairly consistent in its country
positioning--underweighted in Japan and overweighted in Europe. In
Continental Europe, GFM believes these conditions are favorable for stronger
economic growth and is focusing on companies undergoing restructurings to
realize shareholder value. Even with a 32% position, the Fund is
underweighted in Japan. The Japanese economy has recovered, so the
risk-reward relationship is not as good for that market. International Equity
Fund is also significantly underweighted in the United Kingdom, which has
hurt recent fund performance. However, the UK is due to have Parliamentary
elections within the next year, and the stock market often corrects when new
elections are announced.
Outlook
GFM is cautiously optimistic about the international equity markets. The
interest rate environment continues to be favorable and inflation is benign
overseas, just as it is in the U.S. There continues to be opportunity in
Europe, which has trailed the U.S. in recovering from recession of the early
1990s. GFM also expects the dollar to weaken over the long term.
October 31, 1996
Portfolio Comparison to EAFE Index
(by percentage of net assets)
<TABLE>
<CAPTION>
International
Equity Fund EAFE
- ------------------------ --------------------------
<S> <C> <C>
Continental Europe 35% 35%
- ------------------------ --------------------------
UK 10% 17%
- ------------------------ --------------------------
Japan 32% 38%
- ------------------------ --------------------------
Other Far East 12% 10%
- ------------------------ --------------------------
Non-EAFE 7% 0%
- ------------------------ --------------------------
Cash 4% 0%
</TABLE>
The Morgan Stanley EAFE (Europe, Australia, Far East) Index is a
commonly-used measure of international stock market performance. The index is
unmanaged and does not take sales charges into account. Direct investment in
the index is not possible; results are for illustrative purposes only.
5 Largest Country Positions
(by percentage of net assets)
[Bar Chart]
Japan 32.0%
United Kingdom 10.2%
France 7.6%
Germany 6.9%
Netherlands 4.8%
Total: 61.5%
Top 10 Portfolio Holdings
(by percentage of net assets)
1 Bank of Tokyo/Mitsubishi Japan 3.0%
2 Kawasaki Heavy Industries Japan 2.2%
3 NEC Japan 1.9%
4 Kansai Electric Power Japan 1.8%
5 Sumitomo Realty & Development Japan 1.7%
6 Tokio Marine & Fire Japan 1.7%
7 Bank of Ireland Ireland 1.7%
8 Nippon Shinpan Japan 1.5%
9 Mitsubishi Estate Japan 1.5%
10 Canon Japan 1.5%
These securities represent an aggregate of 18.5% of the portfolio. Because of
active management, there is no guarantee that the Fund currently invests, or
will continue to invest, in the securities listed in this table or in the
text above.
2
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
INVESTMENT PORTFOLIO
October 31, 1996
<TABLE>
<CAPTION>
Value
Shares (Note 1)
------------------------------------------------------ --------------
<S> <C> <C>
COMMON STOCKS 84.8%
Australia 4.2%
Amcor Ltd.* 40,000 $ 248,573
Broken Hill Propietary Co. Ltd. 20,000 265,536
Burns, Philp & Co. Ltd.* 150,000 237,793
Coles Myer Ltd. 60,000 219,245
Foster's Brewing Group Ltd. 120,000 218,770
Lend Lease Corp.* 15,000 254,320
Mayne Nickless Ltd. 55,000 365,330
MIM Holdings Ltd.* 305,000 396,481
National Australia Bank* 40,000 439,125
News Corp. Ltd.* 40,000 227,647
Resolute Samantha Ltd. 95,000 192,771
Santos Ltd. 100,000 399,493
--------------
3,465,084
--------------
Austria 1.6%
Bohler Uddeholm AG 3,000 224,412
EVN Energie-Versorgung AG* 2,000 271,247
Flughafen Wien AG 4,000 197,175
OMV Handels AG 3,000 293,679
VA Stahl AG 9,000 298,648
--------------
1,285,161
--------------
Belgium 0.8%
GPE Bruxelles* 2,500 310,597
Petrofina SA* 1,000 307,470
--------------
618,067
--------------
Bermuda 0.8%
China North Industries 465,000 202,275
Isleinvest Ltd.*+ 95,821 464,734
--------------
667,009
--------------
Canada 2.4%
Advanced Material Resources Ltd.* 855,000 478,473
Akiko Gold Resources Ltd.*+ 477,000 156,604
Epicore Networks Inc.*+ 450,000 651,395
Kemgas Ltd.* 200,000 305,925
Turbo Genset Inc. Cl. A* 500,000 167,885
TVI Pacific Inc.* 185,600 207,730
--------------
1,968,012
--------------
Croatia 0.5%
Zagrebacka Banka GDR* 20,000 387,500
--------------
Czech Republic 0.3%
Komercni Banka GDR 10,000 248,750
--------------
Denmark 0.5%
Novo Nordisk AS* 2,320 386,381
--------------
Finland 0.5%
UPM-Kymmene Corp. 7,500 $ 152,150
Valmet Corp. 19,250 293,738
--------------
445,888
--------------
France 7.6%
AXA 5,000 312,274
Cie Fin Paribas 4,500 289,584
Clarins 2,000 275,403
Credit Local De Fractional* 4,000 344,098
Eaux Cie Generale* 3,750 448,166
Elf Aquitaine SA* 3,660 292,657
Hermes International* 1,600 406,220
Lafarge 3,000 180,029
Lagardere Group 6,000 189,536
Lyonnaise Des Eaux SA 4,000 353,643
Pathe* 1,350 364,137
Peugeot SA* 2,500 260,636
Rhone-Poulenc SA 17,800 527,472
Scor SA* 3,500 134,523
Synthelabo 4,000 381,809
Total SA Cl. B* 7,500 586,650
Union Assured Federales 2,500 281,174
Usinor Sacilor* 20,000 296,724
Valeo SA 5,000 300,049
--------------
6,224,784
--------------
Germany 6.9%
BASF AG 17,500 559,297
Bayer AG 10,000 377,839
Bayer Motoren Werken AG 550 321,778
Commerzbank AG* 21,500 481,280
Daimler-Benz AG* 15,500 909,898
Deutsche Bank AG* 7,000 324,208
Mannesmann AG 900 349,445
Preussag AG 1,100 264,831
RWE AG* 10,500 432,231
Siemens AG 7,500 387,530
Thyssen AG 2,200 393,687
Veba AG 6,500 346,675
Volkswagen AG 350 137,802
Wella AG* 600 339,937
--------------
5,626,438
--------------
Ghana 0.4%
Ashanti Goldfields Ltd. GDR 20,000 327,500
--------------
Hong Kong 2.9%
Bank of East Asia Ltd.* 60,000 234,345
Cathay Pacific Airways 135,000 211,259
China Merchants Direct 375,000 169,745
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
Value
Shares (Note 1)
------------------------------------------------------ --------------
Hong Kong (cont'd)
Cosco Pacific Ltd. 275,000 $ 263,185
Goldlion Holdings Ltd.* 250,000 203,694
Hong Kong & China Gas Co. Ltd. 135,000 237,449
Hong Kong Telecommunications Ltd. 250,000 441,336
Johnson Electric Holdings Ltd. 155,000 338,778
South China Morning Post Ltd. 365,000 311,554
--------------
2,411,345
--------------
Indonesia 0.3%
Anglo-Eastern Plantations PLC 125,000 238,037
--------------
Ireland 2.1%
Bank of Ireland 165,000 1,356,201
World Fluids PLC* 3,521,073 344,023
--------------
1,700,224
--------------
Israel 0.6%
Koor Industries Ltd. ADR 30,000 521,250
--------------
Italy 2.1%
Autostrade SPA* 250,000 369,974
Edison SPA 70,000 416,447
ENI SPA 124,000 593,843
Italgas 100,000 369,150
--------------
1,749,414
--------------
Japan 22.4%
Asatsu Inc. 25,000 924,421
Canon Inc. 65,000 1,244,565
Chugai Pharmaceutical Co. Ltd. 61,000 562,293
Clarion Co.* 100,000 512,055
Itoham Foods Inc.* 65,000 422,467
Kandenko Co. 90,000 972,289
Kansai Electric Power 70,000 1,469,413
Keyence Corp. 6,500 753,590
Misawa Homes Co. 100,000 809,802
Mitsubishi Estate 100,000 1,247,200
Mitsukoshi 51,000 443,907
Nippon Hodo Co. 20,000 279,303
Nippon Shinpan Co. 210,000 1,270,827
Nomura Securities* 50,000 825,611
Omron Corp.* 50,000 891,485
Pioneer Electronic 21,000 415,002
Prospect Japan Fund 105,000 893,025
Sumitomo Realty & Development Co. 190,000 1,381,757
Takara Co.* 45,000 328,049
TDK Corp. 19,000 1,114,751
Tokio Marine & Fire Insurance Co. 125,000 1,372,360
Tokyo Nissan Auto Sales Co.* 45,000 276,669
--------------
18,410,841
--------------
Korea 0.3%
Yukong GDR* 32,500 $ 207,187
--------------
Luxembourg 0.6%
Quilmes Industrial SA ADR 21,000 220,500
Arbed SA* 2,000 233,907
--------------
454,407
--------------
Malaysia 1.3%
Magnum Corp. BHD 205,000 353,770
Malaysian Airline System BHD 85,000 213,636
Sime Darby BHD* 72,000 255,056
UMW Holdings BHD 60,000 275,480
--------------
1,097,942
--------------
Mexico 0.2%
Grupo Carso SA de CV 45,000 201,835
--------------
Netherlands 4.8%
ABN Amro Holdings NV 5,000 282,607
Ahold Kon NV 6,500 379,266
Akzo Nobel NV* 2,500 315,023
ASM Lithography Holding NV* 8,000 287,617
DSM NV* 1,750 167,605
Gist-Brocades NV 7,500 224,112
ING Groep NV 20,000 623,563
Kon Ptt* 6,000 217,127
Royal Dutch Petroleum Co. 5,500 908,293
Ver Ned Uitgevers 17,500 317,675
SGS-Thomson Microelectronics NV* 4,500 238,445
--------------
3,961,333
--------------
New Zealand 0.5%
Fletcher Challenge 80,000 216,767
Telecom Corp.* 40,000 207,994
--------------
424,761
--------------
Norway 1.0%
Orkla ASA 6,000 383,651
Storebrand ASA* 75,000 439,600
--------------
823,251
--------------
Panama 0.3%
Banco Latinoamericano de Exportaciones SA
Cl. E* 4,000 209,000
--------------
Poland 0.3%
Bank Gdanski SA GDR 15,000 228,750
--------------
Russia 0.1%
Rao Gazprom ADR* 3,200 60,000
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
INVESTMENT PORTFOLIO (cont'd)
Value
Shares (Note 1)
------------------------------------------------------ --------------
Singapore 1.4%
Development Bank of Singapore Ltd.* 25,000 $ 299,965
Keppel Corp. 45,000 335,463
Singapore Press Holdings Ltd.* 18,000 299,042
United Overseas Bank Ltd.* 25,000 243,166
--------------
1,177,636
--------------
South Africa 0.2%
Sun International 180,000 161,108
--------------
Spain 2.0%
Acerinox SA 2,500 299,777
Banco Bilbao Vizcaya SA 9,000 437,321
Banco Popular Espanol SA* 1,500 286,727
Iberdrola SA 20,250 215,046
Telefonica de Espana* 18,000 361,143
--------------
1,600,014
--------------
Sweden 1.2%
ABB AB Series A* 2,500 283,240
Nordbanken AB* 27,500 723,497
--------------
1,006,737
--------------
Switzerland 3.5%
ABB AG 250 308,940
Ciba-Geigy AG 850 1,047,033
CS Holding AG* 3,000 299,644
Elektrowatt AG 750 284,810
Nestle SA 225 244,403
Schweiz Bankverein AG* 2,000 385,285
SMH Neuenburg AG* 500 306,566
--------------
2,876,681
--------------
Taiwan 0.3%
Tung Ho Steel Enterprise GDR 27,500 261,250
--------------
United Kingdom 9.9%
Alexon Group PLC* 230,000 625,163
Arjo Wiggins Appleton PLC 100,000 267,741
Barclays PLC 32,000 502,344
British Biotech PLC* 200,000 735,677
British Petroleum Co. PLC 55,000 591,044
BTR PLC 79,000 331,095
Euro Sales Finance PLC* 163,560 332,764
Glaxo Wellcome PLC 50,000 785,319
Guardian Royal Exchange PLC 115,500 473,730
Inn Business Group PLC 591,055 673,403
J. Sainsbury PLC 50,000 296,224
Royal Bank Scotland Group PLC* 40,000 327,474
Tarmac PLC 200,000 291,341
Unilever PLC 30,000 630,371
Upton & Southern Holdings PLC* 7,500,000 427,246
United Kingdom (cont'd)
Waverley Mining Finance PLC* 814,280 $ 861,462
--------------
8,152,398
--------------
Total Common Stocks (Cost $68,563,233) 69,585,975
--------------
EQUITY-RELATED SECURITIES 2.0%
Amoy Properties Ltd. Cv. Pfd. 510,000 493,425
Ashurst Technology Ltd. Units+ 1,600,000 644,680
Baltic Republics Fund Pfd.* 2,208 301,392
Upton & Southern Holdings PLC Cv. Pfd. 115,207 171,573
Upton & Southern Holdings PLC Wts.* 750,000 19,836
--------------
Total Equity-Related Securities (Cost $2,486,701) 1,630,906
--------------
</TABLE>
<TABLE>
<CAPTION>
Principal Maturity
Amount Date
------------------------------- --------------- ------------- --------------
<S> <C> <C> <C>
CONVERTIBLE BONDS 9.6%
Asahi Glass Co. Cv. Bond, 1.90% Japanese Yen
95,000,000 12/26/2008 922,006
Kawasaki Heavy Industries Cv.
Bond, 0.50% 180,000,000 09/30/1998 1,822,055
Mitsui & Co. Cv. Bond, 1.05% 95,000,000 9/30/2009 892,802
Swiss Franc
NEC Corp. Cv. Bond, 1.00% 1,700,000 3/31/1999 1,529,865
Bank of Tokyo/Mitsubishi Cv.
Bond, 3.50% $ 2,450,000 3/31/2004 2,500,531
Yageo Corp. Cv. Bond, 1.25% 200,000 7/24/2003 216,500
--------------
Total Convertible Bonds (Cost $8,282,452) 7,883,759
--------------
Total Investments (Cost $79,332,386)--96.4% 79,100,640
Other Assets, Less Liabilities--3.6% 2,959,659
--------------
Net Assets--100.0% $82,060,299
==============
Federal Income Tax Information:
At October 31, 1996, the net unrealized depreciation of
investments based on cost for Federal income tax purposes of
$79,382,605 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost $ 5,818,105
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value (6,100,070)
--------------
$ (281,965)
==============
</TABLE>
* Nonincome-producing securities.
ADR and GDR stand for American Depositary Receipt and Global Depositary
Receipt, respectively, representing ownership of foreign securities.
+ Security determined to be illiquid by the Directors.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments, at value (Cost $79,332,386) (Note 1) $79,100,640
Foreign currency, at value (Cost $4,563,890) 4,576,284
Receivable for securities sold 2,530,517
Dividends and interest receivable 162,412
Foreign tax receivable 126,972
Receivable for fund shares sold 60,378
Receivable from investment manager (Note 3) 41,660
Deferred organization costs and other assets (Note 1) 2,713
---------------
86,601,576
Liabilities
Payable for securities purchased 3,258,637
Payable to custodian 476,476
Payable for fund shares redeemed 303,690
Accrued transfer agent and shareholder services
(Note 2) 148,603
Accrued management fee (Note 2) 73,518
Accrued distribution and service fees (Note 5) 37,425
Accrued directors' fees (Note 2) 18,639
Other accrued expenses 224,289
---------------
4,541,277
---------------
Net Assets $82,060,299
===============
Net Assets consist of:
Unrealized depreciation of investments and foreign
currency $ (216,904)
Accumulated net realized loss on investments and
foreign currency (2,108,047)
Shares of beneficial interest 84,385,250
---------------
$82,060,299
===============
Net Asset Value and redemption price per share of Class A
shares ($21,116,261 / 2,289,362 shares of beneficial
interest) $9.22
===============
Maximum Offering Price per share of Class A shares ($9.22
/ .955) $9.65
===============
Net Asset Value and offering price per share of Class B
shares ($28,970,611 / 3,205,065 shares of beneficial
interest)* $9.04
===============
Net Asset Value, offering price and redemption price per
share of Class C shares ($26,649,162 / 2,867,029 shares
of beneficial interest) $9.29
===============
Net Asset Value and offering price per share of Class D
shares ($5,324,265 / 589,346 shares of beneficial
interest)* $9.03
===============
</TABLE>
* Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Investment Income
Dividends, net of foreign taxes of $154,813 $ 1,219,761
Interest, net of foreign taxes of $1,116 252,990
---------------
1,472,751
Expenses
Management fee (Note 2) 921,649
Transfer agent and shareholder services (Note 2) 501,162
Custodian fee 331,794
Reports to shareholders 102,872
Registration fees 74,104
Service fee--Class A (Note 5) 61,863
Distribution and service fees--Class B (Note 5) 329,552
Distribution and service fees--Class D (Note 5) 72,143
Audit fee 44,551
Directors' fees (Note 2) 18,639
Amortization of organization costs (Note 1) 17,536
Legal fees 10,728
Miscellaneous 31,243
---------------
2,517,836
Expenses borne by the investment manager (Note 3) (452,847)
---------------
2,064,989
---------------
Net investment loss (592,238)
---------------
Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency
Net realized loss on investments (Notes 1 and 4) (1,497,472)
Net realized loss on foreign currency (Note 1) (880,450)
---------------
Total net realized loss (2,377,922)
---------------
Net unrealized appreciation of investments 1,038,313
Net unrealized appreciation of foreign currency 562,951
---------------
Total net unrealized appreciation 1,601,264
---------------
Net loss on investments and foreign currency (776,658)
---------------
Net decrease in net assets resulting from operations $(1,368,896)
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended October 31
-------------------------------
1996 1995
------------------------------- --------------- ---------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment loss $ (592,238) $ (794,085)
Net realized loss on
investments and foreign
currency* (2,377,922) (441,233)
Net unrealized appreciation
(depreciation) of investments
and foreign currency 1,601,264 (9,361,750)
--------------- ---------------
Net decrease resulting from
operations (1,368,896) (10,597,068)
--------------- ---------------
Distribution from net realized gains:
Class A -- (1,132,506)
Class B -- (1,086,016)
Class C -- (2,059,288)
Class D -- (138,131)
--------------- ---------------
-- (4,415,941)
--------------- ---------------
Net increase (decrease) from
fund share transactions
(Note 6) (6,239,509) 6,433,624
--------------- ---------------
Total decrease in net assets (7,608,405) (8,579,385)
Net Assets
Beginning of year 89,668,704 98,248,089
--------------- ---------------
End of year $82,060,299 $ 89,668,704
=============== ===============
*Net realized loss for Federal
income tax purposes (Note 1) $(1,469,788) $ (588,041)
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
Note 1
State Street Research International Equity Fund (the "Fund"), is a
diversified series of State Street Research Portfolios, Inc. ("Portfolios"),
which was organized as a Maryland corporation in April, 1991 and is
registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Fund commenced operations in
January, 1992. Portfolios consists presently of two separate funds: State
Street Research International Equity Fund and State Street Research
International Fixed Income Fund.
The investment objective of the fund is to achieve long-term growth of
capital by investing primarily in common stocks and equity-related securities
of non-U.S. companies. Non-U.S. companies for these purposes are companies
domiciled outside the United States.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and annual service fees of 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Directors
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Securities traded on domestic stock exchanges are valued at the last sale
price as of the close of business on the day the securities are being valued,
or, lacking any sales, at the mean between closing bid and asked prices.
Securities traded on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") system are valued at the last reported sales price. Each
security traded primarily on non-domestic securities exchanges is generally
valued at the preceding closing value of such security on the exchange where
it is primarily traded. A security that is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security by the Board of Directors or its delegates.
If no closing price is available, then such security is valued at the mean
between the last current bid and asked prices or
7
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
by using the last available closing price. Domestic securities traded in the
over-the-counter market are valued at the mean between the bid and asked
prices or yield equivalent as obtained from two or more dealers that make
markets in the securities. All non-U.S. securities traded in the
over-the-counter market are valued at the last sale quote or the last closing
bid price, if there is no active trading in a particular security for a given
day. Portfolio securities traded both in the over-the-counter market and on a
securities exchange are valued according to the broadest and most
representative market. Securities for which market quotations are not readily
available are valued as determined in good faith by or under the authority of
the Directors. Short-term securities maturing within sixty days are valued at
amortized cost. Securities quoted in foreign currencies are translated into
U.S. dollars at the current exchange rate.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.
C. Net Investment Income
Interest income is accrued daily as earned. Dividend income is accrued on the
ex-dividend date. The Fund is charged for expenses directly attributable to
it, while indirect expenses are allocated between both funds in the
Portfolios.
D. Dividends
Dividends from net investment income are declared and paid or reinvested
annually. Net realized capital gains, if any, are distributed annually,
unless additional distributions are required for compliance with applicable
tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing
treatments for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods. At October 31, 1996, the
Fund had a capital loss carryforward of $2,057,829 available, to the extent
provided in regulations, to offset future capital gains, if any, of which
$588,041 and $1,469,788 expires on October 31, 2003 and 2004, respectively.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
G. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Fund and State Street Research Investment Services, Inc., the Fund's
investment manager and principal underwriter (the "Investment Manager" and
"Distributor"), a wholly owned, indirect subsidiary of Metropolitan Life
Insurance Company ("Metropolitan"), have entered into an agreement under
which the Investment Manager receives monthly fees at an annual rate of 0.95%
of the Fund's average daily net assets. The Investment Manager has entered
into a Sub-Investment Management Agreement with GFM International Investors
Limited (the "Sub-Investment Manager"), a substantially wholly owned,
indirect subsidiary of Metropolitan, pursuant to which the Sub-Investment
Manager has assumed the overall responsibility for managing the investments
of the Fund. During the year ended October 31, 1996, the Fund paid the
Investment Manager $921,649 in management fees. The Fund has no
responsibility for the payment of fees to the Sub-Investment Manager.
State Street Research Shareholder Services, a division of the Distributor,
provides certain shareholder services to the Fund such as responding to
inquiries and instructions from investors with respect to the purchase and
redemption of shares of the Fund. In addition, Metropolitan receives a fee
for maintenance of the accounts of certain shareholders who are participants
in sponsored arrangements, employee benefit plans and similar programs or
plans, through or under which shares of the Fund may be purchased. During the
year ended October 31, 1996, the amount of such expenses was $158,321.
The fees of the Directors not currently affiliated with the Investment
Manager amounted to $18,639 during the year ended October 31, 1996.
Note 3
The Investment Manager or affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended October 31, 1996, the amount of such assumed
expenses was $452,847.
Note 4
For the year ended October 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $112,506,420 and
$107,280,061, respectively.
8
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
NOTES (cont'd)
Note 5
Portfolios has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class D shares. In
addition, the Fund pays annual distribution fees of 0.75% of average daily
net assets for Class B and Class D shares. The Distributor uses such payments
for personal services and/or the maintenance or servicing of shareholder
accounts, to reimburse securities dealers for distribution and marketing
services, to furnish ongoing assistance to investors and to defray a portion
of its distribution and marketing expenses. For the year ended October 31,
1996, fees pursuant to such plan amounted to $61,863, $329,552 and $72,143
for Class A, Class B and Class D, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $19,830 and $93,794, respectively, on sales of Class A shares of
the Fund during the year ended October 31, 1996, and that MetLife Securities,
Inc. earned commissions aggregating $170,143 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges of $139,376
and $4,578 on redemptions of Class B and Class D shares, respectively, during
the same period.
Note 6
The authorized capital stock of the Fund currently consists of 100,000,000
shares, $.01 par value per share. The Fund reserves the right to issue
additional classes of shares.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended October 31
--------------------------------------------------------------
1996 1995
------------------------------ -------------------------------
Class A Shares Amount Shares Amount
- ----------------------------------------------------- -------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 1,219,188 $ 11,886,027 1,597,600 $ 15,459,854
Issued upon reinvestment of distribution from net
realized gains -- -- 112,688 1,095,324
Shares repurchased (1,339,064) (12,879,562) (1,357,862) (12,966,664)
-------------- --------------- -------------- ----------------
Net increase (decrease) (119,876) $ (993,535) 352,426 $ 3,588,514
============== =============== ============== ================
Class B Shares Amount Shares Amount
- ----------------------------------------------------- -------------- --------------- -------------- ----------------
Shares sold 1,649,800 $ 15,674,421 1,891,639 $ 18,088,917
Issued upon reinvestment of distribution from net
realized gains -- -- 108,264 1,045,778
Shares repurchased (1,439,371) (13,641,573) (734,821) (6,927,600)
-------------- --------------- -------------- ----------------
Net increase 210,429 $ 2,032,848 1,265,082 $ 12,207,095
============== =============== ============== ================
Class C Shares Amount Shares Amount
- ----------------------------------------------------- -------------- --------------- -------------- ----------------
Shares sold 945,704 $ 9,234,435 1,440,157 $ 13,962,911
Issued upon reinvestment of distribution from net
realized gains -- -- 207,652 2,026,671
Shares repurchased (1,687,889) (16,384,857) (3,000,375) (29,391,886)
-------------- --------------- -------------- ----------------
Net decrease (742,185) $ (7,150,422) (1,352,566) $(13,402,304)
============== =============== ============== ================
Class D Shares Amount Shares Amount
- ----------------------------------------------------- -------------- --------------- -------------- ----------------
Shares sold 377,202 $ 3,629,056 555,007 $ 5,321,534
Issued upon reinvestment of distribution from net
realized gains -- -- 13,592 131,305
Shares repurchased (403,584) (3,757,456) (148,231) (1,412,520)
-------------- --------------- -------------- ----------------
Net increase (decrease) (26,382) $ (128,400) 420,368 $ 4,040,319
============== =============== ============== ================
</TABLE>
9
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class B
------------------------------------ ------------------------------------
Year ended October 31 Year ended October 31
------------------------------------ ------------------------------------
1996*** 1995*** 1994** 1996*** 1995*** 1994**
- ------------------------------------------ ----------- ------------ ------------ ----------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.34 $ 10.98 $ 10.54 $ 9.22 $ 10.93 $ 10.54
Net investment loss* (0.04) (0.08) (0.04) (0.11) (0.15) (0.06)
Net realized and unrealized gain (loss) on
investments and foreign currency (0.08) (1.04) 0.48 (0.07) (1.04) 0.45
Distributions from net realized gains -- (0.52) -- -- (0.52) --
----------- ------------ ------------ ----------------------- -----------
Net asset value, end of year $ 9.22 $ 9.34 $ 10.98 $ 9.04 $ 9.22 $ 10.93
=========== ============ ============ ======================= ===========
Total return (1.28)%+ (10.38)%+ (4.17)%+++ (1.95)%+ (11.09)%+ 3.70%+++
Net assets at end of year (000s) $21,116 $22,497 $22,579 $28,971 $27,614 $18,904
Ratio of operating expenses to average net
assets* 1.90% 1.90% 1.90%++ 2.65% 2.65% 2.65%++
Ratio of net investment loss to average
net assets* (0.37)% (0.82)% (0.87)%++ (1.13)% (1.54)% (1.61)%++
Portfolio turnover rate 132.36% 100.68% 80.60% 132.36% 100.68% 80.60%
Average commission rate@ $0.0069 -- -- $0.0069 -- --
*Reflects voluntary assumption of fees or
expenses per share in each year (Note 3) $ 0.05 $ 0.06 $ 0.03 $ 0.05 $ 0.06 $ 0.03
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
----------------------------------------------------------- ------------------------------------
Year ended October 31 Year ended October 31
----------------------------------------------------------- ------------------------------------
1996*** 1995*** 1994 1993 1992**** 1996*** 1995*** 1994**
- ----------------------------- ----------- ------------ --------- ---------------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 9.39 $ 11.01 $ 9.56 $ 6.50 $ 7.40 $ 9.22 $ 10.93 $10.54
Net investment income (loss)* (0.02) (0.05) (0.07) (0.02) 0.04 (0.11) (0.15) (0.07)
Net realized and unrealized
gain (loss) on investments
and foreign currency (0.08) (1.05) 2.09 3.17 (0.94) (0.08) (1.04) 0.46
Dividends from net investment
income -- -- (0.05) (0.04) -- -- -- --
Distributions from net
realized gains -- (0.52) (0.52) (0.05) -- -- (0.52) --
----------- ------------ --------- ---------------------- ----------- ------------ -----------
Net asset value, end of year $ 9.29 $ 9.39 $ 11.01 $ 9.56 $ 6.50 $ 9.03 $ 9.22 $10.93
=========== ============ ========= ====================== =========== ============ ===========
Total return (1.06)%+ (10.16)%+ 22.73%+ 48.95%+ (12.16)%+++ (2.06)%+ (11.09)%+ 3.70%+++
Net assets at end of year
(000s) $26,649 $33,883 $54,631 $27,767 $10,418 $ 5,324 $ 5,674 $2,134
Ratio of operating expenses
to average net assets* 1.65% 1.65% 1.65% 1.65% 1.65%++ 2.65% 2.65% 2.65%++
Ratio of net investment
income (loss) to average
net assets* (0.16)% (0.51)% (0.75)% (0.37)% 0.79%++ (1.10)% (1.55)% (1.62)%++
Portfolio turnover rate 132.36% 100.68% 80.60% 116.12% 77.83% 132.36% 100.68% 80.60%
Average commission rate@ $0.0069 -- -- -- -- $0.0069 -- --
*Reflects voluntary
assumption of fees or
expenses per share in each
year (Note 3) $ 0.05 $ 0.06 $ 0.05 $ 0.08 $ 0.10 $ 0.05 $ 0.06 $ 0.03
</TABLE>
** March 1, 1994 (commencement of share class designations) to October 31,
1994.
*** Per-share figures have been calculated using the average shares method.
**** January 22, 1992 (commencement of operations) to October 31, 1992.
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Investment Manager and
its affiliates had not voluntarily assumed a portion of the Fund's
expenses.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Investment Manager and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
@ For fiscal years beginning on or after November 1, 1995, the Fund is
required to disclose its average commission rate per share paid for
security trades.
10
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of State Street
Research Portfolios, Inc. and the Shareholders of
State Street Research International Equity Fund
We have audited the accompanying statement of assets and liabilities,
including the investment portfolio, of State Street Research International
Equity Fund (a series of State Street Research Portfolios, Inc.) as of
October 31, 1996, and the related statement of operations for the year then
ended, the statement of changes in net assets for the two years then ended
and the financial highlights for each of the years in the five year period
ended October 31, 1996. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on the financial statements and financial highlights 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. Our procedures included confirmation of
securities owned at October 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 that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of State Street
Research International Equity Fund (a series of State Street Research
Portfolios, Inc.) at October 31, 1996, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
December 16, 1996
11
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
International stocks significantly trailed the returns offered by U.S. stocks
in the past year, in part because the overseas economies have recovered more
slowly than the U.S. economy. International Equity Fund underperformed the
average return provided by Lipper Analytical Services' International Funds
category (does not reflect sales charge).
International Equity Fund underperformed because of disappointing results in
certain key markets, such as Japan earlier in the year and France more
recently. In addition, a significant position in raw materials-related stocks
hurt performance in late 1995 and early 1996. Lastly, small-company stocks
underperformed larger-cap stocks, and value stocks underperformed growth-
oriented stocks.
The Fund increased its position in financial stocks in order to take
advantage of declining interest rates overseas. Another change was a
reduction in the Fund's positions in stocks of companies engaged in gold
mining. In late 1995, gold stocks represented approximately 6% of the
portfolio; currently they stand at approximately 1%.
Over the past year, the Fund has reduced its holdings in small-capitalization
stocks and increased its holdings in stocks represented in the EAFE index.
The Morgan Stanley EAFE (Europe, Australia, Far East) Index is a commonly-used
measure of international stock market performance. The index is unmanaged and
does not take sales charges into account. Direct investment in the index is not
possible; results are for illustrative purposes only. All returns represent past
performance, which is no guarantee of future results. The investment return
and principal value of an investment made in the Fund will fluctuate and shares,
when redeemed, may be worth more or less than their original cost. All returns
assume reinvestment of capital gain distributions and income dividends. Shares
of the Fund had no class designations until March 1, 1994, when designations
were assigned based on the pricing and 12b-1 fees applicable to shares sold
thereafter. Performance for a class include periods prior to the adoption of
class designations. Performance prior to March 1, 1994, does not reflect
annual 12b-1 fees of .25% for "A" shares and 1% for "B" and "D" shares, which
will reduce subsequent performance. "C" shares, offered without a sales charge,
are available only to certain employee benefit plans and large institutions.
Performance results for the Fund are increased by the investment manager's
voluntary reduction of fees and expenses related to the Fund. The first figure
reflects expense reduction; the second shows what results would have been
without subsidization.
Change In Value Of $10,000
Based On The Morgan Stanley EAFE Index Compared
To Change In Value of $10,000 Invested In
International Equity Fund
[Data for Line Charts]
Class A Shares
Average Annual Total Return
- -------------------------------
1 Year Life of Fund
- -------------------------------
- -5.73%/-6.31% -6.41%/+5.48%
$22,000
18,000
14,000
10,000
6,000
$14,732 $13,460
1/22/92 9550 10000
10/31/92 8389 8845
10/31/93 12430 12158
10/31/94 15213 13385
10/31/95 13635 13335
10/31/96 13460 14732
Class B Shares
Average Annual Total Return
- -------------------------------
1 Year Life of Fund
- -------------------------------
- -6.85%/-7.47% +6.68%/+5.73%
$22,000
18,000
14,000
10,000
6,000
$14,732 $13,623
1/22/92 10000 10000
10/31/92 8784 8845
10/31/93 13015 12158
10/31/94 15858 13385
10/31/95 14098 13335
10/31/96 13623 14732
Class C Shares
Average Annual Total Return
- -------------------------------
1 Year Life of Fund
- -------------------------------
- -1.06%/-1.67% -7.61%/+6.66%
$22,000
18,000
14,000
10,000
6,000
$14,732 $14,198
1/22/92 10000 10000
10/31/92 8784 8845
10/31/93 13015 12158
10/31/94 15974 13385
10/31/95 14351 13335
10/31/96 14198 14732
Class D Shares
Average Annual Total Return
- -------------------------------
1 Year Life of Fund
- -------------------------------
- -3.04%/-3.66% +6.98%/+6.04%
$22,000
18,000
14,000
10,000
6,000
$14,732 $13,808
1/22/92 10000 10000
10/31/92 8784 8845
10/31/93 13015 12158
10/31/94 15858 13385
10/31/95 14098 13335
10/31/96 13808 14732
LEGEND:
Solid Line: International Equity Fund
Dashed Line: Morgan Stanley EAFE Index
12
<PAGE>
STATE STREET RESEARCH INTERNATIONAL EQUITY FUND
FUND INFORMATION, OFFICERS AND DIRECTORS OF STATE STREET RESEARCH PORTFOLIOS,
INC.
Fund Information
State Street Research
International Equity Fund
One Madison Avenue
New York, NY 10010
Investment Manager
and Distributor
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
Sub-Investment Manager
GFM International
Investors Limited
5 Upper St. Martins Lane
London, WC2H 9EA
England
Shareholder Services
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
1-800-562-0032
Custodian
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
Independent Accountants
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
Officers
Jeffrey J. Hodgman
President and
Chief Executive Officer
Gary Lineberry
Vice President
Elaine Stevenson
Vice President and
Chief Operating Officer
Elliot Reiter
Treasurer
Brad White
Controller
Patricia S. Worthington
Secretary
Directors
Steve A. Garban
Retired; formerly Senior Vice President for Finance and
Operations and Treasurer, The Pennsylvania State University
Jeffrey J. Hodgman, Chairman
Executive Vice President,
Metropolitan Life Insurance
Company
Malcolm T. Hopkins
Former Vice Chairman of the Board and Chief Financial
Officer, St. Regis Corp.
Robert A. Lawrence
Partner, Saltonstall & Co.
Dean O. Morton
Retired; formerly Executive Vice
President, Chief Operating
Officer and Director,
Hewlett-Packard Company
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts Institute of Technology
John H. Tweedie
Executive Vice President,
Metropolitan Life Insurance
Company
13
<PAGE>
[Back Cover]
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 600
State Street Research Investment Services
One Financial Center
Boston, MA 02111
Questions? Comments?
Call us at 1-800-562-0032,
or write us at:
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
[State Street Research Logo]
This report is prepared for the general information of current shareholders
only. It is not authorized for use as sales material with prospective investors.
The Dalbar awards recognize quality shareholder service and should not be
considered a rating of fund performance. The survey included mutual fund
complexes that volunteered or were otherwise selected to participate and was
not industry-wide.
CONTROL NUMBER: 3560-961224(0198)SSR-LD
Cover Illustration by Dorothy Cullinan
IE-905D-1296
<PAGE>
{Front Cover]
[State Street Research Logo]
STATE STREET RESEARCH
INTERNATIONAL FIXED INCOME FUND
ANNUAL REPORT
October 31, 1996
[Graphic - Figure carrying umbrella and briefcase
bounding over globe of the world]
WHAT'S INSIDE
From the President
Positive returns from
overseas bond markets
Portfolio Manager's Review
A difficult year for the
Fund
Fund Information
Facts and figures
Plus, Complete Portfolio Holdings
and Financial Statements
[Dalbar Quality Tested Service Logo]
DALBAR
Honors Commitment To:
Investors
For Excellence
in
Shareholder Service
<PAGE>
FROM THE PRESIDENT
To Our Shareholders:
Thus far, 1996 has been the second consecutive year that the U.S. stock market
has outperformed overseas markets. Of course, this can be frustrating to an
investor in an international stock fund. However, the performance of overseas
bonds has paralleled that of many sectors of the U.S. bond market.
International stock markets have lagged because their economies have not
recovered as quickly as the U.S. economy. Currently, Japan's economy has just
turned the corner and moved into a strengthening stage. Europe remains slow,
forcing its central banks to lower interest rates to stimulate growth.
The slow-moving economies of many overseas countries boosted bond performance
over the past year. In local currency terms, all major global bond markets
generated positive returns. And in U.S. dollar terms, with the exception of
Japan and Switzerland, bond markets posted healthy returns.
As foreign economies pick up speed, their stock markets should rally. Interest
rates are low, allowing overseas companies to borrow cheaply to help build their
businesses. Plus, inflation is just as passive abroad as it has been in the
U.S., which benefits the markets and investors.
For a variety of reasons, consideration is currently being given to the
possibility of combining the Fund with another fund and/or liquidating the Fund,
among other alternatives. If the Board of Directors determines that such action
is in the best interest of shareholders, a Special Meeting of Shareholders may
be convened in the first part of 1997.
Since our last letter, there have been several developments relating to the
Fund's sub-adviser, GFM International Investors Limited ("GFM"), which are
intended to strengthen GFM. First, GFM has been working more closely with its
sister company, State Street Research & Management Company ("SSRM"), and we
expect that GFM will become a subsidiary of SSRM in the near future. In
addition, GFM has added new investment and administrative personnel in key
areas. As a result of these changes, we believe GFM will benefit from both the
additional resources available through SSRM as well as its own enhanced
resources.
We will look forward to communicating with you further regarding the Board of
Directors' recommendations with respect to the Fund.
Sincerely,
/s/ Jeffrey J. Hodgman
Jeffrey J. Hodgman
President and Chief Executive Officer
December 18, 1996
(1) +0.61% for Class B shares; +1.54% for Class C shares; +0.39% for Class D
shares.
(2) Performance results for the Fund are increased by the voluntary reduction of
fees and expenses related to the Fund. The first figure reflects expense
reduction; the second shows what results would have been without subsidization.
(3) All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in the
Fund will fluctuate, and shares, when redeemed, may be worth more or less than
their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Shares of the Fund had no class designations
until March 1, 1994, when designations were assigned based on the pricing and
12b-1 fees applicable to shares sold thereafter. Performance for a class
includes periods prior to the adoption of class designations. Performance prior
to March 1, 1994 does not reflect annual 12b-1 fees of .25% for "A" shares and
1% for "B" and "D" shares, which will reduce subsequent performance. "C" shares,
offered without a sales charge, are available only to certain employee benefit
plans and large institutions.
(4) Performance reflects maximum 4.5% "A" share front-end sales charge or 5% "B"
share or 1% "D" share contingent deferred sales charges, where applicable.
(5) Cumulative total returns are not annualized, nor do they reflect sales
charges, which, if reflected, would reduce performance.
Please note that the discussion throughout this shareholder report is dated as
indicated and because of possible changes in viewpoint, data and transactions
should not be relied upon as being current thereafter.
FUND INFORMATION (all data are for periods ended October 31, 1996, except where
otherwise noted)
SEC Yield(2)
Class A 2.30%/0.99%
- ------------- -------------------
Class B 1.68%/0.32%
- ------------- -------------------
Class C 2.65%/1.28%
- ------------- -------------------
Class D 1.68%/0.31%
- ------------- -------------------
SEC yield is based on the net investment income produced for the 30 days
ended October 31, 1996.
SEC Average Annual Compound
Rates of Return for periods ended 9/30/96
(at maximum applicable sales charge)(2,3,4)
Life of Fund
(since 1/22/92) 1 Year
- -------------------------------- -------------------
Class A +6.94%/+6.42% -3.29%/-3.77%
- -------------------------------- -------------------
Class B +7.26%/+6.70% -4.23%/-4.72%
- -------------------------------- -------------------
Class C +8.14%/+7.58% +1.49%/+1.00%
- -------------------------------- -------------------
Class D +7.54%/+7.02% -0.38%/-0.87%
- -------------------------------- -------------------
Average Annual Compound
Rates of Return for periods ended 10/31/96
(at maximum applicable sales charge)(2,3,4)
Life of Fund
(since 1/22/92) 1 Year
- -------------------------------- -------------------
Class A +7.08%/+6.55% -3.25%/-3.70%
- -------------------------------- -------------------
Class B +7.37%/+6.81% -4.19%/-4.67%
- -------------------------------- -------------------
Class C +8.26%/+7.70% +1.54%/+1.06%
- -------------------------------- -------------------
Class D +7.65%/+7.12% -0.56%/-1.04%
- -------------------------------- -------------------
Cumulative Total Returns
(do not reflect sales charge)(2,3,5)
Life of Fund
(since 1/22/92) 1 Year
- -------------------------------- -------------------
Class A +45.21%/+41.85% +1.31%/+0.83%
- -------------------------------- -------------------
Class B +42.48%/+39.00% +0.61%/+0.14%
- -------------------------------- -------------------
Class C +46.13%/+42.57% +1.54%/+1.06%
- -------------------------------- -------------------
Class D +42.23%/+38.93% +0.39%/-0.08%
- -------------------------------- -------------------
<PAGE>
PORTFOLIO MANAGER'S REVIEW
International Fixed Income Fund is managed by GFM International Investors
Limited, a London-based money manager and indirect subsidiary of MetLife. The
following is a discussion with portfolio manager Nick Sanjana.
Q: How did the Fund perform over the past 12 months?
A: We had a disappointing year. Class A shares of State Street Research
International Fixed Income Fund provided a total return of +1.31% (does not
include sales charge).(1) The Fund underperformed the average total return of
+9.99% for the 42 funds in Lipper Analytical Services' International Income
category (does not include sales charge).
Q: Why did the Fund underperform versus the other funds in its category?
A: Early on, we saw indications that some economies were experiencing an
uptick in inflation. We saw this as the beginning of a trend and expected the
central banks around the world to raise interest rates. In response, we
positioned the Fund defensively, taking an overall bearish position on the
global bond markets and holding as much as 25% of the Fund's exposure in
cash.
Basically, we underperformed in three key areas. First, we weren't very
optimistic on the outlook for the U.S. dollar at the beginning of the period,
so we weren't focusing on U.S. dollar or dollar-block (Canada and Australia)
assets and/or currencies. Many competing funds took the opposite viewpoint
and had significant exposure there, which helped their performance relative
to ours. Second, we were underweighted in the bonds of the peripheral
European markets (Italy, Sweden and Spain), which offered strong performance.
Many other funds had higher weightings in these bonds. Third, our defensive
positioning caused us to miss the markets' rallies.
Q: What happened in the overseas economies over the past 12 months?
A: Despite what we perceived as evidence that economic activity in Europe and
Japan began to recover in 1996, underlying activity remained sluggish.
Additionally, inflation pressures remained subdued. This was apparent in the
U.S. In the absence of inflationary pressures, central banks allowed monetary
policy to remain easy -- which was different from our expectations of rising
short-term interest rates. Indeed, many central banks continued to ease
monetary policy. Against this background, global bond markets rallied.
Q: What's your outlook and strategy going forward?
A: We are looking for global economic activity to eventually gain momentum
and wouldn't be surprised to see the central banks beginning to tighten
monetary conditions should inflationary pressures emerge. However, in the
short term we recognize that the central banks appear willing to delay
tightening until there is clear evidence of rising price pressures and also
that bond markets may continue to rally.
Consequently, we have reduced our cash exposure and bought more Canadian and
Australian bonds. Additionally, we have raised our exposure to the U.K. bond
market, which has lagged other European markets recently. In Continental
Europe, we continue to favor the German bond market.
October 31, 1996
Asset Allocation
(by percentage of net assets)
[Pie Chart]
Bonds 87%
Cash and currency 13%
Currency Allocation
(by percentage of net assets)
[Pie Chart]
Other 5%
Japanese yen 25%
European currencies 70%
German deutsche mark 23%
British pound 12%
French franc 10%
Italian lire 6%
Danish krone 5%
Dutch guilder 5%
Spanish peseta 4%
Belgian franc 3%
Swedish krona 2%
Because of active management, there is no guarantee that the Fund currently
invests, or will continue to invest, in the currencies shown.
2
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
INVESTMENT PORTFOLIO
October 31, 1996
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------- ------------------------ ----------------- --------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 87.0%
Australia 3.6% Australian Dollar
Government of Australia, 7.50% 1,500,000 7/15/2005 $ 1,202,758
--------------
Austria 1.8% Pound Sterling
Oest Kontrollbank AG, 9.25% 350,000 7/15/2002 613,457
--------------
Belgium 1.4% Belgian Franc
Kingdom of Belgium, 9.00% 12,000,000 6/27/2001 448,721
--------------
Canada 3.5% Canadian Dollar
Government of Canada, 7.00% 1,500,000 12/01/2006 1,163,893
--------------
Denmark 5.1% Danish Krone
Kingdom of Denmark, 9.00% 3,000,000 11/15/2000 583,246
Kingdom of Denmark, 8.00% 6,000,000 11/15/2001 1,130,361
--------------
1,713,607
--------------
France 12.2% Deutsche Mark
Credit Foncier de France, 7.25% 1,500,000 2/24/2003 1,058,835
Japanese Yen
Credit Local de France, 6.00% 100,000,000 10/31/2001 1,048,483
French Franc
Government of France, 8.50% 4,500,000 11/25/2002 1,026,484
Government of France, 6.75% 4,500,000 10/25/2003 945,330
--------------
4,079,132
--------------
Germany 17.0% Pound Sterling
Bayerische Landesbank Girozentrale, 7.88% 750,000 12/07/2006 1,223,755
Deutsche Mark
Federal Republic of Germany, 6.50% 1,500,000 7/15/2003 1,039,422
KFW International Finance, 6.25% 2,000,000 10/15/2003 1,358,452
LKB Baden Wurttemb, 6.63% 1,500,000 8/20/2003 1,040,016
Sudwest Landesbank, 6.75% 1,500,000 8/26/2003 1,040,946
--------------
5,702,591
--------------
Italy 5.2% Italian Lira
Republic of Italy, 10.50% 1,000,000,000 4/01/2005 750,626
Republic of Italy, 9.50% 1,400,000,000 2/01/1999 969,479
--------------
1,720,105
--------------
Japan 10.3% Japanese Yen
Asian Development Bank, 5.63% 100,000,000 2/18/2002 1,040,798
Export Import Bank, 4.38% 180,000,000 10/01/2003 1,790,435
Japan Development Bank, 6.50% 23,000,000 9/20/2001 246,580
Pound Sterling
Tokyo Electric Power Co. Inc., 11.00% 200,000 6/05/2001 $ 367,432
--------------
3,445,245
--------------
Netherlands 5.2% Guilder
Government of Netherlands, 6.50% 2,800,000 4/15/2003 1,745,978
--------------
Spain 2.0% Spanish Peseta
Government of Spain, 8.00% 85,000,000 5/30/2004 682,358
--------------
Sweden 2.3% Swedish Krona
Kingdom of Sweden, 13.00% 4,000,000 6/15/2001 764,056
--------------
United Kingdom 5.1% Pound Sterling
United Kingdom Treasury, 6.75% 1,100,000 11/26/2004 1,710,357
--------------
Supranational 12.3% Deutsche Mark
European Economic Community, 6.50% 1,500,000 3/10/2000 1,050,416
Japanese Yen
European Investment Bank, 6.63% 100,000,000 3/15/2000 1,033,112
Inter-American Development Bank, 6.75% 100,000,000 2/20/2001 1,064,402
International Bank for Reconstruction &
Development, 4.50% 100,000,000 6/20/2000 977,669
--------------
4,125,599
--------------
Total Fixed Income Securities and Investments
(Cost $26,621,548)--87.0% 29,117,857
Cash and Other Assets, Less Liabilities--13.0% 4,362,788
--------------
Net Assets--100.0% $33,480,645
==============
Federal Income Tax Information:
At October 31, 1996 the net unrealized appreciation of investments based on cost for
Federal income tax purposes of $26,621,548 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess
of value over tax cost $ 2,658,545
Aggregate gross unrealized depreciation for all investments in which there is an excess
of tax cost over value (162,236)
--------------
$ 2,496,309
==============
</TABLE>
The principal amount of each security is stated in the currency in which the
security is denominated.
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
Assets
Investments, at value (Cost $26,621,548) (Note 1) $ 29,117,857
Foreign currency, at value (Cost $5,894,892) 5,798,618
Cash 357,519
Interest receivable 817,804
Receivable from investment manager (Note 3) 38,332
Foreign tax receivable 10,406
Receivable for fund shares sold 838
Deferred organization costs and other assets (Note 1) 13,483
--------------
36,154,857
Liabilities
Payable for securities purchased 2,484,901
Accrued management fee (Note 2) 21,216
Accrued transfer agent and shareholder services (Note 2) 20,196
Accrued directors' fees (Note 2) 14,297
Accrued distribution and service fees (Note 5) 5,577
Payable for fund shares redeemed 2,298
Other accrued expenses 125,727
--------------
2,674,212
--------------
$33,480,645
==============
Net Assets
Net Assets consist of:
Undistributed net investment income $ 293,705
Unrealized appreciation of investments
and foreign currency 2,401,275
Accumulated net realized gain on investments
and foreign currency 277,438
Shares of beneficial interest 30,508,227
--------------
$ 33,480,645
==============
Net Asset Value and redemption price per share of Class A shares
($2,806,572 / 332,131 shares of beneficial interest) $8.45
==============
Maximum Offering Price per share of Class A shares
($8.45 / .955) $8.85
==============
Net Asset Value and offering price per share of Class B shares
($4,028,022 / 478,504 shares of beneficial interest)* $8.42
==============
Net Asset Value, offering price and redemption price per share
of Class C shares ($24,840,299 / 2,934,746 shares of
beneficial interest) $8.46
==============
Net Asset Value and offering price per share of Class D shares
($1,805,752 / 214,595 shares of beneficial interest)* $8.41
==============
*Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
Investment Income
Interest, net of foreign taxes of $17,063 $ 1,644,032
Expenses
Management fee (Note 2) 246,122
Custodian fee 147,686
Transfer agent and shareholder services (Note 2) 104,744
Audit fee 64,035
Registration fees 35,448
Reports to shareholders 24,799
Amortization of organization costs (Note 1) 17,297
Directors' fees (Note 2) 14,297
Legal fees 11,861
Service fee--Class A (Note 5) 6,258
Distribution and service fees--Class B (Note 5) 38,313
Distribution and service fees--Class D (Note 5) 16,462
Miscellaneous 6,438
--------------
733,760
Expenses borne by the investment manager (Note 3) (179,424)
--------------
554,336
--------------
Net investment income 1,089,696
--------------
Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency
Net realized gain on investments (Notes 1 and 4) 290,826
Net realized gain on foreign currency (Note 1) 30,346
--------------
Total net realized gain 321,172
--------------
Net unrealized depreciation of investments (639,506)
Net unrealized depreciation of foreign currency (307,408)
--------------
Total net unrealized depreciation (946,914)
--------------
Net loss on investments and foreign currency (625,742)
--------------
Net increase in net assets resulting from operations $ 463,954
==============
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
Year ended October 31
--------------------------------
1996 1995
- ------------------------------------------ --------------- ----------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 1,089,696 $ 1,405,292
Net realized gain on investments and
foreign currency* 321,172 684,995
Net unrealized appreciation (depreciation)
of investments and foreign currency (946,914) 1,568,923
--------------- ----------------
Net increase resulting from operations 463,954 3,659,210
--------------- ----------------
Dividends from net investment income:
Class A (113,884) (88,114)
Class B (143,579) (113,623)
Class C (1,216,944) (1,691,435)
Class D (59,902) (41,936)
--------------- ----------------
(1,534,309) (1,935,108)
--------------- ----------------
Distributions from net realized gains:
Class A (14,778) (5,975)
Class B (20,669) (8,086)
Class C (155,630) (123,136)
Class D (7,956) (2,986)
--------------- ----------------
(199,033) (140,183)
--------------- ----------------
Net increase from fund share transactions
(Note 6) 4,103,576 2,690,071
--------------- ----------------
Total increase in net assets 2,834,188 4,273,990
Net Assets
Beginning of year 30,646,457 26,372,467
--------------- ----------------
End of year (including undistributed net
investment income of $293,705 and
$696,597, respectively) $ 33,480,645 $ 30,646,457
=============== ================
* Net realized gain for Federal income tax
purposes (Note 1) $ 279,451 $ 197,316
=============== ================
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
Note 1
State Street Research International Fixed Income Fund (the "Fund"), is a
diversified series of State Street Research Portfolios, Inc. ("Portfolios"),
which was organized as a Maryland corporation in April, 1991 and is registered
under the Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in January, 1992. Portfolios
consists presently of two separate funds: State Street Research International
Fixed Income Fund and State Street Research International Equity Fund.
The investment objective of the fund is to achieve the highest possible total
return, consisting of income and realized and unrealized capital gains,
consistent with prudent investment risk and preservation of capital, by
investing primarily in high quality debt securities of non-U.S. issuers.
The Fund offers four classes of shares. Class A shares are subject to an initial
sales charge of up to 4.50% and annual service fees of 0.25% of average daily
net assets. Class B shares are subject to a contingent deferred sales charge on
certain redemptions made within five years of purchase and pay annual
distribution and service fees of 1.00%. Class B shares automatically convert
into Class A shares (which pay lower ongoing expenses) at the end of eight years
after the issuance of the Class B shares. Class C shares are only offered to
certain employee benefit plans and large institutions. No sales charge is
imposed at the time of purchase or redemption of Class C shares. Class C shares
do not pay any distribution or service fees. Class D shares are subject to a
contingent deferred sales charge of 1.00% on any shares redeemed within one year
of their purchase. Class D shares also pay annual distribution and service fees
of 1.00%. The Fund's expenses are borne pro-rata by each class, except that each
class bears expenses, and has exclusive voting rights with respect to provisions
of the Plan of Distribution, related specifically to that class. The Directors
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.
A. Investment Valuation
Securities traded on domestic stock exchanges are valued at the last sale price
as of the close of business on the day the securities are being valued, or,
lacking any sales, at the mean between closing bid and asked prices. Securities
traded on the National Association of Securities Dealers Automated Quotation
("NASDAQ") system are valued at the last reported sales price. Each security
traded primarily on non-domestic securities exchanges is generally valued at the
preceding closing value of such security on the exchange where it is primarily
traded. A security that is listed or traded on more than one exchange is valued
at the quotation on the exchange determined to be the primary market for such
security by the Board of Directors or its delegates. If no closing price is
available, then such security is valued at the mean between the last current bid
and asked prices or by using the last available closing price. Domestic
securities traded in
5
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
the over-the-counter market are valued at the mean between the bid and asked
prices or yield equivalent as obtained from two or more dealers that make
markets in the securities. All non-U.S. securities traded in the
over-the-counter market are valued at the last sale quote or the last closing
bid price, if there is no active trading in a particular security for a given
day. Portfolio securities traded both in the over-the-counter market and on a
securities exchange are valued according to the broadest and most representative
market. Securities for which market quotations are not readily available are
valued as determined in good faith by or under the authority of the Directors.
Short-term securities maturing within sixty days are valued at amortized cost.
Securities quoted in foreign currencies are translated into U.S. dollars at the
current exchange rate.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.
C. Net Investment Income
Investment income is accrued daily as earned. The Fund is charged for
expenses directly attributable to it, while indirect expenses are allocated
between both funds in the Portfolios.
D. Dividends
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually,
unless additional distributions are required for compliance with applicable
tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing treatments
for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a period
of five years.
G. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Note 2
The Fund and State Street Research Investment Services, Inc., the Fund's
investment manager and principal underwriter (the "Investment Manager" and
"Distributor"), a wholly owned indirect subsidiary of Metropolitan Life
Insurance Company ("Metropolitan"), have entered into an agreement under which
the Investment Manager receives monthly fees at an annual rate of 0.75% of the
Fund's average daily net assets. The Investment Manager has entered into a
Sub-Investment Management Agreement with GFM International Investors Limited
(the "Sub-Investment Manager"), a substantially wholly owned, indirect
subsidiary of Metropolitan, pursuant to which the Sub-Investment Manager has
assumed the overall responsibility for managing the investments of the Fund.
During the year ended October 31, 1996, the Fund paid the Investment Manager
$246,122 in management fees. The Fund has no responsibility for the payment of
fees to the Sub-Investment Manager.
State Street Research Shareholder Services, a division of the Distributor,
provides certain shareholder services to the Fund such as responding to
inquiries and instructions from investors with respect to the purchase and
redemption of shares of the Fund. In addition, Metropolitan receives a fee for
maintenance of the accounts of certain shareholders who are participants in
sponsored arrangements, employee benefit plans and similar programs or plans,
through or under which shares of the Fund may be purchased. During the year
ended October 31, 1996, the amount of such expenses was $21,704.
The fees of the Directors not currently affiliated with the Invest-
ment Manager amounted to $14,297 during the year ended October 31, 1996.
Note 3
The Investment Manager or affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended October 31, 1996, the amount of such assumed
expenses was $179,424.
Note 4
For the year ended October 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $18,021,481 and $11,266,940,
respectively.
Note 5
Portfolios has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class D shares. In addition,
the Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
services and/or the maintenance or servicing of shareholder accounts, to
reimburse securities dealers for distribution and marketing services, to furnish
ongoing assistance to investors and to defray a portion of its distribution and
marketing expenses. For the year ended October 31, 1996, fees pursuant to such
plan amounted to $6,258, $38,313 and $16,462 for Class A, Class B and Class D,
respectively.
6
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
NOTES (cont'd)
Note 5 (cont'd)
The Fund has been informed that the Distributor and MetLife Securities, Inc., a
wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $3,914 and $7,073, respectively, on sales of Class A shares of the
Fund during the year ended October 31, 1996, and that MetLife Securities, Inc.
earned commissions aggregating $11,721 on sales of Class B shares, and that the
Distributor collected contingent deferred sales charges of $8,598 and $867 on
redemptions of Class B and Class D shares, respectively, during the same period.
Note 6
The authorized capital stock of the Fund currently consists of 100,000,000
shares, $.01 par value per share. The Fund reserves the right to issue
additional classes of shares. At October 31, 1996, Metropolitan owned 2,745,384
Class C shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended October 31
------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
Class A Shares Amount Shares Amount
-------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Shares sold 239,978 $ 2,018,281 154,393 $1,349,055
Issued upon reinvestment of:
Distributions from net realized gains 1,644 14,223 737 5,712
Dividends from net investment income 10,609 89,660 5,748 47,607
Shares repurchased (159,405) (1,342,020) (51,420) (442,983)
-------------- -------------- -------------- --------------
Net increase 92,826 $ 780,144 109,458 $ 959,391
============== ============== ============== ==============
Class B Shares Amount Shares Amount
-------------------------------------------------------- -------------- -------------- --------------
Shares sold 332,479 $ 2,810,842 189,985 $1,645,022
Issued upon reinvestment of:
Distributions from net realized gains 2,095 18,040 931 7,205
Dividends from net investment income 11,765 99,331 6,879 57,359
Shares repurchased (192,808) (1,619,138) (46,537) (393,423)
-------------- -------------- -------------- --------------
Net increase 153,531 $ 1,309,075 151,258 $1,316,163
============== ============== ============== ==============
Class C Shares Amount Shares Amount
-------------------------------------------------------- -------------- -------------- --------------
Shares sold 356,166 $ 3,010,729 34,745 $ 311,510
Issued upon reinvestment of:
Distributions from net realized gains 17,927 154,527 15,646 121,415
Dividends from net investment income 11,325 96,005 16,717 137,775
Shares repurchased (232,104) (1,931,942) (88,669) (760,263)
-------------- -------------- -------------- --------------
Net increase (decrease) 153,314 $ 1,329,319 (21,561) $ (189,563)
============== ============== ============== ==============
Class D Shares Amount Shares Amount
-------------------------------------------------------- -------------- -------------- --------------
Shares sold 189,105 $ 1,599,158 73,243 $ 639,413
Issued upon reinvestment of:
Distributions from net realized gains 889 7,646 385 2,985
Dividends from net investment income 4,851 40,579 894 7,531
Shares repurchased (113,909) (962,345) (5,482) (45,849)
-------------- -------------- -------------- --------------
Net increase 80,936 $ 685,038 69,040 $ 604,080
============== ============== ============== ==============
</TABLE>
7
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class B
------------------------------- -------------------------------
Year ended October 31 Year ended October 31
------------------------------- -------------------------------
1996*** 1995*** 1994** 1996*** 1995*** 1994**
------------------------------------------ --------- --------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.80 $ 8.31 $ 7.99 $ 8.77 $ 8.28 $ 7.99
Net investment income* 0.27 0.40 0.30 0.21 0.34 0.27
Net realized and unrealized gain (loss) on
investments and foreign currency (0.16) 0.72 0.27 (0.16) 0.72 0.26
Dividends from net investment income (0.40) (0.59) (0.25) (0.34) (0.53) (0.24)
Distributions from net realized gains (0.06) (0.04) -- (0.06) (0.04) --
--------- --------- --------- --------- -------------------
Net asset value, end of year $ 8.45 $ 8.80 $ 8.31 $ 8.42 $ 8.77 $ 8.28
========= ========= ========= ========= ===================
Total return 1.31%+ 14.26%+ 7.33%+++ 0.61%+ 13.53%+ 6.73%+++
Net assets at end of year (000s) $2,807 $2,106 $1,079 $4,028 $2,851 $1,439
Ratio of operating expenses to average net
assets* 1.75% 1.74% 1.69%++ 2.50% 2.49% 2.43%++
Ratio of net investment income to average
net assets* 3.25% 4.71% 5.79%++ 2.50% 3.94% 5.06%++
Portfolio turnover rate 45.84% 23.31% 38.84% 45.84% 23.31% 38.84%
*Reflects voluntary assumption of fees or
expenses per share in each year (Note 3) $ 0.05 $ 0.06 $ 0.01 $ 0.05 $ 0.06 $ 0.02
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
------------------------------------------------------------ -------------------------------
January 22, 1992
(Commencement of
Year ended October 31 Operations) to Year ended October 31
------------------------------------------ -------------------------------
1996*** 1995*** 1994 1993 October 31, 1992 1996*** 1995*** 1994**
- ------------------ --------- --------- --------- --------- ----------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 8.81 $ 8.32 $ 8.24 $ 7.85 $ 7.40 $ 8.78 $ 8.29 $ 7.99
Net investment income* 0.30 0.44 0.14 0.41 0.32 0.21 0.34 0.27
Net realized and
unrealized gain (loss)
on investments and
foreign currency (0.17) 0.70 0.46 0.34 0.13 (0.17) 0.72 0.26
Dividends from net
investment income (0.42) (0.61) (0.49) (0.36) -- (0.35) (0.53) (0.23)
Distributions from
net realized gains (0.06) (0.04) (0.03) -- -- (0.06) (0.04) --
--------- --------- --------- --------- ----------------- --------- --------- ----------
Net asset value,
end of year $ 8.46 $ 8.81 $ 8.32 $ 8.24 $ 7.85 $ 8.41 $ 8.78 $ 8.29
========= ========= ========= ========= ================= ========= ========= ==========
Total return 1.54%+ 14.51%+ 7.72%+ 9.98%+ 6.08%+++ 0.39%+ 13.49%+ 6.81%+++
Net assets at end
of year (000s) $24,840 $24,516 $23,319 $24,965 $22,299 $1,806 $1,173 $ 536
Ratio of operating
expenses to average
net assets* 1.50% 1.49% 1.47% 1.50% 1.50%++ 2.50% 2.49% 2.45%++
Ratio of net investment
income to average net
assets* 3.50% 5.14% 5.62% 5.48% 5.63%++ 2.50% 3.94% 4.98%++
Portfolio turnover rate 45.84% 23.31% 38.84% 20.44% 56.31% 45.84% 23.31% 38.84%
*Reflects voluntary
assumption of fees or
expenses per share in
each year (Note 3) $ 0.05 $ 0.06 $ 0.03 $ 0.03 $ 0.04 $ 0.05 $ 0.06 $ 0.01
</TABLE>
** March 1, 1994 (commencement of share class designations) to October 31,
1994.
*** Per-share figures have been calculated using the average shares method.
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Investment Manager and
its affiliates had not voluntarily assumed a portion of the Fund's
expenses.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Investment Manager and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of State Street
Research Portfolios, Inc. and the Shareholders of
State Street Research International Fixed Income Fund
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio, of State Street Research International Fixed Income
Fund (a series of State Street Research Portfolios, Inc.), as of October 31,
1996, and the related statement of operations for the year then ended, the
statement of changes in net assets for the two years then ended and the
financial highlights for each of the years in the five year period ended October
31, 1996. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the financial statements and financial highlights 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. Our procedures included confirmation of securities owned at October
31, 1996, by correspondence with the custodian. 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 that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of State Street
Research International Fixed Income Fund (a series of State Street Research
Portfolios, Inc.) at October 31, 1996, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
December 16, 1996
9
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
International Fixed Income Fund had a disappointing year. The Fund
underperformed the average total return of the 42 funds in Lipper Analytical
Services' International Income category.
Despite what Fund management perceived as evidence that economic activity in
Europe and Japan had begun to recover in 1996, underlying activity remained
sluggish. Additionally, inflation pressures remained subdued. This was apparent
in the U.S. In the absence of inflationary pressures, central banks allowed
monetary policy to remain easy. Many central banks continued to ease monetary
policy. Against this background, global bond markets rallied.
The Fund underperformed in three key areas. First, Fund management wasn't very
optimistic on the outlook for the U.S. dollar at the beginning of the period, so
the Fund wasn't focused on U.S. dollar or dollar-block (Canada and Australia)
assets and/or currencies. The dollar wound up stronger than expected, which hurt
Fund performance relative to other funds that had more exposure there. Second,
The Fund was underweighted in the bonds of the peripheral European markets
(Italy, Sweden and Spain), which offered strong performance. Third, the Fund was
positioned more defensively than many of its peers, which caused it to miss the
markets' rallies. Fund management took an overall bearish position on the global
bond markets and held as much as 25% of the Fund's exposure in cash.
The Salomon Brothers Non-U.S. Dollar World Bond Index is a commonly used measure
of overseas bond market performance. The index is unmanaged and does not take
sales charges into consideration. Direct investment in the index is not
possible; results are for illustrative purposes only. All returns represent past
performance, which is no guarantee of future results. The investment return and
principal value of an investment made in the Fund will fluctuate, and shares,
when redeemed, may be worth more or less than their original cost. All returns
assume reinvestment of capital gain distributions and income dividends. Shares
of the Fund had no class designations until March 1, 1994, when designations
were assigned based on the pricing and 12b-1 fees applicable to shares sold
thereafter. Performance for a class includes periods prior to the adoption of
class designations. Performance prior to March 1, 1994 does not reflect annual
12b-1 fees of .25% for "A" shares and 1% for "B" and "D" shares, which will
reduce subsequent performance. "C" shares, offered without a sales charge, are
available only to certain employee benefit plans and large institutions.
Performance reflects maximum 4.5% "A" share front-end sales charge or 5% "B"
share or 1% "D" share contingent deferred sales charges, where applicable.
Performance results for the Fund are increased by the investment manager's
voluntary reduction of fees and expenses related to the Fund. The first figure
reflects expense reduction; the second shows what results would have been
without subsidization.
Change In Value Of $10,000
Based On The Salomon Brothers
Non-U.S. Dollar World Bond Index Compared
To Change In Value Of $10,000 Invested In
International Fixed Income Fund
[LINE CHARTS]
Class A Shares
Average Annual Total Return
- -------------------------------
1 Year Life of Fund
- -------------------------------
- -3.25%/-3.70% +7.08%/+6.55%
$17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000
$16,154 $13,868
1/22/92 10/31/92 10/31/93 10/31/94 10/31/95 10/31/96
1/22/92 9550 10000
10/31/92 10131 10990
10/31/93 11142 12222
10/31/94 11979 13299
10/31/95 13688 15319
10/31/96 13868 16154
Class B Shares
Average Annual Total Return
- -------------------------------
1 Year Life of Fund
- -------------------------------
- -4.19%/-4.67% +7.37%/+6.81%
$17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000
$16,154 $14,048
1/22/92 10/31/92 10/31/93 10/31/94 10/31/95 10/31/96
1/22/92 10000 10000
10/31/92 10608 10990
10/31/93 11667 12222
10/31/94 12473 13299
10/31/95 14161 15319
10/31/96 14048 16154
Class C Shares
Average Annual Total Return
- -------------------------------
1 Year Life of Fund
- -------------------------------
+1.54%/+1.06% +8.26%/+7.70%
$17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000
$16,154 $14,613
1/22/92 10/31/92 10/31/93 10/31/94 10/31/95 10/31/96
1/22/92 10000 10000
10/31/92 10608 10990
10/31/93 11667 12222
10/31/94 12567 13299
10/31/95 14391 15319
10/31/96 14613 16154
Class D Shares
Average Annual Total Return
- -------------------------------
1 Year Life of Fund
- -------------------------------
- -0.56%/-1.04% +7.65%/+7.12%
$17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000
$16,154 $14,223
1/22/92 10/31/92 10/31/93 10/31/94 10/31/95 10/31/96
1/22/92 10000 10000
10/31/92 10608 10990
10/31/93 11667 12222
10/31/94 12483 13299
10/31/95 14167 15319
10/31/96 14223 16154
LEGEND:
Solid Line: International Fixed Income Fund
Dashed Line: Salomon Brothers Non-U.S. Dollar World Bond Index
10
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
FUND INFORMATION, OFFICERS AND DIRECTORS OF STATE STREET RESEARCH PORTFOLIOS,
INC.
Fund Information
State Street Research
International Fixed
Income Fund
One Madison Avenue
New York, NY 10010
Investment Manager
and Distributor
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
Sub-Investment Manager
GFM International
Investors Limited
5 Upper St. Martins Lane
London, WC2H 9EA
England
Shareholder Services
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
1-800-562-0032
Custodian
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
Independent Accountants
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
Officers
Jeffrey J. Hodgman
President and
Chief Executive Officer
Gary Lineberry
Vice President
Elaine Stevenson
Vice President and Chief
Operating Officer
Elliot Reiter
Treasurer
Brad White
Controller
Patricia S. Worthington
Secretary
Directors
Steve A. Garban
Retired; formerly Senior Vice
President for Finance and
Operations and Treasurer, The
Pennsylvania State University
Jeffrey J. Hodgman, Chairman
Executive Vice President,
Metropolitan Life Insurance
Company
Malcolm T. Hopkins
Former Vice Chairman of the
Board and Chief Financial Officer,
St. Regis Corp.
Robert A. Lawrence
Partner, Saltonstall & Co.
Dean O. Morton
Retired; formerly Executive
Vice President, Chief
Operating Officer and Director,
Hewlett-Packard Company
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School
of Management, Massachusetts
Institute of Technology
John H. Tweedie
Executive Vice President,
Metropolitan Life Insurance
Company
11
<PAGE>
[Back Cover]
Bulk Rate
U.S. Postage
PAID
Brockton, MA
Permit No. 600
State Street Research Investment Services
One Financial Center
Boston, MA 02111
Questions? Comments?
Call us at 1-800-562-0032,
or write us at:
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
[State Street Research Logo]
This report is prepared for the general information of current shareholders
only. It is not authorized for use as sales material with prospective investors.
The Dalbar awards recognize quality shareholder service and should not be
considered a rating of fund performance. The survey included mutual fund
complexes that volunteered or were otherwise selected to participate and was
not industry-wide.
CONTROL NUMBER: 3563-961223(0198)SSR-LD
Cover Illustration by Dorothy Cullinan
IF-108E-1296
