Smith Barney
Small Cap
Value Fund
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SEMI-ANNUAL REPORT
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MARCH 31, 1999
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SMITH BARNEY
SMALL CAP VALUE FUND
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The SMITH BARNEY SMALL CAP VALUE FUND seeks long-term capital appreciation by
investing primarily in the common stocks of companies with relatively small
market capitalizations.
SMITH BARNEY SMALL CAP VALUE FUND
AVERAGE ANNUAL TOTAL RETURNS
MARCH 31, 1999
WITHOUT SALES CHARGES(1)
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CLASS A CLASS B CLASS L
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Since Inception+ ++ 1.40% 1.32% 1.32%
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WITH SALES CHARGES(2)
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CLASS A CLASS B CLASS L
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Since Inception+ ++ (3.67)% (3.68)% (0.74)%
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(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 5.00% and 1.00%
respectively; and Class B shares reflect the deduction of a 5.00% CDSC,
which applies if shares are redeemed within one year from purchase.
Thereafter, the CDSC declines by 1.00% per year until no CDSC is incurred.
Class L shares also reflect the deduction of a 1.00% CDSC which applies if
shares are redeemed within the first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Inception date for Class A, B and L shares is February 26, 1999.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
FUND HIGHLIGHT
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RELATIVE TO THE RUSSELL 2000 VALUE INDEX, WE HAVE CONSTRUCTED A PORTFOLIO THAT
WE BELIEVE HAS HIGHER QUALITY ASSETS, HIGH RETURN POTENTIAL AND CURRENTLY MORE
ATTRACTIVE VALUATIONS. AS TO THE FUND'S SECTOR WEIGHTINGS VERSUS THE RUSSELL
2000 VALUE INDEX, WE ARE OVERWEIGHTED IN CONSUMER CYCLICALS, ENERGY AND
FINANCIALS (INCLUDING REITS). THE FUND'S LARGEST UNDERWEIGHTINGS ARE IN CONSUMER
STAPLES AND TECHNOLOGY.
NASDAQ SYMBOL
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CLASS A SBVAX
CLASS B SBVBX
CLASS L SBVLX
WHAT'S INSIDE
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SHAREHOLDER LETTER............................................ 1
HISTORICAL PERFORMANCE ....................................... 4
SCHEDULE OF INVESTMENTS ...................................... 5
STATEMENT OF ASSETS AND LIABILITIES .......................... 8
STATEMENT OF OPERATIONS ...................................... 9
STATEMENT OF CHANGES IN NET ASSETS .......................... 10
NOTES TO FINANCIAL STATEMENTS ............................... 11
FINANCIAL HIGHLIGHTS ........................................ 15
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Shareholder Letter
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PHOTO OF: HEATH B. MC LENDON
HEATH B.
MC LENDON
Chairman
PHOTO OF: PETER J. HABLE
PETER J. HABLE
Vice President and Investment Officer
DEAR SHAREHOLDER:
We are pleased to provide the first semi-annual report for the Smith Barney
Small Cap Value Fund ("Fund") for the period ended March 31, 1999. In this
report we have summarized the period's prevailing economic and market conditions
and outlined our portfolio strategy. A detailed summary of the Fund's
performance can be found in the appropriate sections that follow. We hope you
find this report to be useful and informative.
A STYLE PURE SERIES FUND
The Smith Barney Small Cap Value Fund is a Style Pure Series Fund. Style Pure
Series mutual funds are Smith Barney Mutual Funds that are the basic building
blocks of asset allocation. Other than maintaining minimal cash or under
extraordinary market conditions, each Style Pure Series Fund is usually fully
invested 100% of the time within its designated asset class and its designated
investment style.
PERFORMANCE UPDATE AND STRATEGY
The Small Cap Value Fund commenced operations on February 26, 1999. Since
inception through March 31, 1999, the Class A, B and L shares of the Fund
returned 1.40%, 1.32% and 1.32%, respectively, without sales charges. In
comparison, the Russell 2000 Value Index returned a negative 0.82% over the same
period. (The Russell 2000 Value Index contains those securities with a
less-than-average growth orientation.)
Our research team looks for small-capitalization stocks that we believe sell at
low prices relative to several measures of value and where some dynamic change
in a company or an industry may enhance stock price performance. (Market
capitalization is the value of a company's outstanding shares of common stock,
determined by multiplying the number of shares outstanding by the share price.)
We generally prefer to invest in companies where managements have meaningful
ownership stakes, as well as in companies with positive cash flows, strong
balance sheets and high returns on equity. We focus on small-capitalization
companies in order to uncover fundamental value and because of the significant
capital appreciation potential.
MARKET UPDATE
The stock market of 1998 was characterized by an extraordinary divergence in
performance between large-cap and small-cap stocks, with small-cap stocks
underperforming by a staggering 30 percentage points. This underperformance
occurred despite the fact that small-cap stocks began the year undervalued
versus large-cap stocks by virtually any historical valuation measure. By the
end of 1998, small-cap valuations had fallen off even further.
Small-cap stocks underperformed the S&P 500 Index again in the first quarter of
1999. (The S&P 500 Index is a capitalization-weighted measure of 500 widely held
common stocks.) Small-cap stocks have now posted one of the longest losing
streaks on record. As a result of this recent losing streak, relative valuations
for small-cap stocks remain at all-time lows.
The current P/E discount for small caps is greater than the discount we saw in
1990, just before small caps began a three-year period of strong performance.
The
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SMITH BARNEY SMALL CAP VALUE FUND 1
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current P/E discount is even larger than the 45% discount that existed in the
early 1970s, preceding an eight-year period of superior small-cap stock
performance.
The other small-cap relative valuation measures also continued their descent.
Small cap relative price to sales, price to cash flow, and price to book are now
all at record lows. Within the small-cap universe, the current general rule
seems to be: the smaller the market cap, the more pronounced the valuation
discount. At these extraordinarily low valuations, many small-cap companies have
the potential to provide venture capital rates of return.
On the positive side, the outflow of assets from small-cap mutual funds
continued during the reporting period, but at a much slower pace. In fact,
small-cap mutual fund redemptions slowed considerably in February and March.
With many institutional consultants recommending diversifying away from the S&P
500 Index towards the broader Wilshire 5000 Index, inflows may finally be
turning positive for many small-cap stocks. (The Wilshire 5000 Index is widely
followed as an indicator of the broad trend in stock prices.) The other positive
trend is the high level of recent merger and acquisition activity within the
small-cap arena.
PORTFOLIO UPDATE*
At March 31, 1999, the Fund's portfolio was made up of 75 stocks that
represented approximately 90% of net asset value ("NAV"). About 10% of the
Fund's portfolio is held in Russell 2000 small-cap index futures to keep the
Fund fully invested. We expect the percentage of the Fund's assets held in stock
index futures to be reduced over time as we take advantage of short-term price
volatility to add to our targeted stocks. We also expect the number of holdings
in the Fund's portfolio to increase slightly over time.
Turning to some investment characteristics of the Fund's portfolio, as of April
8, 1999, the average capitalization of the stocks held in the Fund's portfolio
was roughly $1.15 billion versus $710 million for the Russell 2000 Value Index.
What follows are some comparisons between the Fund and the Russell 2000 Value
Index:
SMALL CAP RUSSELL 2000
VALUE FUND VALUE INDEX
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Average P/E ratio 15.6 20.9
Average price/cash flow 11.5 15.4
Average price/book 2.1 2.1
Average return on equity 11.7 7.7
Relative to the Russell 2000 Value Index, we have constructed a portfolio that
we believe has higher quality assets, high return potential and currently more
attractive valuations.
As to the Fund's sector weightings versus the Russell 2000 Value Index, we are
overweighted in consumer cyclicals, energy, and financials (including REITs).
The Fund's largest underweightings are in consumer staples and technology.
As of March 31, 1999, the Fund's top-ten holdings included:
o BARRETT RESOURCES and UNION PACIFIC RESOURCES, both companies stand to
benefit from the apparent recovery of natural gas prices
o FOOTSTAR, a shoe retailer that should benefit from the trend toward
increased footwear sales in discount stores and the recovery of the
athletic footwear market
o MERITOR, a components and systems supplier to the strengthening heavy and
medium truck market
o CORN PRODUCTS, a beneficiary of the increased utilization of high fructose
corn syrup
o CYPRESS SEMICONDUCTOR, a company that designs, develops, manufactures and
sells digital and mixed-signal integrated circuits that are in high demand
* Please note that the Fund's holdings are subject to change.
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2 1999 SEMI-ANNUAL REPORT TO SHAREHOLDERS
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o MAXTOR, a hard disc drive producer whose products meet the long term demand
for digitized computer storage
o GOLDEN STATE BANCORP, a thrift that should benefit from the consolidation
of the banking industry
o CITIZENS UTILITIES, a public utility that also provides communications and
local exchange carrier services
MARKET OUTLOOK
With our small-cap holdings growing their earnings faster than many other
large-cap stocks and trading at significant discount to liquidation value, we
believe our holdings will either attract investors or they will be taken over.
It is our opinion that the superior returns and the record low valuations for
small-cap stocks should not go unnoticed by either individual or institutional
investors indefinitely.
In closing, thank you for investing in the Smith Barney Small Cap Value Fund. We
encourage you to visit our Web site at WWW.SMITHBARNEY.COM. We look forward to
continuing to help you pursue your financial goals in the years ahead.
Sincerely,
/S/HEATH B. MC LENDON /S/PETER J. HABLE
HEATH B. MC LENDON PETER J. HABLE
Chairman Vice President and
Investment Officer
APRIL 14, 1999
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SMITH BARNEY SMALL CAP VALUE FUND 3
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<TABLE>
<CAPTION>
Historical Performance -- Class A, B and L Shares
HISTORICAL PERFORMANCE -- CLASS A SHARES
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NET ASSET VALUE
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BEGINNING END INCOME CAPITAL GAIN TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDEND DISTRIBUTION RETURN(1)
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<S> <C> <C> <C> <C> <C>
Inception*-- 3/31/99 $11.40 $11.56 $0.00 $0.00 1.40%+
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HISTORICAL PERFORMANCE -- CLASS B SHARES
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NET ASSET VALUE
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BEGINNING END INCOME CAPITAL GAIN TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDEND DISTRIBUTION RETURN(1)
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Inception*-- 3/31/99 $11.40 $11.55 $0.00 $0.00 1.32%+
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HISTORICAL PERFORMANCE -- CLASS L SHARES
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NET ASSET VALUE
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BEGINNING END INCOME CAPITAL GAIN TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDEND DISTRIBUTION RETURN(1)
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Inception*-- 3/31/99 $11.40 $11.55 $0.00 $0.00 1.32%+
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</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
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WITHOUT SALES CHARGES(1)
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CLASS A CLASS B CLASS L
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<S> <C> <C> <C>
Inception* through 3/31/99+ 1.40% 1.32% 1.32%
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WITH SALES CHARGES(2)
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CLASS A CLASS B CLASS L
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Inception* through 3/31/99+ (3.67)% (3.68)% (0.74)%
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</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURNS
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WITHOUT SALES CHARGES(1)
<S> <C>
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Class A (Inception* through 3/31/99) 1.40%
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Class B (Inception* through 3/31/99) 1.32
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Class L (Inception* through 3/31/99) 1.32
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</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 5.00% and 1.00%,
respectively; Class B shares reflect the deduction of a 5.00% CDSC, which
applies if shares are redeemed within one year from purchase. Thereafter,
the CDSC declines by 1.00% per year until no CDSC is incurred. Class L
shares also reflect the deduction of a 1.00% CDSC, which applies if shares
are redeemed within the first year of purchase.
* Inception date for Class A, B and L shares is February 26, 1999.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
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4 1999 SEMI-ANNUAL REPORT TO SHAREHOLDERS
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SCHEDULE OF INVESTMENTS (unaudited) March 31, 1999
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<TABLE>
<CAPTION>
SHARES SECURITY VALUE
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<S> <C> <C> <C>
COMMON STOCK -- 87.6%
AUTOS & TRANSPORTATION -- 3.0%
35,000 Arnold Industries, Inc. $ 520,625
2,000 Convenant Transport+ 29,750
70,000 Kirby Corp. 1,325,625
100,000 Wisconsin Central Transportation Corp.+ 1,325,000
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3,201,000
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CAPITAL GOODS -- 7.6%
80,000 Belden Inc. 1,365,000
62,500 Federal Signal Corp. 1,304,688
52,500 IDEX Corp. 1,237,031
90,000 Meritor Automotive, Inc. 1,395,000
35,000 Precision Castparts Corp. 1,408,750
57,500 Roper Industries, Inc. 1,372,812
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8,083,281
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CONSUMER DISCRETIONARY -- 17.3%
90,000 Ambassadors International, Inc.+ 1,456,875
50,000 American Greetings Corp., Class A Shares 1,268,750
140,000 Arctic Cat Inc. 1,391,250
127,500 Buffets, Inc.+ 1,259,063
57,500 Corn Products International, Inc. 1,376,407
47,500 Footstar, Inc.+ 1,520,000
60,000 Interstate Bakeries Corp. 1,293,750
47,500 Lancaster Colony Corp. 1,264,688
40,000 Liz Claiborne, Inc. 1,305,000
170,000 Pier 1 Imports, Inc. 1,381,250
70,000 Rexall Sundown, Inc.+ 1,343,125
55,000 Ruddick Corp. 1,072,500
72,500 Scientific Games Holdings Corp.+ 1,286,875
137,500 Sturm, Ruger & Co., Inc.+ 1,375,000
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18,594,533
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FINANCIAL SERVICES -- 18.2%
48,000 Chittenden Corp. 1,278,000
40,000 City National Corp. 1,235,000
37,500 CMAC Investment Corp.+ 1,462,500
27,500 Cullen/Frost Bankers, Inc. 1,318,281
48,000 FirstMerit Corp. 1,236,000
60,000 Golden State Bancorp Inc.+ 1,335,000
37,500 GreenPoint Financial Corp. 1,303,125
20,000 InterWest Bancorp, Inc. 476,250
42,500 Investors Financial Services Corp. 1,221,875
65,000 Old Republic International Corp 1,186,250
35,000 Peoples Bank Corp. 1,041,250
70,000 Peoples Heritage Financial Group, Inc. 1,260,000
50,000 Sky Financial Group, Inc.+ 1,353,125
16,000 US Trust Corp. 1,187,000
SEE NOTES TO FINANCIAL STATEMENTS.
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SMITH BARNEY SMALL CAP VALUE FUND 5
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SCHEDULE OF INVESTMENTS (unaudited) (continued) March 31, 1999
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SHARES SECURITY VALUE
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FINANCIAL SERVICES -- 18.2% (CONTINUED)
67,500 Waddell & Reed Financial, Inc. $ 1,383,750
45,000 Webster Financial Corp. 1,299,375
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19,576,781
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HEALTH CARE -- 1.4%
125,000 Foundation Health Systems, Inc.+ 1,523,438
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INTEGRATED OIL -- 3.5%
60,000 Barrett Resources Corp.+ 1,503,750
56,700 Mitchell Energy & Development Corp. 708,750
125,000 Union Pacific Resources Group Inc. 1,484,375
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3,696,875
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MATERIALS & PROCESSING -- 4.4%
52,500 Carpenter Technology Corp. 1,361,719
75,000 Engelhard Corp. 1,270,313
75,000 Oregon Steel Mills, Inc. 782,813
62,500 Wolverine Tube, Inc.+ 1,320,312
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4,735,157
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PRODUCER DURABLES -- 1.1%
65,000 Cooper Tire & Rubber Co. 1,194,375
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REAL ESTATE -- 19.5%
58,500 Arden Realty, Inc. 1,301,625
40,000 Avalonbay Communities, Inc. 1,265,000
41,250 Boston Properties, Inc. 1,304,531
95,000 Catellus Development Corp.+ 1,270,625
44,000 Cousins Properties, Inc. 1,273,250
62,500 Del E. Webb Corp. 1,355,469
60,000 Duke Realty Investments, Inc. 1,290,000
55,000 FelCor Lodging Trust Inc. 1,275,313
40,000 General Growth Properties, Inc. 1,297,500
57,500 Highwoods Properties, Inc. 1,354,843
62,500 Kilroy Realty Corp. 1,281,250
35,000 Kimco Realty Corp. 1,290,625
57,500 The Rouse Co. 1,275,781
37,500 Spieker Properties, Inc. 1,321,875
77,500 Trammell Crow Co.+ 1,433,750
52,500 TriNet Corporate Realty Trust, Inc. 1,332,187
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20,923,624
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TECHNOLOGY -- 2.3%
141,250 Cypress Semiconductor Corp.+ 1,271,250
182,500 Maxtor Corp.+ 1,288,906
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2,560,156
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UTILITIES -- 9.3%
77,500 Avista, Corp. 1,259,375
157,500 Citizens Utilities Co., Class B Shares 1,220,625
35,100 Eastern Enterprises 1,276,762
SEE NOTES TO FINANCIAL STATEMENTS.
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6 1999 SEMI-ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
SCHEDULE OF INVESTMENTS (unaudited) (continued) March 31, 1999
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SHARES SECURITY VALUE
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UTILITIES -- 9.3% (CONTINUED)
42,500 IDACORP, Inc. $ 1,248,437
50,000 Nevada Power Co. 1,237,500
37,500 Peoples Energy Corp. 1,211,719
57,500 Washington Gas Light Co. 1,300,937
42,500 WPS Resources Corp. 1,253,750
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10,009,105
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TOTAL COMMON STOCK
(Cost--$92,002,165) 94,098,325
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<CAPTION>
FACE
AMOUNT SECURITY VALUE
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<S> <C> <C>
U.S. TREASURY BILLS -- 4.3%
$4,580,000 U.S. Treasury Bills due 4/15/99
(Cost--$4,572,128) 4,572,128
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REPURCHASE AGREEMENT -- 8.1%
8,707,000 Morgan Stanley Dean Witter & Co., 4.900% due 4/1/99;
Proceeds at maturity -- $8,708,183; (Fully collateralized by U.S.
Treasury Bonds, 8.750% due 8/15/20; Market value -- $8,882,146)
(Cost-- $8,707,000) 8,707,000
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TOTAL INVESTMENTS -- 100%
(Cost-- $105,281,293*) $107,377,453
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</TABLE>
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
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SMITH BARNEY SMALL CAP VALUE FUND 7
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STATEMENT OF ASSETS AND LIABILITIES (unaudited) March 31, 1999
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ASSETS:
Investments, at value (Cost-- $105,281,293) $107,377,453
Cash 690
Receivable for Fund shares sold 3,046,709
Dividends and interest receivable 178,347
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TOTAL ASSETS 110,603,199
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LIABILITIES:
Payable for securities purchased 1,785,477
Payable to broker - variation margin 110,000
Management fees payable 70,902
Distribution fees payable 28,685
Accrued expenses 11,878
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TOTAL LIABILITIES 2,006,942
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TOTAL NET ASSETS $108,596,257
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NET ASSETS:
Par value of shares of capital shares $ 9,400
Capital paid in excess of par value 107,212,857
Undistributed net investment income 383,950
Accumulated net realized loss on security
transactions and futures contracts (1,078,235)
Net unrealized appreciation of investments
and futures contracts 2,068,285
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TOTAL NET ASSETS $ 108,596,257
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SHARES OUTSTANDING:
Class A 2,914,405
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Class B 3,679,533
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Class L 2,806,473
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NET ASSET VALUE:
Class A (and redemption price) $ 11.56
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Class B * $ 11.55
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Class L ** $ 11.55
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MAXIMUM PUBLIC OFFERING PRICE PER SHARE:
Class A (net asset value plus 5.26% of net asset
value per share) $ 12.17
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Class L (net asset value plus 1.01% of net asset
value per share) $ 11.67
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* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
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8 1999 SEMI-ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
STATEMENT OF OPERATIONS (unaudited) FOR THE PERIOD ENDED MARCH 31, 1999(a)
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INVESTMENT INCOME:
Dividends $ 177,164
Interest 374,511
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TOTAL INVESTMENT INCOME 551,675
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EXPENSES:
Distribution fees (Note 2) 73,189
Management fees (Note 2) 70,902
Registration fees 10,000
Audit and legal 4,756
Shareholder and system servicing fees 4,500
Directors' fees 1,500
Custody 1,000
Shareholder communications 500
Other 1,378
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TOTAL EXPENSES 167,725
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NET INVESTMENT INCOME 383,950
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REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 3 AND 7):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 2,070
Futures contracts (1,080,305)
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NET REALIZED LOSS (1,078,235)
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Change in Net Unrealized Appreciation of Investments and Futures Contracts:
Beginning of period --
End of period 2,068,285
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INCREASE IN NET UNREALIZED APPRECIATION 2,068,285
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NET GAIN ON INVESTMENTS AND FUTURES CONTRACTS 990,050
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INCREASE IN NET ASSETS FROM OPERATIONS $1,374,000
================================================================================
(a) For the period from February 26, 1999 (commencement of operations) to March
31, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
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SMITH BARNEY SMALL CAP VALUE FUND 9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS (unaudited)
FOR THE PERIOD ENDED MARCH 31, 1999(a)
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OPERATIONS:
Net investment income $ 383,950
Net realized loss (1,078,235)
Increase in net unrealized appreciation 2,068,285
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INCREASE IN NET ASSETS FROM OPERATIONS 1,374,000
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FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 107,726,728
Cost of shares reacquired (504,471)
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INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 107,222,257
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INCREASE IN NET ASSETS 108,596,257
NET ASSETS:
Beginning of period --
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END OF PERIOD* $108,596,257
================================================================================
* Includes undistributed net investment income of: $383,950
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(a) For the period from February 26, 1999 (commencement of operations) to March
31, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
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10 1999 SEMI-ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
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1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Small Cap Value Fund ("Portfolio"), a separate investment fund
of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund consists of this
Portfolio and seven other separate investment portfolios: Concert Peachtree
Growth Fund, Smith Barney Investment Grade Bond Fund, Smith Barney Special
Equities Fund, Smith Barney Contrarian Fund, Smith Barney Government Securities
Fund, Smith Barney Hansberger Global Value Fund and Smith Barney Hansberger
Global Small Cap Value Fund. The financial statements and financial highlights
for the other portfolios are presented in separate semi-annual reports.
The significant accounting policies consistently followed by the Portfolio are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing price on such markets;
securities traded in the over-the-counter market and listed securities for which
no sales price were reported are valued at bid price, or in the absence of a
recent bid price, at the bid equivalent obtained from one or more of the major
market makers; (c) securities for which market quotations are not available will
be valued in good faith at fair value by or under the direction of the Board of
Trustees; (d) securities that have a maturity of more than 60 days are valued at
prices based on market quotations for securities of similar type, yield and
maturity; (e) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates value; (f)
dividend income is recorded on ex-dividend date and interest income is recorded
on an accrual basis; (g) dividends and distributions to shareholders are
recorded on the ex-dividend date; (h) gains or losses on the sale of securities
are calculated using the specific identification method; (i) the accounting
records are maintained in U.S. dollars. All assets and liabilities denominated
in foreign currencies are translated into U.S. dollars on the date of valuation.
Purchases and sales of securities and income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income or expense amounts recorded and collected
or paid are adjusted when reported by the custodian bank (j) direct expenses are
charged to each class; management fees and general portfolio expenses are
allocated on the basis of relative net assets; (k) the Portfolio intends to
comply with the applicable provisions of the Internal Revenue Code of 1986, as
amended, pertaining to regulated investment companies and to make distributions
of taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (l) the character of income and gains distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles; and (m) estimates and assumptions are
required to be made regarding assets, liabilities and changes in net assets
resulting from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ.
2. MANAGEMENT AGREEMENT AND
OTHER TRANSACTIONS
SSBC Fund Management Inc. ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), acts as investment manager of the Fund. The Portfolio
pays SSBC a management fee calculated at an annual rate of 0.75% of the average
daily net assets. This fee is calculated daily and paid monthly.
CFBDS, Inc. acts as the Fund's distributor. Salomon Smith Barney Inc. ("SSB"),
another subsidiary of SSBH, as well as certain other broker-dealers, also sell
Fund shares to the public as a member of the selling group.
- --------------------------------------------------------------------------------
SMITH BARNEY SMALL CAP VALUE FUND 11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
- --------------------------------------------------------------------------------
For the period ended March 31, 1999, SSB received approximately $657,000 and
$291,000 on sales of the Fund's Class A and L shares, respectively.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B shares,
which applies if redemption occurs within one year from initial purchase and
declines thereafter by 1.00% per year until no CDSC is incurred. Class Lshares
also have a 1.00% CDSC, which applies if redemption occurs within the first year
of purchase. CDSCs paid to SSB were approximately:
CLASS B CLASS L
- --------------------------------------------------------------------------------
CDSCs $1,000 $1,000
- --------------------------------------------------------------------------------
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to Class A, B and L shares calculated at the annual rate of 0.25% of the average
daily net assets for each respective class. The Portfolio also pays a
distribution fee with respect to Class B and L shares calculated at an annual
rate of 0.75% of the average daily net assets of each class.
For the period ended March 31, 1999, total Distribution Plan fees incurred by
the Portfolio were:
CLASS A CLASS B CLASS L
- --------------------------------------------------------------------------------
Distribution Plan Fees $7,116 $37,348 $28,725
- --------------------------------------------------------------------------------
All officers and one Director of the Fund are employees of SSB.
3. INVESTMENTS
During the period ended March 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
- --------------------------------------------------------------------------------
Purchases $92,051,566
- --------------------------------------------------------------------------------
Sales 51,470
- --------------------------------------------------------------------------------
At March 31, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
- --------------------------------------------------------------------------------
Gross unrealized appreciation $3,522,387
Gross unrealized depreciation (1,426,227)
- --------------------------------------------------------------------------------
Net unrealized appreciation $2,096,160
- --------------------------------------------------------------------------------
4. REPURCHASE AGREEMENTS
The Portfolio purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Portfolio requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. OPTION CONTRACTS
Premiums paid when put or call options are purchased by the Portfolio, represent
investments, which are marked-to-market daily. When a purchased option expires,
the Portfolio will realize a loss in the amount of the premium paid. When the
Portfolio enters into a closing sales transaction, the Portfolio will realize a
gain or loss depending on whether the sales proceeds from the closing sales
transaction are greater or less than the premium paid for the option. When the
Portfolio exercises a put option, it will realize a gain or loss from the sale
of the underlying security and the proceeds from such sale will be decreased by
the premium originally paid. When the Portfolio exercises a call option, the
cost of the security which the Portfolio purchases upon exercise will be
increased by the premium originally paid.
At March 31, 1999, the Portfolio had no purchased call or put options.
- --------------------------------------------------------------------------------
12 1999 SEMI-ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
- --------------------------------------------------------------------------------
When a Portfolio writes a covered call or put option, an amount equal to the
premium received by the Portfolio is recorded as a liability, the value of which
is marked-to-market daily. When a written option expires, the Portfolio realizes
a gain equal to the amount of the premium received. When the Portfolio enters
into a closing purchase transaction, the Portfolio realizes a gain or loss
depending upon whether the cost of the closing transaction is greater or less
than the premium originally received, without regard to any unrealized gain or
loss on the underlying security, and the liability related to such option is
eliminated. When a written call option is exercised, the cost of the security
sold will be decreased by the premium originally received. When a written put
option is exercised, the amount of the premium originally received will reduce
the cost of the security which the Portfolio purchased upon exercise. When a
written index option is exercised, settlement is made in cash. The risk
associated with purchasing options is limited to the premium originally paid.
The Portfolio enters into options for hedging purposes. The risk in writing a
covered call option is that the Portfolio gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Portfolio is
exposed to the risk of loss if the market price of the underlying security
declines.
During the period ended March 31, 1999, the Portfolio did not write any call or
put options.
6. LENDING OF PORTFOLIO SECURITIES
The Portfolio has an agreement with its custodian whereby the custodian may lend
securities owned by the Portfolio to brokers, dealers and other financial
organizations. Fees earned by the Portfolio on securities lending are recorded
as interest income. Loans of securities by the Portfolio are collateralized by
cash, U.S. government securities or high quality money market instruments that
are maintained at all times in an amount at least equal to the current market
value of the loaned securities, plus a margin which may vary depending on the
type of securities loaned. The custodian establishes and maintains the
collateral in a segregated account. The Portfolio maintains exposure for the
risk of any losses in the investment of amounts received as collateral.
At March 31, 1999, the Portfolio had no securities on loan.
7. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are recognized
as assets. Securities equal to the initial margin amount are segregated by
custodian in the name of the broker. Additional securities are also segregated
up to the current market value of futures contracts. During the period the
futures contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking-to-market" on a daily basis to reflect
the market value of the contract at the end of each day's trading. Variation
margin payments are made or received and recognized as assets due from or
liabilities due to broker, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Portfolio records a realized gain or
loss equal to the difference between the proceeds from (or cost of) the closing
transactions and the Fund's basis in the contract. The Portfolio enters into
such contracts to hedge a portion of its portfolio. The Portfolio bears the
market risk that arises from changes in the value of the financial instruments
and securities indices (futures contracts) and the credit risk should a
counterparty fail to perform under such contracts.
- --------------------------------------------------------------------------------
SMITH BARNEY SMALL CAP VALUE FUND 13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
- --------------------------------------------------------------------------------
At March 31, 1999, the Portfolio had the following open futures contracts:
<TABLE>
<CAPTION>
EXPIRATION # OF BASIS MARKET UNREALIZED
MONTH/YEAR CONTRACTS VALUE VALUE LOSS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FUTURES CONTRACTS TO BUY:
Russell 2000 Index 6/99 50 $9,990,375 $9,962,500 $(27,875)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8. CAPITAL SHARES
At March 31, 1999, the Fund had ten billion shares of capital stock authorized
with a par value of $0.001 per share. The Portfolio has the ability to issue
multiple classes of shares. Each share of a class represents an identical
interest and has the same rights, except that each class bears certain direct
expenses, including those specifically related to the distribution of its
shares.
At March 31, 1999, total paid-in capital amounted to the following for each
class:
CLASS A CLASS B CLASS L
- --------------------------------------------------------------------------------
Total Paid-in Capital $33,260,620 $41,961,932 $31,999,705
================================================================================
Transactions in shares of each class were as follows:
PERIOD ENDED
MARCH 31, 1999*
----------------------------------
SHARES AMOUNT
- --------------------------------------------------------------------------------
CLASS A
Shares sold 2,932,276 $33,468,168
Shares reacquired (17,871) (207,548)
- --------------------------------------------------------------------------------
Net Increase 2,914,405 $33,260,620
================================================================================
CLASS B
Shares sold 3,687,971 $42,059,227
Shares reacquired (8,438) (97,295)
- --------------------------------------------------------------------------------
Net Increase 3,679,533 $41,961,932
================================================================================
CLASS L
Shares sold 2,823,701 $32,199,333
Shares reacquired (17,228) (199,628)
- --------------------------------------------------------------------------------
Net Increase 2,806,473 $31,999,705
================================================================================
* For the period from February 26, 1999 (commencement of operations) to March
31, 1999.
- --------------------------------------------------------------------------------
14 1999 SEMI-ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
1999(1) CLASS A CLASS B CLASS L
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $11.40 $11.40 $11.40
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.05 0.04 0.04
Net realized and unrealized gain 0.11 0.11 0.11
- ---------------------------------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 0.16 0.15 0.15
- ---------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total Distributions -- -- --
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.56 $11.55 $11.55
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN++ 1.40% 1.32% 1.32%
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD $33,684 $42,498 $32,414
- ---------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses 1.21% 1.94% 1.94%
Net investment income 4.46 3.72 3.71
- ---------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 0.05% 0.05% 0.05%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from February 26, 1999 (commencement of operations) to March
31, 1999 (unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
SMITH BARNEY SMALL CAP VALUE FUND 15
<PAGE>
SMITH BARNEY
SMALL CAP VALUE FUND
DIRECTORS
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank G. Hubbard
Heath B. McLendon, CHAIRMAN
Jerome Miller
Ken Miller
John F. White, EMERITUS
OFFICERS
Heath B. McLendon
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Lewis E. Daidone
SENIOR VICE PRESIDENT AND TREASURER
Peter J. Hable
VICE PRESIDENT AND INVESTMENT OFFICER
Paul A. Brook
CONTROLLER
Christina T. Sydor
SECRETARY
INVESTMENT MANAGER
SSBC Fund Management Inc.
DISTRIBUTOR
CFBDS, Inc.
CUSTODIAN
PNC Bank, N.A.
SHAREHOLDER SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of shareholders of Smith
Barney Small Cap Value Fund. It is not for distribution to prospective investors
unless accompanied by a current Prospectus for the Fund, which contains
information concerning the Fund's investment policies and expenses as well as
other pertinent information.
Logo:
Solomon Smith Barney
A member of citigroup
SALOMON SMITH BARNEY IS A SERVICE MARK OF SALOMON SMITH BARNEY INC.
SMITH BARNEY
SMALL CAP VALUE FUND
388 Greenwich Street, MF-2 New York, New York 10013
www.smithbarney.com
FD01653 5/99
