Scudder
Balanced
Fund
Annual Report
December 31, 1998
Pure No-Load(TM) Funds
A fund that seeks a balance of growth and income, as well as long-term
preservation of capital, from a diversified portfolio of equity and fixed-income
securities.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
Scudder Balanced Fund
- --------------------------------------------------------------------------------
Date of Inception: 1/04/93 Total Net Assets as of Ticker Symbol: SCBAX
12/31/98: $263.9 million
- --------------------------------------------------------------------------------
o Scudder Balanced Fund returned 21.10%, ranking it in the top 12% of 409
balanced funds according to Lipper Analytical Services for the 12-month period
ended December 31, 1998.
o Assets were allocated 57% in equities and 43% in fixed income securities
(including cash equivalents), a proportion that remained relatively constant
over the year.
o The Fund's equity holdings made a major contribution to performance as
large-cap growth stocks rose strongly.
o In the fixed income portion of the Fund, emphasis was increased on securities
sensitive to changes in interest rates during the first half of the year to
benefit from the declining rate environment.
Table of Contents
3 Letter from the Fund's President 21 Notes to Financial Statements
4 Performance Update 25 Report of Independent Accountants
5 Portfolio Summary 26 Tax Information
6 Portfolio Management Discussion 27 Shareholder Meeting Results
9 Glossary of Investment Terms 28 Officers and Trustees
10 Investment Portfolio 29 Investment Products and Services
17 Financial Statements 30 Scudder Solutions
20 Financial Highlights
2 - Scudder Balanced Fund
<PAGE>
Letter from the Fund's President
Dear Shareholders,
The domestic stock and bond markets closed the year with another set of
impressive returns as declining interest rates and a healthy U.S. economy
provided a generally favorable setting for investors. However, we were reminded
of the truly global nature of the markets in the third quarter when the Russian
currency devaluation shocked the world's financial markets and sent investors
fleeing for the safest and most liquid investments. The market averages
recovered in the fourth quarter, but the big gains for the year were confined to
the largest growth stocks. In the final analysis, the 12-month period was a
volatile one for investors.
We believe that, in an environment where market volatility has been on the
rise for several years, investments such as Scudder Balanced Fund can provide a
level of comfort. The Fund's balanced approach to investing in quality growth
companies and investment grade bonds worked well, providing strong gains with
less volatility than a pure equity investment. We think this Fund continues to
make sense as a core component for many investors who have a long-term
investment horizon and prefer reduced exposure to the stock market's sharp
movements. Your Fund's management team provides further insights into the Fund's
strategy and the market environment over the year beginning on page 6.
For those of you who are interested in new Scudder products, we recently
introduced two funds which employ portfolio strategies that are designed to
minimize tax consequences to investors: Scudder Tax Managed Growth Fund -- which
seeks long-term growth of capital through equity investments in medium- to
large-sized U.S. companies, and Scudder Tax Managed Small Company Fund -- which
focuses on small-cap stocks. For further information on these new funds, please
call Scudder Investor Relations at 1-800-225-2470.
Thank you for your continued investment in Scudder Balanced Fund. If you
have any questions about your account, please call Scudder Investor Relations at
the toll-free number above, or visit our Web site at www.scudder.com.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Balanced Fund
3 - Scudder Balanced Fund
<PAGE>
Performance Update as of December 31, 1998
Fund Index Comparisons
--------------------------------------------
Total Return
--------------------------------------------
Period
Ended Growth of Average
12/31/98 $10,000 Cumulative Annual
--------------------------------------------
Scudder Balanced Fund
--------------------------------------------
1 Year $ 12,110 21.10% 21.10%
5 Year $ 20,475 104.75% 15.41%
Life of $ 21,319 113.19% 13.47%
Fund*
--------------------------------------------
S&P 500 Index (60%) and LBAB Index (40%)
--------------------------------------------
1 Year $ 12,098 20.98% 20.98%
5 Year $ 22,223 122.23% 17.31%
Life of $ 24,134 141.34% 16.05%
Fund*
--------------------------------------------
* The Fund commenced operation on January 4, 1993.
Index comparisons begin January 31, 1993.
Growth of a $10,000 Investment
- -----------------------------------------------
THE PRINTED DOCUMENT CONTAINS A LINE CHART HERE
CHART DATA:
Yearly periods ended December 31
Scudder Balanced Fund
Year Amount
- -------------------
1/31/93* 10000
'93 10395
'94 10147
'95 12834
'96 14315
'97 17576
'98 21284
S&P 500 Index
Year Amount
- -------------------
1/31/93* 10000
'93 10915
'94 11059
'95 15214
'96 18707
'97 24951
'98 32083
LBAB Index
Year Amount
- -------------------
1/31/93* 10000
'93 10768
'94 10454
'95 12386
'96 12833
'97 14075
'98 15295
The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-weighted
measure of 500 widely held common stocks listed on the New York Stock Exchange,
American Stock Exchange, and Over-The-Counter market and The Lehman Brothers
Aggregate Bond (LBAB) Index is an unmanaged market value-weighted measure of
treasury issues, agency issues, corporate bond issues and mortgage securities.
Index returns assume reinvestment of dividends and, unlike Fund returns, do not
reflect any fees or expenses.
Returns and Per Share Information
- ---------------------------------
THE PRINTED DOCUMENT CONTAINS A BAR CHART HERE
ILLUSTRATING THE FUND TOTAL RETURN (%) AND
INDEX (S&P 500 60%, LBAB Index 40%) TOTAL RETURN (%)
CHART DATA:
Yearly Periods Ended December 31
<TABLE>
<CAPTION>
1993* 1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value $ 12.23 $ 11.63 $ 14.12 $ 14.60 $ 16.85 $ 18.96
- ---------------------------------------------------------------------------------------------------------
Income Dividends $ .26 $ .31 $ .32 $ .34 $ .36 $ .37
- ---------------------------------------------------------------------------------------------------------
Capital Gains Distributions $ -- $ -- $ .25 $ .79 $ .68 $ 1.02
- ---------------------------------------------------------------------------------------------------------
Fund Total Return (%) 4.12 -2.39 26.48 11.54 22.78 21.10
- ---------------------------------------------------------------------------------------------------------
Index Total Return (%) 8.56 -.03 31.34 14.96 23.63 20.98
- ---------------------------------------------------------------------------------------------------------
</TABLE>
All performance is historical, assumes reinvestment of all dividends and capital
gains, and is not indicative of future results. Investment return and principal
value will fluctuate, so an investor's shares, when redeemed, may be worth more
or less than when purchased. If the Adviser had not temporarily capped expenses,
the average annual total return for the Fund for the one year, five year, and
life of Fund periods would have been lower.
4 - Scudder Balanced Fund
<PAGE>
Portfolio Summary as of December 31, 1998
Diversification
- ---------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Common Stocks 57%
Fixed Income Holdings 35%
Cash Equivalents 8%
-----------------------------
100%
=============================
The Fund's combination of equity and fixed income securities helped to dampen
the effects of increased price volatility in 1998.
Fixed Income Holdings
(Excludes 8% Cash Equivs.)
- --------------------------
Type
-------------------------------
Corporate Bonds 47%
U.S. Treasury Obligations 31%
U.S. Government Agency
Pass-Thrus 8%
Asset-Backed Securities 8%
Foreign Bonds -- U.S.
$ Denominated 3%
Collateralized Mortgage
Obligations 3%
-------------------------------
100%
===============================
Quality
---------------------------
AAA 53%
AA 9%
A 24%
BBB 14%
--------------------------
100%
==========================
While Treasury securities generally provided the best total return for the
year, the Fund continued to overweight corporate bonds based on their
attractive valuations, higher yields, and potential for outperformance over
the long run.
Equity Holdings
- -------------------------------
A graph in the form of a pie chart appears here, illustrating the exact data
points in the table below.
Technology 21%
Health 19%
Consumer Staples 14%
Consumer Discretionary 14%
Media 9%
Manufacturing 7%
Financial 6%
Durables 4%
Service Industries 4%
Communications 2%
------------------------------
100%
==============================
Five Largest Equity Holdings
----------------------------
1. Microsoft Corp.
Computer operating systems software
2. Intel Corp.
Semiconductor memory circuits
3. General Electric Co.
Leading producer of electrical equipment
4. Pfizer, Inc.
Leading international pharmaceutical company
5. Home Depot, Inc.
Building supply and home improvement stores
Consumer discretionary and technology stocks were among the best performing
sectors in 1998, and a significant weighting in these areas was a major
contributor to the Fund's outperformance.
For more complete details about the Fund's Investment Portfolio, see page 10.
A quarterly Fund Summary and Portfolio Holdings are available upon request.
5 - Scudder Balanced Fund
<PAGE>
Portfolio Management Discussion
We asked portfolio managers Valerie F. Malter, George Fraise, and Stephen A.
Wohler to review the market environment and the Fund's performance for the
12-month period ended December 31, 1998. Below are highlights of their
discussion.
Q: Despite increased volatility in the third quarter, the stock and bond markets
recorded another banner year. How would you describe the market environment in
1998?
The dismal performance of the U.S. equity markets in the third quarter was
followed by one of the most spectacular recoveries on record during the fourth
quarter. The recovery was fueled in part by three consecutive interest rate cuts
by the Federal Reserve and the bailout of Long-Term Capital Management, a hedge
fund whose collapse threatened the integrity of global financial markets. These
events accomplished two major objectives, in our view. First, the rate cuts
infused urgently needed liquidity into a financial system reeling from the debt
default in Russia, the devaluation of the ruble, a potential devaluation in
Brazil (which ultimately occurred), and the continued aftershocks from the
economic crisis in Asia. Lower interest rates also allowed earning multiples to
rise, contributing to higher equity market valuations. Second, and as
importantly, the rate cuts and the bailout of the hedge fund restored confidence
in the financial systems and allowed investors to once again focus on the
healthy domestic economy.
Q: How did the Fund perform in this environment?
The Fund ended the year on a very strong note, appreciating 21.10%, exceeding
the 13.48% average return of 409 balanced funds according to Lipper Analytical
Services. This performance ranked the Fund in the top 12% of balanced funds for
the year. Shareholders benefited from the exceptional performance of the Fund's
holdings of large-cap growth stocks in the equity portion of the portfolio,
which were among the best performing stocks in 1998. In addition, declining
interest rates provided solid returns in the bond portion of the portfolio.
Q: What was different about the performance of the equity markets last year?
It is worth noting that stock market breadth was particularly narrow in 1998
with only 14 stocks providing 50% of the 28.58% return of the unmanaged S&P 500
Index. For the unmanaged Russell 1000 Growth Index, the numbers were similar
with 17 stocks providing half of the 38.71% 1998 return. The average market
capitalization of those 17 stocks at the end of 1997 was $81 billion.
Essentially, if you were not invested in these top growth stocks, your
performance lagged the overall market.
Q: In the equity portion of the Fund, what were the biggest contributors to
performance?
While technology stocks and particularly Internet stocks seemed to garner most
of the attention towards the end of the year, the consumer discretionary sector
was the biggest contributor to performance. Expectations that Christmas sales
would benefit from strong consumer confidence, a robust stock market, and
continued economic strength buoyed stocks such as Home Depot, Costco, Dayton
Hudson, Wal-Mart, and Rite Aid. Meanwhile, Consolidated Stores continued to lag
as the inventory restructuring at Odd Lots/Big Lots remained behind schedule. We
6 - Scudder Balanced Fund
<PAGE>
are sticking with this stock for now because we believe that management has
turned the corner and sales comparisons are starting to show distinct
improvement.
Q: Technology was also a strong sector for stocks, with many of the Fund's
equity holdings outperforming the Russell 1000 Growth Index. What were the
notable performers?
We continued to focus on leading technology companies with substantial market
dominance because we believe they tend to be less prone to earnings
disappointments. Stocks such as America Online, which we added to the portfolio
early in the third quarter, Linear Technology, Sun Microsystems, Lucent
Technologies, and Cisco, among others, made major contributions to performance.
In addition, a lack of exposure to energy stocks -- which underperformed
dramatically in the fourth quarter as plunging oil prices resulted in a lowering
of earnings expectations for the whole sector -- also was an important
contributor to performance. In the advertising/media sector, positive
performance was led by stock holdings Interpublic Group and Outdoor Systems.
Q: What sectors detracted from performance?
The finance sector held back performance as our equity investments in insurance
companies such as UNUM and Allstate reported earnings at the low end of
expectations. Performance of our healthcare holdings was mixed with some profit
taking holding down the recovery in a number of large pharmaceutical names such
as Merck, Eli Lilly, Schering-Plough, and Warner-Lambert. This was offset partly
by strength in medical device holdings such as Medtronic, which made a bid to
acquire Arterial Vascular Engineering, another Fund holding.
Q: With interest rates falling and bonds rallying for much of the year, how did
you position the Fund's fixed income holdings?
We increased our exposure to changes in interest rates by lengthening duration
of the fixed income portion of the Fund over the first half of the year. In the
third quarter, duration was reduced, but it crept up in the fourth quarter as a
result of our addition of intermediate-term corporate securities. After the big
rally in Treasuries over the first nine months of the year, the corporate bond
sector appeared attractively valued. We added intermediate-term corporate
securities -- those with maturities in the 3-7 year range -- because we believe
they were attractively valued and offered most of the yield of longer-term bonds
with significantly reduced price volatility. At the end of the year, the fixed
income portfolio's duration stood at 5.39 years and the average quality of the
Fund's fixed income holdings was AA -- the second highest rating.
Q: What were your fixed income sector allocations?
While Treasuries provided the best performance in 1998, we continued to maintain
significant weighting in the corporate bond sector. We have been emphasizing the
corporate bonds because typically they provide slightly higher income and have
underperformed over the last year. We also significantly underweighted mortgages
for most of the year, as they are usually negatively impacted by a high level of
7 - Scudder Balanced Fund
<PAGE>
refinancings in a declining interest rate environment. However, we began
building a position in mortgages at year-end based on the increasingly
attractive values in this sector and expectations for reduced volatility.
Q: What is your outlook?
Last year was marked by unnerving volatility that sorely tested investor resolve
to stick with investment processes and individual holdings. However, by the time
the gavel fell on the last trade of the year, the S&P 500 had rung up another
gain of more than 20%, the fourth in a row, rewarding those investors who stuck
to their disciplines. Looking ahead, it is difficult to argue that the market
returns over the next couple of years will equal those of the recent past.
Nevertheless, we continue to believe that superior equity returns will come from
those companies that deliver the growth expected of them. Given the Fund's
diversified approach to investing in quality growth stocks and investment grade
bonds, we believe the Fund is especially well suited to weather the slower
growth environment we expect in 1999.
Scudder Balanced Fund:
A Team Approach to Investing
Scudder Balanced Fund is managed by a team of Scudder Kemper Investments, Inc.
(the "Adviser") professionals, each of whom plays an important role in the
Fund's management process. Team members work together to develop investment
strategies and select securities for the Fund's portfolio. They are supported
by the Adviser's large staff of economists, research analysts, traders, and
other investment specialists who work in our offices across the United States
and abroad. We believe our team approach benefits Fund investors by bringing
together many disciplines and leveraging our extensive resources.
Lead Portfolio Manager Valerie F. Malter assumed responsibility for the Fund's
day-to-day management and investment strategies in 1995. Ms. Malter has 11
years of experience as an analyst covering a wide range of industries, and
four years of portfolio management experience, focusing on the stocks of
companies with medium- to large-sized market capitalizations. Portfolio
Manager George Fraise joined the Adviser and the Fund in 1997 and has 10 years
of industry experience as an international research analyst. Stephen A. Wohler
joined the Adviser in 1979 and the team in 1998. Mr. Wohler has over 18 years'
experience in the investment industry.
8 - Scudder Balanced Fund
<PAGE>
Glossary of Investment Terms
COUPON The interest rate the bond issuer promises to pay to
the bondholder until maturity, expressed as an annual
percentage of face value. As an example, a bond with
a 10% coupon and a $1,000 face value pays $100 a
year.
DURATION A measure of the portfolio's sensitivity to changes
in interest rates. If an investment portfolio has a
duration of 5 years and interest rates decline by 1%
from present levels, the value of the portfolio would
rise by about 5% and vice versa.
FUNDAMENTAL RESEARCH Analysis of a company's financial statements to
project future stock price changes. Considers past
records of sales and earnings as well as the future
impact of products, consumer markets, and management
in weighting a company's prospects. Distinct from
technical analysis, which evaluates the
attractiveness of a stock, based on historical price
and trading volume movements.
LIQUIDITY A characteristic of an investment or an asset
referring to the ease of convertibility into cash
within a reasonably short period of time.
MARKET CAPITALIZATION The value of a company's outstanding shares of
common stock, determined by multiplying the
number of shares outstanding by the share price
(shares x price = market capitalization). The
universe of publicly traded companies is frequently
divided into large-, mid-, and small-capitalizations.
OVER/UNDER WEIGHTING Refers to the allocation of assets -- usually by
sector, industry, or country -- within an
investment portfolio relative to a benchmark index or
investment universe.
PRICE/EARNINGS RATIO A widely used gauge of a stock's valuation, which
(also "P/E" or "earnings indicates what investors are paying for a company's
multiple") earning power at the current stock price. Often
based on a company's projected earnings for the
coming 12 months. A higher "earnings multiple"
indicates higher expected earnings growth and greater
risk; a lower multiple is usually associated with
mature or out-of-favor companies, and lower stock
price volatility.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of
Finance and Investment Terms)
9 - Scudder Balanced Fund
<PAGE>
Investment Portfolio as of December 31, 1998
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
==============================================================================================================================
<S> <C> <C>
Repurchase Agreements 6.8%
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement with Donaldson, Lufkin & Jenrette dated 12/31/1998 at 5%,
to be repurchased at $18,213,113 on 1/4/1999, collateralized by a $18,065,000 ---------------
U.S. Treasury Bond, 1/15/2008 (Cost $18,203,000) ..................................... 18,203,000 18,203,000
---------------
Commercial Paper 0.8%
- ------------------------------------------------------------------------------------------------------------------------------
American Express Credit Corp., 5.71%, 1/4/1999 ......................................... 1,500,000 1,500,000
Household Finance Corp., 5.72%, 1/7/1999 ............................................... 750,000 750,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Commercial Paper (Cost $2,250,000) 2,250,000
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations 11.0%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note, 5.875%, 11/30/2001 ................................................. 2,000,000 2,067,500
U.S. Treasury Note, 5.625%, 12/31/2002 ................................................. 6,000,000 6,199,680
U.S. Treasury Bond, 10.75%, 8/15/2005 .................................................. 2,000,000 2,667,500
U.S. Treasury Bond, 9.375%, 2/15/2006 .................................................. 2,500,000 3,186,725
U.S. Treasury Bond, 7.25%, 5/15/2016 ................................................... 11,000,000 13,325,510
U.S. Treasury Bond, 3.65%, 4/15/2028 ................................................... 1,750,000 1,739,376
- ------------------------------------------------------------------------------------------------------------------------------
Total U. S. Government & Agencies (Cost $28,839,669) 29,186,291
- ------------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association 0.0%
- ------------------------------------------------------------------------------------------------------------------------------
---------------
Government National Mortgage Association Pass-thru, 9.5%, 8/15/2019 (Cost $13,603) ..... 12,541 13,464
---------------
U.S. Government Agency Pass-Thrus 2.9%
- ------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., 5.75%, 7/15/2003 ..................................... 3,000,000 3,077,340
Federal National Mortgage Association, 8.0% with various maturities to 12/1/2012 ....... 1,900,340 1,956,742
Federal National Mortgage Association, 6.5% with various maturities to 1/1/2026 ........ 2,743,638 2,762,486
- ------------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Agency Pass-Thrus (Cost $7,690,288) 7,796,568
- ------------------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations 1.0%
- ------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp., 8.0%, 4/1/2008 ....................................... 923,122 944,105
Residential Asset Securitization Trust, Series 1997-A6, 7.25%, 9/25/2012 ............... 1,541,000 1,558,336
- ------------------------------------------------------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations (Cost $2,511,277) 2,502,441
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Bonds-- U.S.$ Denominated 1.1%
- ------------------------------------------------------------------------------------------------------------------------------
Norsk Hydro ASA, 7.75%, 6/15/2023 ...................................................... 1,000,000 1,103,740
Province of Ontario Global, 6%, 2/21/2006 .............................................. 1,000,000 1,031,120
Saga Petroleum, 7.25%, 9/23/2027 ....................................................... 1,000,000 927,290
- ------------------------------------------------------------------------------------------------------------------------------
Total Foreign Bonds-- U.S.$ Denominated (Cost $3,071,940) 3,062,150
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
10 - Scudder Balanced Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
==============================================================================================================================
<S> <C> <C>
Asset Backed Securities 2.8%
- ------------------------------------------------------------------------------------------------------------------------------
Manufacturing 0.7%
PBG Equipment Trust, Series 1A, 6.27%, 1/20/2012 ....................................... 1,747,477 1,762,558
---------------
Automobile Receivables 0.7%
Ford Credit Automobile Trust, Series 1996-A A4, 6.75%, 9/15/2000 ....................... 966,368 972,408
Premier Auto Trust Asset Backed Certificate, Series 1996-3 A4, 6.75%, 11/6/2000 ........ 1,000,000 1,009,680
---------------
1,982,088
---------------
Credit Card Receivables 1.0%
MBNA Master Credit Card Trust, 5.8%, 12/15/2005 ........................................ 1,500,000 1,524,609
Proffitt's, Inc. Credit Card Master Trust, 6%, 9/15/2004 ............................... 1,000,000 1,017,375
Sears Credit Account Master Trust, Series 1995-A4, 6.25%, 1/15/2003 .................... 233,334 233,406
---------------
2,775,390
---------------
Home Equity Loans 0.4%
First Plus Home Loan Trust, Series 1998, 6.25%, 11/10/2016 ............................. 1,000,000 990,000
- ------------------------------------------------------------------------------------------------------------------------------
Total Asset Backed (Cost $7,440,640) 7,510,036
- ------------------------------------------------------------------------------------------------------------------------------
Corporate Bonds 16.6%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 0.3%
ITT Corp., 7.375%, 11/15/2015 .......................................................... 1,000,000 823,500
---------------
Consumer Staples 1.7%
Bass America Inc., 6.625%, 3/1/2003 .................................................... 1,500,000 1,512,945
J Seagram & Sons Inc., 6.625%, 12/15/2005 .............................................. 1,500,000 1,493,700
Kellogg Co., 5.75%, 2/2/2001 ........................................................... 1,000,000 1,010,000
Seagram Co., Ltd., 8.35%, 1/15/2022 .................................................... 500,000 548,465
---------------
4,565,110
---------------
Communications 1.3%
Lucent Technologies Inc., 6.9%, 7/15/2001 .............................................. 1,250,000 1,302,925
Worldcom, Inc., 6.4%, 8/15/2005 ........................................................ 2,000,000 2,078,640
---------------
3,381,565
---------------
Financial 4.5%
Associates Corp. of North America, 6.625%, 5/15/2001 ................................... 500,000 513,230
Capital One Bank, Medium Term Note, 5.95%, 2/15/2001 ................................... 1,000,000 983,330
First Union Corp., 8.125%, 6/24/2002 ................................................... 1,000,000 1,083,950
First USA Bank, 5.85%, 2/22/2001 ....................................................... 1,000,000 1,009,270
Fleet Financial Group, 6.875%, 1/15/2028 ............................................... 1,000,000 1,054,070
Ford Motor Credit Co., 6.125%, 4/28/2003 ............................................... 1,250,000 1,279,500
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Balanced Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
==============================================================================================================================
<S> <C> <C>
General Electric Capital Corp., 6.02%, 5/4/2001 ........................................ 1,000,000 1,007,200
Home Savings of America, 6%, 11/1/2000 ................................................. 1,000,000 1,006,230
ICI Investments, 6.75%, 8/7/2002 ....................................................... 1,000,000 1,007,500
Lehman Brothers Holding Corp., Medium Term Note, 6.33%, 8/1/2000 ....................... 1,000,000 1,006,830
Prudential Insurance Co., 6.375%, 7/23/2006 ............................................ 1,000,000 1,017,500
Southern National Corp., 7.05%, 5/23/2003 .............................................. 1,000,000 1,044,400
---------------
12,013,010
---------------
Media 2.4%
Cox Communications, Inc., 6.85%, 1/15/2018 ............................................. 1,000,000 1,055,000
News America, Inc., 7.25%, 5/18/2018 ................................................... 1,000,000 1,021,680
TCA Cable TV, Inc., 6.53%, 2/1/2028 .................................................... 1,000,000 1,018,320
TCI Communications, Inc., 8%, 8/1/2005 ................................................. 1,000,000 1,125,790
Time Warner, Inc., 9.125%, 1/15/2013 ................................................... 1,000,000 1,265,960
Time Warner, Inc., 6.875%, 6/15/2018 ................................................... 750,000 785,670
---------------
6,272,420
---------------
Durables 1.6%
Loral Corp., 8.375%, 6/15/2024 ......................................................... 1,750,000 2,124,203
Martin Marietta Corp., 6.5%, 4/15/2003 ................................................. 1,000,000 1,026,700
McDonnell Douglas Finance Corp. Medium Term Note, 6.75%, 12/23/2003 .................... 1,000,000 1,043,370
---------------
4,194,273
---------------
Manufacturing 0.4%
Fort James Corp., 6.625%, 9/15/2004 .................................................... 1,000,000 1,018,420
---------------
Technology 1.1%
IBM Corp., 5.1%, 11/10/2003 ............................................................ 1,500,000 1,485,900
Xerox Corp, 5.5%, 11/15/2003 ........................................................... 1,500,000 1,509,408
---------------
2,995,308
---------------
Energy 1.8%
Anadarko Petroleum Corp., 5.875%, 10/15/2003 ........................................... 1,500,000 1,484,025
Louisiana Land and Exploration Company, 7.65%, 12/1/2023 ............................... 1,250,000 1,315,763
PanEnergy Corp., 7.375%, 9/15/2003 ..................................................... 1,000,000 1,064,480
Petroleum Geo-Services ASA, 6.625%, 3/30/2008 .......................................... 1,000,000 976,210
---------------
4,840,478
---------------
Transportation 0.4%
Continental Airlines Inc., Series 1997-1A, 7.461%, 4/1/2015 ............................ 987,173 1,034,459
---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Balanced Fund
<PAGE>
<TABLE>
<CAPTION>
Principal Market
Amount ($) Value ($)
==============================================================================================================================
<S> <C> <C>
Utilities 1.1%
PacifiCorp Australia, 6.15%, 1/15/2008 ................................................. 2,000,000 2,038,800
Public Service Co. of Colorado, 6%, 4/15/2003 .......................................... 1,000,000 1,012,590
---------------
3,051,390
- ------------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $43,521,236) 44,189,933
- ------------------------------------------------------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------------------------------------------------------------
Common Stocks 57.0%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 7.7%
Department & Chain Stores 7.1%
Consolidated Stores Corp.* ............................................................. 86,900 1,754,294
Costco Companies, Inc.* ................................................................ 29,200 2,107,875
Dayton Hudson Corp. .................................................................... 55,600 3,016,300
Home Depot, Inc. ....................................................................... 90,900 5,561,944
Rite Aid Corp. ......................................................................... 54,000 2,676,375
Wal-Mart Stores Inc. ................................................................... 45,800 3,729,838
---------------
18,846,626
---------------
Hotels & Casinos 0.6%
Royal Caribbean Cruises Ltd. ........................................................... 46,800 1,731,600
---------------
Consumer Staples 7.8%
Alcohol & Tobacco 1.3%
Philip Morris Companies, Inc. .......................................................... 65,500 3,504,250
---------------
Food & Beverage 3.2%
Coca-Cola Co., Inc. .................................................................... 50,500 3,377,188
H.J. Heinz Co. ......................................................................... 51,600 2,921,850
Kroger Co.* ............................................................................ 36,700 2,220,350
---------------
8,519,388
---------------
Package Goods/Cosmetics 3.3%
Colgate-Palmolive Co. .................................................................. 32,800 3,046,300
Estee Lauder Companies "A" ............................................................. 31,700 2,710,350
Procter & Gamble Co. ................................................................... 33,100 3,022,444
---------------
8,779,094
---------------
Health 10.9%
Health Industry Services 0.7%
Total Renal Care Holdings, Inc.* ....................................................... 60,900 1,800,356
---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder Balanced Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
==============================================================================================================================
<S> <C> <C>
Medical Supply & Specialty 2.2%
Arterial Vascular Engineering, Inc.* ................................................... 39,100 2,052,750
Medtronic Inc. ......................................................................... 51,600 3,831,300
---------------
5,884,050
---------------
Pharmaceuticals 8.0%
Bristol-Myers Squibb Co. ............................................................... 25,000 3,345,313
Eli Lilly & Co. ........................................................................ 31,638 2,811,827
Johnson & Johnson ...................................................................... 18,500 1,551,688
Merck & Co., Inc. ...................................................................... 25,000 3,692,188
Pfizer, Inc. ........................................................................... 45,300 5,682,319
Schering-Plough Corp. .................................................................. 32,800 1,812,200
Warner-Lambert Co. ..................................................................... 33,200 2,496,225
---------------
21,391,760
---------------
Communications 1.1%
Telephone/Communications
MCI WorldCom, Inc.* .................................................................... 38,500 2,762,375
---------------
Financial 3.6%
Banks 0.5%
First Union Corp. ...................................................................... 22,600 1,374,363
---------------
Insurance 3.1%
Allstate Corp. ......................................................................... 42,100 1,626,113
American International Group, Inc. ..................................................... 31,888 3,081,124
MBIA, Inc. ............................................................................. 21,300 1,396,481
UNUM Corp. ............................................................................. 36,000 2,101,500
---------------
8,205,218
---------------
Media 5.3%
Advertising 2.2%
Omnicom Group, Inc. .................................................................... 41,200 2,389,600
Outdoor Systems, Inc.* ................................................................. 113,862 3,415,860
---------------
5,805,460
---------------
Broadcasting & Entertainment 3.1%
Clear Channel Communications, Inc. * ................................................... 71,800 3,913,100
Infinity Broadcasting Corp. ............................................................ 53,800 1,472,775
Univision Communication Inc.* .......................................................... 77,700 2,811,769
---------------
8,197,644
---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
14 - Scudder Balanced Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
==============================================================================================================================
<S> <C> <C>
Service Industries 2.1%
EDP Services 1.0%
America Online Inc.* ................................................................... 18,300 2,648,925
---------------
Miscellaneous Commercial Services 0.5%
Modis Professional Services, Inc.* ..................................................... 87,100 1,262,950
---------------
Miscellaneous Consumer Services 0.6%
Service Corp. International ............................................................ 45,000 1,712,813
---------------
Durables 2.6%
Telecommunications Equipment
Ascend Communications, Inc.* ........................................................... 27,800 1,827,850
Lucent Technologies Inc. ............................................................... 46,300 5,093,000
---------------
6,920,850
---------------
Manufacturing 3.9%
Chemicals 0.5%
Monsanto Co. ........................................................................... 30,200 1,434,500
---------------
Diversified Manufacturing 3.4%
General Electric Co. ................................................................... 60,400 6,164,575
Textron, Inc. .......................................................................... 36,900 2,802,094
---------------
8,966,669
---------------
Technology 12.0%
Computer Software 3.9%
Computer Associates International, Inc. ................................................ 34,725 1,480,153
Microsoft Corp.* ....................................................................... 56,600 7,849,713
PeopleSoft Inc.* ....................................................................... 54,200 1,026,413
---------------
10,356,279
---------------
EDP Peripherals 0.7%
EMC Corp.* ............................................................................. 23,500 1,997,500
---------------
Electronic Data Processing 2.1%
Dell Computer Corp.* ................................................................... 43,200 3,161,700
Sun Microsystems, Inc.* ................................................................ 27,000 2,311,875
---------------
5,473,575
---------------
Office/Plant Automation 2.0%
Cisco Systems, Inc.* ................................................................... 58,275 5,408,648
---------------
Semiconductors 3.3%
Intel Corp. ............................................................................ 56,600 6,710,638
Linear Technology Corp. ................................................................ 23,500 2,104,719
---------------
8,815,357
---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
15 - Scudder Balanced Fund
<PAGE>
<TABLE>
<CAPTION>
Market
Shares Value ($)
==============================================================================================================================
<S> <C> <C>
Other 0.0%
Miscellaneous securities ............................................................... 21 1,584
- ------------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (Cost $94,293,632) 151,801,834
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $207,835,285) (a) 266,515,717
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Non-income producing security.
(a) The cost for federal income tax purposes was $208,368,117. At
December 31, 1998, net unrealized appreciation for all securities
based on tax cost was $58,147,600. This consisted of aggregate gross
unrealized appreciation for all securities in which there was an
excess of market value over tax cost of $60,862,846 and aggregate
gross unrealized depreciation for all securities in which there was
an excess of tax cost over market value $2,715,246.
The accompanying notes are an integral part of the financial statements.
16 - Scudder Balanced Fund
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of December 31, 1998
<TABLE>
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $207,835,285) ................ $ 266,515,717
Cash ................................................................. 327
Receivable for investments sold ...................................... 1,633,378
Dividends and interest receivable .................................... 1,379,999
Receivable for Fund shares sold ...................................... 2,268,991
Other assets ......................................................... 706
----------------
Total assets ......................................................... 271,799,118
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Payable for investments purchased .................................... 7,294,055
Payable for Fund shares redeemed ..................................... 299,132
Accrued management fee ............................................... 146,110
Other payables and accrued expenses .................................. 153,928
----------------
Total liabilities .................................................... 7,893,225
---------------------------------------------------------------------------------------------
Net assets, at market ................................................ $ 263,905,893
---------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Net unrealized appreciation (depreciation) on investments ............ 58,680,432
Accumulated net realized gain (loss) ................................. (344,266)
Paid-in capital ...................................................... 205,569,727
---------------------------------------------------------------------------------------------
Net assets, at market ................................................ $ 263,905,893
---------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($263,905,893 / 13,918,098 outstanding shares of beneficial ----------------
interest, $.01 par value, unlimited number of shares authorized) .. $18.96
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
17 - Scudder Balanced Fund
<PAGE>
Statement of Operations
year ended December 31, 1998
<TABLE>
<S> <C>
Investment Income
- ----------------------------------------------------------------------------------------------------------------------------
Income:
Interest ............................................................. $ 5,499,531
Dividends (net of foreign taxes withheld of $3,242) .................. 984,080
----------------
6,483,611
Expenses:
Management fee ....................................................... 1,385,115
Services to shareholders ............................................. 954,432
Custodian and accounting fees ........................................ 84,564
Trustees' fees and expenses .......................................... 37,364
Reports to shareholders .............................................. 78,377
Auditing ............................................................. 37,644
Registration fees .................................................... 56,596
Legal ................................................................ 18,195
Other ................................................................ 7,417
----------------
Total expenses before reductions ..................................... 2,659,704
Expense reductions ................................................... (104,241)
----------------
Expenses, net ........................................................ 2,555,463
---------------------------------------------------------------------------------------------
Net investment income 3,928,148
---------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment transactions
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) from:
Investments .......................................................... 11,426,217
Futures .............................................................. (41,802)
Options .............................................................. (75,579)
----------------
11,308,836
----------------
Net unrealized appreciation (depreciation) during the period on:
Investments .......................................................... 24,853,873
---------------------------------------------------------------------------------------------
Net gain (loss) on investment transactions 36,162,709
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ 40,090,857
---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
18 - Scudder Balanced Fund
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended December 31,
Increase (Decrease) in Net Assets 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income .................................. $ 3,928,148 $ 3,186,362
Net realized gain (loss) from investment transactions .. 11,308,836 6,767,432
Net unrealized appreciation (depreciation) on
investment transactions during the period ........... 24,853,873 18,257,895
--------------- ----------------
Net increase (decrease) in net assets resulting from
operations .......................................... 40,090,857 28,211,689
--------------- ----------------
Distributions to shareholders:
From net investment income ............................. (4,059,339) (3,153,021)
--------------- ----------------
From net realized gains ................................ (12,314,730) (6,023,486)
--------------- ----------------
Fund share transactions:
Proceeds from shares sold .............................. 132,016,807 58,695,668
Net asset value of shares issued to shareholders in
reinvestment of distributions .......................... 16,026,652 8,964,419
Cost of shares redeemed ................................ (66,566,262) (37,524,903)
--------------- ----------------
Net increase (decrease) in net assets from Fund share
transactions ........................................ 81,477,197 30,135,184
--------------- ----------------
Increase (decrease) in net assets ...................... 105,193,985 49,170,366
Net assets at beginning of period ...................... 158,711,908 109,541,542
Net assets at end of period (including undistributed
net investment income of $0 and $105,659, --------------- ----------------
respectively) ....................................... $263,905,893 $158,711,908
--------------- ----------------
Other Information
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Fund shares
Shares outstanding at beginning of period .............. 9,416,710 7,502,830
--------------- ----------------
Shares sold ............................................ 7,309,381 3,666,310
Shares issued to shareholders in reinvestment of
distributions ....................................... 870,324 542,526
Shares redeemed ........................................ (3,678,317) (2,294,956)
--------------- ----------------
Net increase (decrease) in Fund shares ................. 4,501,388 1,913,880
--------------- ----------------
Shares outstanding at end of period .................... 13,918,098 9,416,710
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
19 - Scudder Balanced Fund
<PAGE>
Financial Highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
Years Ended December 31
1998(a) 1997(a) 1996(a) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------
Net asset value, beginning of period .............................. $ 16.85 $ 14.60 $ 14.12 $ 11.63 $ 12.23
-----------------------------------------------------------
Income from investment operations:
Net investment income ............................................. .36 .38 .36 .32 .31
Net realized and unrealized gain (loss) on investments ............ 3.14 2.91 1.25 2.74 (.60)
-----------------------------------------------------------
Total from investment operations .................................. 3.50 3.29 1.61 3.06 (.29)
-----------------------------------------------------------
Less distributions from:
Net investment income ............................................. (.37) (.36) (.34) (.32) (.31)
Net realized gains on investment transactions ..................... (1.02) (.68) (.79) (.25) --
-----------------------------------------------------------
Total distributions ............................................... (1.39) (1.04) (1.13) (.57) (.31)
-----------------------------------------------------------
-----------------------------------------------------------
Net asset value, end of period .................................... $ 18.96 $ 16.85 $ 14.60 $ 14.12 $ 11.63
-----------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Total Return (%) (b) .............................................. 21.10 22.78 11.54 26.48 (2.39)
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................ 264 159 110 90 66
Ratio of operating expenses, net to average daily net assets (%) .. 1.29 1.02 1.00 1.00 1.00
Ratio of operating expenses before expense reductions, to
average daily net assets (%) .................................... 1.34 1.37 1.37 1.40 1.47
Ratio of net investment income to average daily net assets (%) .... 1.99 2.32 2.42 2.51 2.66
Portfolio turnover rate (%) ....................................... 74.7 43.2 69.7 103.3 105.4
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Total returns would have been lower had certain expenses not been reduced.
20 - Scudder Balanced Fund
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
Scudder Balanced Fund (the "Fund") is a diversified series of Scudder Portfolio
Trust (the "Trust"). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of its financial statements.
Security Valuation. Portfolio securities which are traded on U.S. or foreign
stock exchanges are valued at the most recent sale price reported on the
exchange on which the security is traded most extensively. If no sale occurred,
the security is then valued at the calculated mean between the most recent bid
and asked quotations. If there are no such bid and asked quotations, the most
recent bid quotation is used. Securities quoted on the Nasdaq Stock Market
("Nasdaq"), for which there have been sales, are valued at the most recent sale
price reported on such system. If there are no such sales, the value is the most
recent bid quotation. Securities which are not quoted on Nasdaq but are traded
in another over-the-counter market are valued at the most recent sale price on
such market. If no sale occurred, the security is then valued at the calculated
mean between the most recent bid and asked quotations. If there are no such bid
and asked quotations, the most recent bid quotation shall be used.
Portfolio debt securities purchased with an original maturity greater than sixty
days are valued by pricing agents approved by the officers of the Fund, whose
quotations reflect broker/dealer-supplied valuations and electronic data
processing techniques. If the pricing agents are unable to provide such
quotations, the most recent bid quotation supplied by a bona fide market maker
shall be used. Money market instruments purchased with an original maturity of
sixty days or less are valued at amortized cost.
All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Board of Trustees.
Repurchase Agreements. The Fund may enter into repurchase agreements with
certain banks and broker/dealers whereby the Fund, through its custodian,
receives delivery of the underlying securities, the amount of which at the time
of purchase and each subsequent business day is required to be maintained at
such a level that the market value is equal to at least the repurchase price.
Options. An option contract is a contract in which the writer of the option
grants the buyer of the option the right to purchase from (call option), or sell
to (put option), the writer a designated instrument at a specified price within
a specified period of time. Certain options, including options on indices, will
require cash settlement by the Fund if the option is exercised. During the
period, the Fund purchased put options and wrote call options on other financial
instruments as a hedge against potential adverse price movements in the value of
portfolio assets. In addition, during the period, the Fund purchased call
options and wrote put options on other financial instruments to lock in the
purchase price of a security or currency which it expects to purchase in the
near future and to enhance potential gain.
If the Fund writes an option and the option expires unexercised, the Fund will
realize income, in the form of a capital gain, to the extent of the amount
received for the option (the "premium"). If the Fund elects to close out the
option it would recognize a gain or loss based on the difference between the
cost of closing the option and the initial premium received. If the Fund
purchased an option and allows the option to expire it would realize a loss to
the extent of the premium paid. If the Fund elects
21 - Scudder Balanced Fund
<PAGE>
to close out the option it would recognize a gain or loss equal to the
difference between the cost of acquiring the option and the amount realized upon
the sale of the option.
The gain or loss recognized by the Fund upon the exercise of a written call or
purchased put option is adjusted for the amount of option premium. If a written
put or purchased call option is exercised, the Fund's cost basis of the acquired
security or currency would be the exercise price adjusted for the amount of the
option premium.
The liability representing the Fund's obligation under an exchange traded
written option or investment in a purchased option is valued at the last sale
price or, in the absence of a sale, the mean between the closing bid and asked
price or at the most recent asked price (bid for purchased options) if no bid
and asked prices are available. Over-the-counter written or purchased options
are valued using dealer supplied quotations.
When the Fund writes a covered call option, the Fund foregoes, in exchange for
the premium, the opportunity to profit during the option period from an increase
in the market value of the underlying security or currency above the exercise
price. When the Fund writes a put option it accepts the risk of a decline in the
market value of the underlying security or currency below the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum exposure
to purchased options is limited to the premium initially paid. In addition,
certain risks may arise upon entering into option contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out an
option contract prior to the expiration date and, that a change in the value of
the option contract may not correlate exactly with changes in the value of the
securities or currencies hedged.
Futures Contracts. A futures contract is an agreement between a buyer or seller
and an established futures exchange or its clearinghouse in which the buyer or
seller agrees to take or make a delivery of a specific amount of an item at a
specified price on a specific date (settlement date). During the period, the
Fund purchased index securities futures as a temporary substitute for purchasing
selected investments and sold index securities futures to hedge against declines
in the value of portfolio securities.
Upon entering into a futures contract, the Fund is required to deposit with a
financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Fund. When entering into a closing transaction, the Fund will realize a gain
or loss equal to the difference between the value of the futures contract to
sell and the futures contract to buy. Futures contracts are valued at the most
recent settlement price.
Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Fund's ability to close out a
futures contract prior to the settlement date and that a change in the value of
a futures contract may not correlate exactly with changes in the value of the
securities or currencies hedged. When utilizing futures contracts to hedge, the
Fund gives up the opportunity to profit from favorable price movements in the
hedged positions during the term of the contract.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, which are applicable to regulated
investment companies and to distribute all of its taxable income to its
shareholders. The Fund accordingly paid no federal income taxes and no provision
for federal income taxes was required.
22 - Scudder Balanced Fund
<PAGE>
Distribution of Income and Gains. Distributions of net investment income are
made quarterly. During any particular year, net realized gains from investment
transactions, in excess of available capital loss carryforwards, would be
taxable to the Fund if not distributed and, therefore, will be distributed to
shareholders. An additional distribution may be made to the extent necessary to
avoid the payment of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. These
differences relate primarily to investments in certain securities sold at a
loss. As a result, net investment income (loss) and net realized gain (loss) on
investment transactions for a reporting period may differ significantly from
distributions during such period. Accordingly, the Fund may periodically make
reclassifications among certain of its capital accounts without impacting the
net asset value of the Fund.
The Fund uses the specific identified cost method for determining realized gain
or loss on investments for both financial and federal income tax reporting
purposes.
Other. Investment security transactions are accounted for on a trade date basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis.
B. Purchases and Sales of Securities
For the year ended December 31, 1998, purchases and sales of investment
securities (excluding short-term investments and direct U.S. Government
obligations) aggregated $151,666,395 and $100,400,611, respectively. Purchases
and sales of direct U.S. Government obligations aggregated $54,426,091 and
$39,475,352, respectively.
The aggregate face value of futures contracts opened and closed during the year
ended December 31, 1998 was $198,462,000.
C. Related Parties
Under the Management Agreement (the "Agreement") with Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"), the Adviser directs the
investments of the Fund in accordance with its investment objectives, policies,
and restrictions. The Adviser determines the securities, instruments, and other
contracts relating to investments to be purchased, sold or entered into by the
Fund. In addition to portfolio management services, the Adviser provides certain
administrative services in accordance with the Agreement. The management fee
payable under the Agreement is equal to an annual rate of .70% of the Fund's
average daily net assets, computed and accrued daily and payable monthly. Until
April 30, 1998, the Adviser agreed not to impose all or a portion of its
management fee and to maintain the annualized expenses of the Fund at not more
than 1.10% of average daily net assets. Accordingly, for the year ended December
31, 1998, the Adviser did not impose a portion of its fees amounting to
$104,241, and the portion imposed amounted to $1,280,874, of which $146,110 is
unpaid at December 31, 1998.
On September 7, 1998, Zurich Insurance Company ("Zurich"), majority owner of the
Adviser, entered into an agreement with B.A.T Industries p.l.c. ("B.A.T")
pursuant to which the financial services businesses of B.A.T were combined with
Zurich's businesses to form a new global insurance and financial services
company known as Zurich Financial Services. Upon consummation of the
transaction, the Fund's Management Agreement with Scudder Kemper was deemed to
have been assigned
23 - Scudder Balanced Fund
<PAGE>
and, therefore, terminated. In December 1998, the Board of Trustees and the
shareholders of the Fund approved a new investment management agreement with
Scudder Kemper, which is substantially identical to the former Management
Agreement, except for the dates of execution and termination.
Scudder Service Corporation ("SSC"), a subsidiary of the Adviser, is the
transfer, dividend paying and shareholder service agent for the Fund. For the
year ended December 31, 1998, the amount charged to the Fund by SSC aggregated
$360,787, of which $31,970 is unpaid at December 31, 1998.
Scudder Trust Company ("STC"), a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans for the Fund. For the year ended December 31, 1998, the
amount charged to the Fund by STC aggregated $496,988, of which $56,830 is
unpaid at December 31, 1998.
Scudder Fund Accounting Corporation ("SFAC"), a subsidiary of the Adviser, is
responsible for determining the daily net asset value per share and maintaining
the portfolio and general accounting records of the Fund. For the year ended
December 31, 1998, the amount charged to the Fund by SFAC aggregated $58,918, of
which $5,190 is unpaid at December 31, 1998.
The Trust pays each Trustee not affiliated with the Adviser an annual retainer
plus specified amounts for attended board and committee meetings. For the year
ended December 31, 1998, Trustees' fees and expenses aggregated $37,364.
C. Line of Credit
The Fund and several Scudder Funds (the "Participants") share in a $850 million
revolving credit facility for temporary or emergency purposes, including the
meeting of redemption requests that otherwise might require the untimely
disposition of securities. The Participants are charged an annual commitment fee
which is allocated among each of the Participants. Interest is calculated based
on the market rates at the time of the borrowing. The Fund may borrow up to a
maximum of 33 percent of its net assets under the agreement.
24 - Scudder Balanced Fund
<PAGE>
Report of Independent Accountants
To the Trustees of Scudder Portfolio Trust and the Shareholders of Scudder
Balanced Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Scudder Balanced Fund (the "Fund")
at December 31, 1998, the results of its operations for the year then ended and
the changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
February 12, 1999
25 - Scudder Balanceed Fund
<PAGE>
Tax Information
The Fund paid distributions of $0.945 per share from net long-term capital gains
during the year ended December 31, 1998. Pursuant to section 852 of the Internal
Revenue Code, the Fund designates $12,000,000 as capital gain dividends for the
year ended December 31, 1998.
For corporate shareholders, 20% of the income dividends paid during the Fund's
fiscal year ended December 31, 1998 qualified for the dividends received
deduction.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Scudder Fund account, please call a Scudder Investor Relations
Representative at 1-800-225-5163.
26 - Scudder Balanceed Fund
<PAGE>
Shareholder Meeting Results
A Special Meeting of Shareholders (the "Meeting") of Scudder Balanced Fund (the
"Fund") was held on December 15, 1998, at the office of Scudder Kemper
Investments, Inc., Two International Place, Boston, Massachusetts 02110. At the
Meeting the following matters were voted upon by the shareholders (the resulting
votes for each matter are presented below).
1. To approve a new Investment Management Agreement for the Fund with Scudder
Kemper Investments, Inc.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
7,301,321 161,960 268,923 0
2. To approve the revision of the Fund's fundamental lending policy.
Number of Votes:
----------------
For Against Abstain Broker Non-Votes*
--- ------- ------- -----------------
6,897,254 239,397 340,695 254,858
- --------------------------------------------------------------------------------
* Broker non-votes are proxies received by the Fund from brokers or nominees
when the broker or nominee neither has received instructions from the
beneficial owner or other persons entitled to vote nor has discretionary power
to vote on a particular matter.
27 - Scudder Balanced Fund
<PAGE>
Officers and Trustees
Daniel Pierce*
President and Trustee
Henry P. Becton, Jr.
Trustee; President and General Manager, WGBH Educational Foundation
Dawn-Marie Driscoll
Trustee; President, Driscoll Associates; Executive Fellow, Center for
Business Ethics, Bentley College
Peter B. Freeman
Trustee; Corporate Director
George M. Lovejoy, Jr.
Trustee; President and Director, Fifty Associates
Wesley W. Marple, Jr.
Trustee; Professor of Business Administration, Northeastern University
Kathryn L. Quirk*
Trustee, Vice President and Assistant Secretary
Jean C. Tempel
Trustee; Managing Partner, Technology Equity Partners
Kelly D. Babson*
Vice President
William M. Hutchinson*
Vice President
Thomas W. Joseph*
Vice President
Valerie F. Malter*
Vice President
Ann M. McCreary*
Vice President
Stephen A. Wohler*
Vice President
Thomas F. McDonough*
Vice President and Secretary
John R. Hebble*
Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
28 - Scudder Balanced Fund
<PAGE>
Investment Products and Services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Prime Reserve Shares*
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series --
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder Corporate Bond Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Preferred Series
- ----------------
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small
Company Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +++Funds within categories are listed in order from
expected least risk to most risk. Certain Scudder funds may not be available for
purchase or exchange. +A portion of the income from the tax-free funds may be
subject to federal, state, and local taxes. *A class of shares of the Fund.
**Not available in all states. ***Only the Scudder Shares of the Fund are part
of the Scudder Family of Funds. ++Only the International Shares of the Fund are
part of the Scudder Family of Funds. +++ +++A no-load variable annuity contract
provided by Charter National Life Insurance Company and its affiliate, offered
by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder Kemper Investments, Inc., are traded on the New York Stock Exchange and,
in some cases, on various other stock exchanges.
29 - Scudder Balanced Fund
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.*
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
* Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- www.scudder.com
1-800-343-2890
Personal Investment Organizer: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
Distributions Direct
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
30 - Scudder Balanced Fund
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 8,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
800 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
</TABLE>
31 - Scudder Balanced Fund
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $230 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER
[LOGO]
