<PAGE>
ANNUAL REPORT
PERIOD ENDING MARCH 31, 2000
KENSINGTON
STRATEGIC
REALTY FUND
A MANAGED PORTFOLIO OF
REAL ESTATE SECURITIES
<PAGE>
KENSINGTON STRATEGIC REALTY FUND
GROWTH OF A $10,000 INVESTMENT
KENSINGTON STRATEGIC REALTY FUND VS NAREIT (benchmark)
[GRAPH]
Kensington Strategic Realty Fund
September 16, 1999 10,000
September 30, 1999 9,542
October 31, 1999 10,297
November 30, 1999 11,230
December 31, 1999 11,509
January 31, 2000 11,272
February 29, 2000 11,342
March 31, 2000 11,719
NARIET Composite Index
September 16, 1999 10,000
September 30, 1999 9,820
October 31, 1999 9,567
November 30, 1999 9,362
December 31, 1999 9,647
January 31, 2000 9,680
February 29, 2000 9,553
March 31, 2000 9,863
This chart represents a historical investment of $10,000 in the Kensington
Strategic Realty Fund (Class Ashares with load)1 from September 16, 1999 to
March 31, 2000 and represents the reinvestment of dividends and capital gains in
the fund.
AVERAGE ANNUAL TOTAL RETURN* INCEPTION TO DATE2 1Q'00**
Kensington Strategic Realty Fund Class A3 17.19%* 1.82%
Kensington Strategic Realty Fund Class B4 18.96%* 1.65%
Kensington Strategic Realty Fund Class C5 22.91%* 1.61%
NAREIT Composite Index6 -1.37% 2.24%
1 The total year-end return on a $10,000 investment excluding payment of the
maximum sales charge of 5.75% would be $12,436. Results shown do not take
into account income or capital gain taxes. The sales charge is lower for
investments of $50,000 or more.
2 Commencement date = 9/16/99.
3 The total return without payment of the maximum sales charge of 5.75% is
24.36% Inception to Date.
4 The total return without payment of the contingent deferred sales charge of
5.00% is 23.96%Inception to Date.
5 The total return without payment of the contingent deferred sales charge of
1.00% is 23.91% Inception to Date.
6 The NAREIT Composite Index is an unmanaged index consisting of
approximately 200 Real Estate Investment Trust stocks. The index does not
reflect the deduction of expenses associated with a mutual fund.
* Includes applicable sales charge.
** Excludes sales charge.
Past performance is not predictive of future performance. Investment return
and net asset value will fluctuate so that investors shares, when redeemed
may be worth more or less than original cost.
1
<PAGE>
KENSINGTON STRATEGIC REALTY FUND
A NOTE FROM THE PRESIDENT
Dear Shareholder,
Thank you for your investment in the Kensington Strategic Realty Fund.
As Advisor to the Fund, Kensington Investment Group has a single goal-providing
premier investment management services to real estate securities investors.
Dedication to research, disciplined execution of investment strategies and
excellent communication with clients are the focus of our organization.
We are in the midst of a fundamental change in how commercial real estate is
financed and owned. Underlying this transformation is a shift in ownership from
the old private real estate empires to publicly traded securities. This
transition is akin to that which has occurred in other capital intensive
industries, such as steel, auto and banking, earlier this century. Capital
intensive industries like real estate, which are privately held, gravitate
towards public ownership because the public securities markets provide the
lowest cost capital. We believe when investors look back in ten to fifteen
years, the 1990s will be seen as a watershed period for the real estate
industry, ushering in a period of significant growth, consolidation and public
ownership of these businesses.
We believe that to successfully capitalize on this opportunity, three factors
will be essential:
- Acting in anticipation of the changes taking place in the commercial
real estate markets.
- Focusing on niche markets and using specialized strategies to our
advantage.
- Coordinating a team of professionals with superior skills and
experience in the research, trading and management of real estate
securities portfolios.
The following report reviews our investment results and portfolios for the
period ending March 31, 2000, but is no substitute for a detailed discussion. We
invite your inquiries regarding any questions, comments or additional
information you may require.
Sincerely,
/s/ John Kramer
JOHN KRAMER
President, Kensington Investment Group
2
<PAGE>
KENSINGTON STRATEGIC REALTY FUND
MANAGEMENT'S DISCUSSION & ANALYSIS
PORTFOLIO REVIEW
The Kensington Strategic Realty Fund completed its first fiscal year with
excellent results. Since its inception on September 16, 1999 through March 31,
2000 the Fund generated a total return of 24.36% (Class A shares without load)1,
well ahead of the 1.37% decline in the NAREIT Composite Index during this
period.
Kensington Strategic Realty Fund's solid performance was the result of
value-driven investments in micro capitalization REITs combined with
opportunistic purchases of larger growth-oriented REITs. In particular, several
of the Fund's small capitalization stocks posted very strong performance during
the fourth quarter of 1999. We commend our research team for finding ways to
generate positive returns in a sector which was down nearly 2% during the
period.
YIELD COMPARISON2
[GRAPH]
Kensington Strategic Average Real Estate
Realty Fund Mutual Fund Utility Stocks
8.1% 5.6% 4.1%
The Fund's focus on high yielding micro capitalization REITs has also allowed
the Kensington Strategic Realty Fund to declare its dividend at a yield of 8.1%
(based on the March 31, 2000 NAV). This compares favorably with the average REIT
mutual fund yield of 5.6% and utility stocks at 4.1%.
1 With a maximum sales charge of 5.75%, the Fund's total return for the
period September 16, 1999 to March 31, 2000 would have been 17.19%.
2 SOURCE Utility Stock Index: Wall Street Journal, April 3, 2000. Average
Real Estate Mutual Fund: Realty Stock Review, March 27, 2000. Kensington
Strategic Realty Fund dividend rate is annualized rate on "A" shares based
on the 3/31/00 NAV. Annualized rate on "B" shares is 7.6%. Annualized rate
on "C" shares is 7.6%.
3
<PAGE>
PORTFOLIO COMPOSITION3
[GRAPH]
Industrial 12%
Retail 17%
Self-Storage 2%
Lodging 5%
Diversified 7.5%
Mortgage 4.5%
Other 4%
Apartment 15%
Office 33%
The Fund is well diversified geographically and by property type. Our largest
concentration is in the office sector, where we believe some of the best values
exist, followed by apartments and industrial properties. Several of the Fund's
office positions are trading at discounts as high as 30% to our estimate of the
value of their properties.
In addition to several larger growth-oriented REITs, Kensington Strategic Realty
Fund's portfolio holds interests in a number of companies which we describe as
"event driven situations." These are smaller REITs which are trading at
significant discounts to our estimate of the value of their property portfolios
and are candidates for acquisition or liquidation. We believe these investments
will provide high returns over time, and they generally pay a high dividend in
the interim.
OUTLOOK AND STRATEGY
We believe the following factors will drive performance over the next 12 to 24
months:
REITs are priced at discounts to their property portfolios - For only the third
time during the last decade, REITs are trading at a discount to their underlying
property values. In addition, dividend yields are north of 7% and are well
covered by cash flow. We do not expect REITs to trade at a discount to these
property values for
3 Portfolio holdings subject to change.
4
<PAGE>
KENSINGTON STRATEGIC REALTY FUND
MANAGEMENT'S DISCUSSION & ANALYSIS (Continued)
prolonged periods of time but expect them to trade at or above property values
over the long term.
Healthy properties markets expected to continue - While demand growth may
moderate from the strong pace of the past several years, construction activity
has also been held in check. The increasingly public nature of the real estate
debt and equity markets has caused property markets to react quickly to
increases in construction by cutting off the supply of money for new
development. This balance between moderating demand growth and restrained
construction activity points toward continued high occupancies of properties and
healthy underlying properties markets.
Positive earnings growth expected for REITs - We expect top line rental revenue
growth to stabilize at a 3% to 4% per year growth rate over the next few years.
In this environment we believe REITs can be expected to generate 6% to 9% bottom
line earnings growth, in addition to the 7%+ dividend rate, although we cannot
assure that events will be as we predict.
CONCLUSION
The Kensington Strategic Realty Fund has made an excellent start within a REIT
sector that seems poised to generate consistent returns. We believe the strong
showing of REITs during the recent volatility in technology stocks is an
indication of the benefits of using real estate to diversify your portfolio.
We are looking forward to working for you in the coming year.
5
<PAGE>
KENSINGTON STRATEGIC REALTY FUND
INVESTMENT OBJECTIVE
Kensington Strategic Realty Fund seeks to provide high current income relative
to equity investment alternatives, plus long term growth of capital.
The Fund will be invested primarily in real estate securities. These companies
will own interests in properties such as apartments, office buildings and
shopping centers throughout the United States.
INVESTMENT STRATEGY
The Fund managers hope to take advantage of the healthy fundamentals in the real
estate market by selectively investing in and actively managing a portfolio of
real estate securities.
Kensington Strategic Realty Fund's investment strategy is income-oriented and
value driven. The Fund managers will utilize specialized investment strategies
to invest in REITs that capitalize on the structural advantages of managing a
smaller portfolio. (The Fund intends to close to new investors at $150 million,
although it may later reopen subject to further limits. Please see prospectus
for additional information related to the Fund's investment strategies and Fund
closing terms.)
The mix of investment strategies within the Kensington Strategic Realty Fund's
portfolio are summarized on the following page. The allocation to each strategy
will be adjusted based on market conditions and will be subject to change at any
time.
6
<PAGE>
KENSINGTON STRATEGIC REALTY FUND
(Continued)
SMALL CAPITALIZATION
Lack of Wall Street research coverage can provide opportunities to purchase
these securities below their break-up value or with exceptionally high yields.
The Fund expects that such REITs will ultimately realize their value through
growth, merger or liquidation of their assets.
SPECIAL SITUATIONS
The inefficient nature of the real estate securities markets creates numerous
special situations. REIT prices tend to react to short term events. Mutual fund
redemptions, quarterly earnings fluctuations, etc. can cause prices to decline
below reasonable levels and allow the Fund to capitalize on short term oversold
conditions. Mergers and acquisition activity, hedging abilities and acquiring
assets cheaply via non-traded markets and/or private securities transactions can
further enhance returns.
LARGE CAPITALIZATION
The Fund will buy and hold high quality companies and focus the portfolio in
those REITs which are in undervalued sectors by property type and/or location.
[GRAPH]
7
<PAGE>
KENSINGTON STRATEGIC REALTY FUND STRUCTURE
[GRAPHIC]
- The Fund intends to close to investors at $150 million.1
- The Fund invests in 40 to 60 separate real estate securities.
- Each security owns many properties.
POTENTIAL DIVERSIFICATION INVESTING
THROUGH A MUTUAL FUND
[MAP]
This map does not represent the actual property types and/or locations held by
securities in the Kensington Strategic Realty Fund. This map is used to provide
an example of the property type and location diversification potentially
available to a mutual fund that invests in REITs.
1 Please see the prospectus for the terms regarding the initial fund closing.
8
<PAGE>
KENSINGTON STRATEGIC REALTY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 2000
SHARES MARKET VALUE
Common Stocks (8.8%)
Commercial Services (0.0%)
Imperial Parking Corporation3 65 $ 849
---------
Health Care (2.3%)
Brookdale Living Communities1 34,000 376,125
---------
Real Estate (6.5%)
Carey Diversified LLC 22,600 378,550
Trizec Hahn Corporation 23,000 345,000
Wellsford Real Properties1 41,800 363,138
---------
1,086,688
---------
Total Common Stocks (Cost $1,408,479) 1,463,662
=========
Preferred Stocks (13.5%)
Real Estate Investment Trust (13.5%)
Apartments Investment & Management
Company, Series D, 8.75% 26,500 457,125
Camden Properties Trust, Series A, $2.25 7,700 170,844
Corporate Office Properties, Series B, 10.00% 34,100 716,099
Equity Residential Properties Trust, Series A, 9.375% 14,200 317,725
Glimcher Realty Trust, Series B, 9.25% 20,400 300,900
Realty Income Corporation, Series B, 9.375% 4,700 85,188
Sovran Self Storage, Incorporated, Series B, 9.85% 3,700 74,463
Starwood Financial, Incorporated, Series B, 9.375% 3,900 60,450
Winston Hotels, Incorporated, Series A, 9.25% 3,700 61,050
---------
Total Preferred Stocks (Cost $2,210,161) 2,243,844
=========
Real Estate Investment Trusts (87.2%)
Apartments (10.9%)
Equity Residential Properties Trust2 21,900 880,106
Gables Residential Trust 19,500 438,750
United Dominion Realty Trust 48,600 489,038
---------
1,807,894
---------
Diversified (19.1%)
Banyan Strategic Realty Trust 220,250 1,156,312
Bedford Property Investors 13,000 208,813
Capital Automotive 9,900 118,800
First Union Real Estate3 111,100 305,525
Glenborough Realty Trust 5,500 79,750
Pacific Gulf Properties 22,300 437,638
Starwood Financial, Incorporated 41,000 722,624
Vornado Realty Trust 4,500 150,750
---------
3,180,212
---------
Hotel/Restaurant (5.0%)
Felcor Lodging Trust 6,800 120,275
Hospitality Properties Trust 8,300 168,075
See notes to financial statements.
9
<PAGE>
Meristar Hospitality Corporation 14,600 254,588
Winston Hotels, Incorporated 38,300 296,825
-----------
839,763
-----------
Office Property (28.7%)
Arden Realty Group, Incorporated 5,000 104,375
Boston Properties, Incorporated 4,800 152,700
Brandywine Realty Trust 34,800 595,949
Cornerstone Properties, Incorporated 22,500 392,344
Corporate Office Properties 11,200 91,700
Equity Office Properties Trust 3,000 75,375
Highwoods Properties, Incorporated 22,300 473,875
HRPT Properties Trust 6,500 56,469
Koger Equity, Incorporated 38,650 666,712
Mack-Cali Realty Corporation 45,300 1,155,149
Parkway Properties, Incorporated 18,600 547,538
Prentiss Properties Trust 10,700 238,744
Prime Group Realty Trust 12,700 181,769
PS Business Parks, Incorporated2 2,000 40,750
-----------
4,773,449
-----------
Regional Malls (2.5%)
Crown American Realty 27,300 145,031
Westfield America, Incorporated2 19,700 267,182
-----------
412,213
-----------
Shopping Centers (14.4%)
Agree Realty Corporation 7,500 97,969
Burnham Pacific Properties3 110,900 783,231
Developers Diversified Realty Corporation 15,800 219,225
Glimcher Realty Trust 18,800 253,800
Malan Realty Investors, Incorporated 59,000 711,687
New Plan Excel Realty Trust 1,000 13,750
Ramco-Gershenson Properties Trust 17,100 243,675
Realty Income Corporation 3,700 71,225
-----------
2,394,562
-----------
Storage (1.9%)
Sovran Self Storage, Incorporated 15,700 317,925
-----------
Warehouse (4.7%)
American Industrial Properties 66,000 779,625
-----------
Total Real Estate Investment Trusts (Cost $14,285,934) 14,505,643
===========
Short Term Securities Purchased with Collateral (1.2%)
Repurchase Agreements (1.2%)
Bear Stearns, 3.16%, 4/3/00, (Collateralized by $15,000,
U.S. Treasury Strips, 11.25%, 2/15/10, market value $8,100) 5,647
Bear Stearns, 6.5%, 4/3/00, (Collateralized by $590,000,
FHLMC Notes, 6.5%, 6/15/29, market value $192,953) 189,000
-----------
Total Short Term Securities Purchased with Collateral
(Cost $194,847) 194,647
-----------
Total Investments (Cost $18,161,664) (a)-110.7% 18,407,796
Liabilities in excess of other assets-(10.7)% (1,773,267)
-----------
TOTAL NET ASSETS- 100.0% $ 16,634,529
===========
See notes to financial statements.
10
<PAGE>
KENSINGTON STRATEGIC REALTY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS (Continued)
SHARES MARKET VALUE
Securities Sold Short (1.3%)
Alexandria Real Estate Equities Incorporated (7,000) $ (210,000)
---------
Total Securities Sold Short [Proceeds ($209,743)] $ (210,000)
=========
Percentages indicated are based on net assets of $16,634,529.
1 Represents non-income producing securities.
2 All or part of this security has been loaned at March 31, 2000.
3 Portion of security is held as collateral with broker and custodian for
securities sold short.
(a) Represents cost for financial reporting purposes and differs from value by
net unrealized appreciation as follows:
Unrealized appreciation ................... $ 690,701
Unrealized depreciation ................... $(444,826)
--------
Net unrealized appreciation ............... $ 245,875
========
See notes to financial statements.
11
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 2000
ASSETS
Investments, at value (cost $18,161,664) $18,407,796
Deposits with broker and custodian bank for 519,075
securities sold short
Interest and dividends receivable 226,039
Receivables from investment securities sold 1,367,443
Receivable for capital shares issued 1,058,000
Receivable from investment advisor 54,561
-----------
Total Assets 21,632,914
-----------
LIABILITIES
Payable to custodian 2,478,489
Securities sold short (proceeds $209,743) 210,000
Payable for return of collateral received for 194,647
securities on loan
Payables for investments purchased 2,023,744
Accrued expenses and other payables
Distribution fees 4,994
Other 86,511
-----------
Total Liabilities 4,998,385
-----------
NET ASSETS $16,634,529
===========
Capital $16,219,983
Undistributed net investment income 40,239
Net unrealized appreciation on investments and short sales 245,875
Accumulated net realized gains 128,432
-----------
Net Assets $16,634,529
===========
Outstanding units of beneficial interest (shares)
Class A
Net Assets $11,967,021
Shares 406,145
-----------
Redemption price per share $ 29.46
===========
Maximum Sales Charge-Class A 5.75%
Maximum Offering Price
[100%/(100%-Maximum Sales Charge) of net asset
-----------
value adjusted to the nearest cent] per share $ 31.26
===========
Class B
Net Assets $ 1,433,361
Shares outstanding 48,719
-----------
Offering price per share1 $ 29.42
===========
Class C
Net Assets $ 3,234,147
Shares outstanding 109,998
-----------
Offering price per share1 $ 29.40
===========
1 Redemption price per share varies by length of time shares are held.
See notes to financial statements.
12
<PAGE>
----------------------------------
KENSINGTON STRATEGIC REALTY FUND
----------------------------------
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED MARCH 31, 2000/1/
INVESTMENT INCOME
Interest income $ 3,538
Dividend income 377,527
---------
Total income 381,065
---------
EXPENSES
Investment advisory fees 34,548
Administration fees 91,290
Distribution fees
Class A 3,839
Class B 2,765
Class C 4,912
Custodian fees 19,845
Legal fees 60,005
Transfer agent fees 17,865
Trustees' fees 2,353
State Registration fees 32,824
Dividend Expense 3,657
Printing fees 10,521
Other Expenses 11,362
---------
Total Expenses before expenses voluntarily reduced 295,786
Expenses voluntarily reduced/waivers (234,535)
---------
Net expenses 61,251
---------
Net investment income 319,814
---------
REALIZED/UNREALIZED GAINS/(LOSSES)
FROM INVESTMENTS
Net realized gains from investments and securities sold short 135,524
Net change in unrealized appreciation
from investments and securities sold short 245,875
---------
Net realized/unrealized gains from investments
and securities sold short 381,399
---------
Change in net assets resulting from operations $ 701,213
=========
1 Commencement of operations was September 16, 1999.
See notes to financial statements.
13
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED MARCH 31, 2000/1/
FROM INVESTMENT ACTIVITIES
OPERATIONS
Net investment income/(loss) $ 319,814
Net realized gains/(losses) from investments and 135,524
securities sold short
Net change in unrealized appreciation/(depreciation)
from investments and securities sold short 245,875
------------
Change in net assets resulting from operations 701,213
------------
DISTRIBUTIONS TO CLASS A SHAREHOLDERS
From net investment income (187,765)
From net realized gains from investments and
securities sold short (3,922)
DISTRIBUTIONS TO CLASS B SHAREHOLDERS
From net investment income (31,902)
From net realized gains from investments and
securities sold short (1,517)
DISTRIBUTIONS TO CLASS C SHAREHOLDERS
From net investment income (59,908)
From net realized gains from investments and
securities sold short (1,653)
------------
Change in net assets from distributions to shareholders (286,667)
------------
CAPITAL TRANSACTIONS
Proceeds from shares issued 15,867,495
Shares issued in reinvestment of distributions 264,328
Payments for shares redeemed (1,840)
------------
Change in net assets from capital transactions 16,129,983
------------
Change in net assets 16,544,529
NET ASSETS
Beginning of period 90,000
------------
End of period $ 16,634,529
============
1 Commencement of operations was September 16, 1999.
See notes to financial statements.
14
<PAGE>
----------------------------------
KENSINGTON STRATEGIC REALTY FUND
----------------------------------
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
periods indicated.
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED MARCH 31, 2000/1/
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF PERIOD $ 25.00 $ 25.00 $ 25.00
-------- ------- --------
INVESTMENT ACTIVITIES
Net investment income 1.48 1.34 1.36
Net realized gain/(losses)
from investments 4.48 4.52 4.49
-------- ------- --------
Total from Investment Activities 5.96 5.86 5.85
-------- ------- --------
DISTRIBUTIONS
Net investment income (1.39) (1.33) (1.34)
Net realized gains (0.11) (0.11) (0.11)
-------- ------- --------
Total Distributions (1.50) (1.44) (1.45)
-------- ------- --------
NET ASSET VALUE -
END OF PERIOD $ 29.46 $ 29.42 $ 29.40
======== ======= ========
Total Return (excludes sales charge) 24.36% (b) 23.96% (b) 23.91% (b)
RATIOS/SUPPLEMENTARY DATA
Net Assets, End of Period (000's) $ 11,967 $ 1,433 $ 3,234
Ratio of expenses to average net assets
(excluding dividend expense) 2.25% (a) 2.99% (a) 3.00% (a)
Ratio of expenses to average net assets
(including dividend expense) 2.41% (a) 3.15% (a) 3.16% (a)
Ratio of net investment income/(loss)
to average net assets 14.63% (a) 11.58% (a) 12.52% (a)
Ratio of expenses to average net assets
(excluding dividend expense)2 11.03% (a) 18.79% (a) 14.12% (a)
Ratio of expenses to average net assets
(including dividend expense)2 11.19% (a) 18.95% (a) 14.28% (a)
Portfolio Turnover 240.19% 240.19% 240.19%
</TABLE>
1 Commencement of operations was September 16, 1999.
2 During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions had not occurred, the ratios would have
been as indicated.
(a) Annualized.
(b) Not-Annualized.
See notes to financial statements.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
1. ORGANIZATION
The Coventry Group (the "Group") was organized on January 8, 1992 as a
Massachusetts business trust, and is registered under the Investment Company Act
of 1940, as amended (the "1940 Act"), as a diversified, open-end management
investment company. Between the date of organization and the date of
commencement of operations (September 16, 1999) of the Kensington Strategic
Realty Fund (the "Fund"), a series of the Group, the Fund earned no investment
income and had no operations other than incurring organizational expenses. The
Fund's investment objective is to seek high current income relative to equity
investment alternatives, plus long term growth of capital. Kensington Investment
Group, Inc. invested the original seed capital of $90,000 into the Fund.
The Fund is authorized to offer three classes of shares: Class A, Class B and
Class C shares. Class A shares are sold with a maximum front-end load charge of
5.75%. Class B shares are sold without a front-end load but have a maximum
deferred sale charge of 5.00%. Class C shares are sold without a front-end load,
but have a deferred sales charge of 1.00% that is applied to redemptions within
one year of purchase.
2. SIGNIFICANT ACCOUNTING PRINCIPLES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
SECURITIES VALUATION
The Fund invests primarily in real estate securities, including securities
issued by real estate investment trusts, master limited partnerships and other
real estate companies. Investments in these issuers include common, convertible
and preferred stock and debt securities, rights or warrants to purchase common
stock, and limited partnership interests.
16
<PAGE>
----------------------------------
KENSINGTON STRATEGIC REALTY FUND
----------------------------------
NOTES TO FINANCIAL STATEMENTS MARCH 31,2000 (Continued)
These securities are valued at their market values determined on the basis of
the latest available bid quotation in the principal market(closing sales prices
if the principal market is an exchange) in which such securities are normally
traded.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. Securities pledged as collateral
for repurchase agreements are held by the custodian on the Fund's behalf. The
Fund monitors the adequacy of the collateral daily and will require the seller
to provide additional collateral in the event the market value of the securities
pledged falls below the carrying value of the repurchase agreement, including
accrued interest. The Fund will only enter into repurchase agreements with banks
and other financial institutions which are deemed by the investment advisor to
be creditworthy pursuant to guidelines established by the Board of Trustees.
Repurchase agreements are considered to be loans under the 1940 Act.
SECURITY TRANSACTIONS AND RELATED INCOME
Security transactions are accounted for on the date the security is purchased or
sold (trade date). Interest income is recognized on an accrual basis and
includes, where applicable, the amortization of premium or discount. Dividend
income is recorded on the ex-dividend date. Gains or losses realized on sales of
securities are determined by comparing the identified cost of the security lot
sold with the net sales proceeds.
SHORT SALE TRANSACTIONS
Short sales are transactions in which the fund sells a security it does not own,
in anticipation of a decline in the market value of that security. To complete
such a transaction, the Fund must borrow the security to deliver to the buyer
upon the short sale, the Fund then is obligated to replace the security borrowed
by purchasing it in the open market at a later date. The Fund will incur a loss
if the market price of the security increases between the date of the short sale
and the date on which the Fund replaces the borrowed security. The Fund will
realize a gain if the security declines in value between those dates. All short
sales must be
17
<PAGE>
collateralized in accordance with the applicable exchange or broker
requirements. The Fund maintains the collateral in a segregated account with its
custodian and broker, consisting of cash and equities sufficient to
collateralize its obligation on the short positions. At March 31, 2000, the
value of securities sold short amounted to $210,000 against which collateral
held by the broker and custodian, in the form of securities and cash, of
$525,328 was held.
DIVIDENDS TO SHAREHOLDERS
Dividends from net investment income, if any, are declared and paid quarterly
and net realized capital gains, if any, are declared and distributed at least
annually.
Dividends from net investment income and from net realized capital gains are
determined in accordance with income tax regulations, which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments for organization costs and deferrals of certain losses.
FEDERAL INCOME TAXES
It is the policy of the Fund to qualify as a regulated investment company by
complying with the provisions available to certain investment companies, as
defined in applicable sections of the Internal Revenue Code, and to make
distributions of net investment income and net realized capital gains sufficient
to relieve it from all, or substantially all, Federal income taxes. The Fund's
tax year-end is April 30.
SECURITIES LENDING
To generate additional income, the Funds may lend up to 33.33% of securities in
which they are invested pursuant to agreements requiring that the loan be
continuously secured by cash, U.S. government securities or other liquid,
high-grade debt securities or by a letter of credit in favor of the Fund at
least equal at times to 100% of the market value of the securities loaned, plus
accrued interest. The Funds continue to earn interest and dividends on
securities lent while simultaneously seeking to earn interest on the investment
of collateral.
When cash is received as collateral for securities loaned, the Funds may invest
such cash in short-term U.S. government securities, repurchase
18
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----------------------------------
KENSINGTON STRATEGIC REALTY FUND
----------------------------------
NOTES TO FINANCIAL STATEMENTS MARCH 31,2000 (Continued)
agreements, or other short-term corporate securities. The cash or subsequent
short-term investments are recorded as assets of the Funds, offset by a
corresponding liability to repay the cash at the termination of the loan. In
addition, the short-term securities purchased with the cash collateral are
included in the accompanying schedule of portfolio investments.
There may be risks of delay in recovery of the securities or even loss of rights
in the collateral should the borrower of the securities fail financially.
However, loans will be made only to borrowers deemed by the advisor to be of
good standing and creditworthy under guidelines established by the Board of
Trustees and when, in the judgment of the advisor, the consideration which can
be earned currently from such securities loans justifies the attendant risks.
Loans are subject to termination by the Funds or the borrower at any time, and
are, therefore, not considered to be illiquid investments. As of March 31, 2000,
the Fund had securities on loan with market values of $186,409.
The loaned securities were fully collateralized by cash which was invested in
repurchase agreements at March 31, 2000.
OTHER
Expenses that are directly related to the Fund are charged directly to the Fund.
Expenses relating to the Group are prorated to all the investment portfolios of
the Group, including the Fund, on the basis of each Fund's relative net assets.
3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding short-term securities) for the
fiscal year ending March 31, 2000 were $31,049,246 and $13,489,692,
respectively.
4. RELATED PARTY TRANSACTIONS
Investment advisory services are provided to the Fund by Kensington Investment
Group, Inc. who receives a management fee for their services. The management fee
is a fulcrum-type performance fee that, after the first twelve months of Fund
operations, increases or decreases from the base fee of 1.50% depending on the
Fund's performance
19
<PAGE>
relative to that of the NAREIT Composite Index during the preceding twelve
months. The Advisor will receive the base fee for the first twelve months of
operations and thereafter for periods when the Fund's performance for the past
twelve months equals that of the Index. Though performance adjustments equal to
15% of the difference between the performance of the Fund and that of the Index
during the previous twelve months, the fee can range from a minimum of 0.50% to
a maximum of 2.50%. This fee arrangement may result in higher fees than those
paid by other investment companies. The Advisor may receive the maximum fee even
if the Fund's absolute performance is negative, and it may receive the minimum
fee even when the Fund has significant positive performance.
The Advisor has contractually agreed, until October 31, 2002, to waive fees
and/or reimburse the Fund to the extent necessary to maintain Total Fund
Operating Expenses for Class A, B, and C shares at 2.25%, 3.00%, and 3.00%,
respectively, provided that these limits do not apply to increases due to
performance fee adjustments. For the first 36 full months of the Fund's
operations, the Fund will pay or repay fees that were waived or reimbursed to
the extent such payments or repayments would not cause the expenses of a Class
to exceed the above limits. Kensington Investment Group has waived $34,548 in
management fees and reimbursed fees of $199,987 to the Fund for the period ended
March 31, 2000.
BISYS Fund Services Ohio, Inc d/b/a BISYS Fund Services ("BISYS") is a
subsidiary of The BISYS Group, Inc.
BISYS, with whom certain officers and trustees of the Group are affiliated,
serves the Fund as administrator, fund accountant, and transfer agent under the
Administration, Fund Accounting and Transfer Agency Agreements. Such officers
and trustees are paid no fees directly by the Fund for serving as officers and
trustees of the Group. Under the terms of the Agreements, BISYS' fees are
computed daily as a percentage of the average net assets of the Fund in addition
to a fee based on the number of shareholders in the Fund.
BISYS serves as the Fund's principal distributor (the "Distributor") and has
entered into a Distribution and Shareholder Services Plan. This Plan
20
<PAGE>
----------------------------------
KENSINGTON STRATEGIC REALTY FUND
----------------------------------
NOTES TO FINANCIAL STATEMENTS MARCH 31,2000 (Continued)
is in accordance with Rule 12b-1 under the 1940 Act. Under the Plan, the Funds
will pay a monthly fee to the Distributor in annual rates equal to 0.25%, 1.00%,
and 1.00% of the average daily net assets of Class A, Class B, and Class C,
respectively. The Distributor may voluntarily choose to waive all or a portion
of its fee.
5. SHARES OF BENEFICIAL INTEREST
Each share represents an equal proportionate interest in the Fund with other
shares of the same series and class, and is entitled to such dividends and
distributions out of the income earned on the assets belonging to that Fund. The
following is a summary of transactions in Fund shares for the fiscal year ending
March 31, 2000:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Beginning Shares 1,200 $ 30,000 1,200 $ 30,000 1,200 $ 30,000
Shares issued 398,629 11,449,973 46,447 1,336,536 106,709 3,080,986
Shares reinvested 6,319 175,046 1,139 31,504 2,089 57,778
Shares redeemed 3 92 67 1,748 -- --
------- ---------- ------ ----------- ------- -----------
Net increase 404,945 11,624,927 47,519 1,366,292 108,798 3,138,764
------- ----------- ------ ----------- ------- -----------
Ending Shares 406,145 $11,654,927 48,719 $ 1,396,292 109,998 $ 3,168,764
======= =========== ====== =========== ======= ===========
</TABLE>
6. CONCENTRATION OF CREDIT RISK
The fund invests a substantial portion of its assets in the equity securities of
issuers engaged in the real estate industry, including real estate investment
trusts (REITs). As a result, the Fund may be more affected by economic
developments in the real estate industry than would a diversified equity fund.
7. LEVERAGE
The Fund can buy securities with borrowed money (a form of leverage). Leverage
exaggerates the effect one net asset value of any increase or decrease in the
market value of a fund's portfolio securities. These borrowings will be subject
to interest costs which may or may not be recovered by appreciation of the
securities purchased; in certain cases, interest costs may exceed the return
received on the securities purchased.
21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF TRUSTEES AND SHAREHOLDERS
KENSINGTON STRATEGIC REALTY FUND OF THE COVENTRY GROUP
We have audited the accompanying statement of assets and liabilities, including
the schedule of portfolio investments, of Kensington Strategic Realty Fund (the
Fund) as of March 31, 2000, and the related statement of operations, statement
of changes in net assets and financial highlights for the period indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of March 31, 2000, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Kensington Strategic Realty Fund at March 31, 2000, the results of its
operations, the changes in its net assets and its financial highlights for the
indicated period, in conformity with accounting principles generally accepted in
the United States.
ERNST & YOUNG LLP
Columbus, Ohio
May 18, 2000
22
<PAGE>
INVESTMENT ADVISOR
Kensington Investment Group
4 Orinda Way, Suite 220 D
Orinda, California 94563
(800)253-2949
(925)253-9878 Fax
[email protected]
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219
(877)833-7114 Toll Free
LEGAL COUNSEL
Dechert Price & Rhoads
1775 Eye Street, NW
Washington, DC 20006
INDEPENDENT AUDITORS
Ernst & Young LLP
10 West Broad Street, Suite 2300
Columbus, Ohio 43215
CUSTODIAN
Custodial Trust Company
101 Carnegie Center
Princeton, New Jersey 08540
This material does not constitute an offer to sell or a solicitation of an offer
to buy any security. This material is authorized for distribution only when
preceded or accompanied by a current prospectus for the Kensington Strategic
Realty Fund. The prospectus contains complete information including charges,
expenses and ongoing fees and should be read carefully before investing.
Performance information is prior to fees and expenses. Past performance may not
be indicative of future results. Investment returns and principal value will
fluctuate so shares may be worth more or less than their original cost.
Investments in the Fund are subject to the risks related to direct investment in
real estate such as real estate risk, regulatory risks, concentration risk, and
diversification risk. By itself, the Fund does not constitute a complete
investment plan and should be considered a long-term investment for investors
who can afford to weather changes in the value of their investments.
Ken 0016
