<PAGE>
SEMI-ANNUAL REPORT
PERIOD ENDING SEPTEMBER 30, 2000
KENSINGTON
STRATEGIC
REALTY
FUND
A MANAGED PORTFOLIO OF
REAL ESTATE SECURITIES
<PAGE>
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KENSINGTON STRATEGIC REALTY FUND
--------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
KENSINGTON STRATEGIC REALTY FUND VS NAREIT (benchmark)
[GRAPH]
[PLOT POINTS TO COME]
This chart represents a historical investment of $10,000 in the Kensington
Strategic Realty Fund (Class A shares with load)/1/ from September 15, 1999 to
September 30, 2000 and represents the reinvestment of dividends and capital
gains in the fund.
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN* INCEPTION TO DATE/2/ 1 YEAR
--------------------------------------------------------------------------------
Kensington Strategic Realty Fund Class A/3/ 47.18%* 47.73%*
Kensignton Strategic Realty Fund Class B/4/ 50.97%* 50.64%*
Kensignton Strategic Realty Fund Class C/5/ 54.71%* 54.59%*
NAREIT Composite Index/6/ 16.54% 19.42%
/1/ The total year-end return on a $10,000 investment excluding payment of the
maximum sales charge of 5.75% would be $15,869. 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 = 9/15/99.
/3/ The total return without payment of the maximum sales charge of 5.75% is
55.82% Inception to Date and 56.72% for the one year return.
/4/ The total return without payment of the contingent deferred sales charge of
5.00% is 54.75% Inception to Date and 55.64% for the one year return.
/5/ The total return without payment of the contingent deferred sales charge of
1.00% is 54.71% Inception to Date and 55.59% for the one year return.
/6/ The NAREIT Composite Index is an unmanaged index consisting of
approximately 200 Real Estate Investment Trust stocks.
* Includes applicable 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>
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KENSINGTON STRATEGIC REALTY FUND
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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 believe 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, this 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 September 30, 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>
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KENSINGTON STRATEGIC REALTY FUND
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MANAGEMENT'S DISCUSSION & ANALYSIS
PORTFOLIO REVIEW
The Kensington Strategic Realty Fund completed the six month period ending
September 30, 2000 with excellent results. From March 31, 2000 through September
30, 2000 the Fund generated a total return of 27.6%, well ahead of the 18.9%
return in the NAREIT Composite Index during this period. The Kensington
Strategic Realty Fund ranked #1 out of 145 funds within Lipper's realty fund
category for the period ending September 30, 2000./1/
Our decision to overweight the hotel sector contributed to this solid
performance, as hotel stocks performed well during the period. Additionally, the
Fund's focus on high yielding micro capitalization rates has also allowed the
Kensington Strategic Realty Fund to declare a quarterly dividend at a yield of
6.5% (based on the September 30, 2000 NAV). This compares favorable with the
average REIT mutual fund yield of 4.6% and utility stocks at 2.9%.
YIELD COMPARISON/2/
[GRAPH]
6.5% 4.6% 2.9%
Kensington Strategic Average Real Estate
Realty Fund Mutual Fund Utility Stocks
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 retail and industrial properties.
/1/ A share class ranking. The Fund was not ranked for the 5 and 10 year
periods. The Lipper ranking is based on total return and does not reflect a
sales charge.
/2/ SOURCE Utility Stock Index: S&P Utility as of the close September 29, 2000.
Average Real Estate Mutual Fund: Realty Stock Review, September 14, 2000.
Kensington Strategic Realty Fund dividend rate is annualized rate on "A"
Shares based on the 9/29/00 NAV. Annualized rate on "B" shares is 6.0%.
Annualized rate on "C" shares is 6.0%.
3
<PAGE>
PORTFOLIO COMPOSITION/3/
[GRAPH]
Diversified 9%
Health Care 3%
Apartments 10%
Office 22.5%
Industrial 15%
Retail 20%
Self Storage 0.5%
Hotel 14%
Mortgage 6%
Kensington Strategic Realty Fund's portfolio holds interests in a number of
companies that we describe as "event driven situations." These are smaller REITs
that 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 excellent returns over time, and they
generally pay a high dividend in the interim.
INVESTMENT OUTLOOK
We believe the following factors will drive the performance of REITs over the
next 12 to 24 months:
Healthy Property Markets expected to continue - The supply and demand balance in
the underlying properties markets continues to be favorable. Occupancy rates
remain high, over 90% for most property types. While we expect demand growth to
moderate from the strong pace of the past several years, construction activity
is being held in check. The increasingly public nature of the real estate debt
and equity markets has caused property markets to react quickly to excesses in
construction activity by quickly 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.
/3/ Portfolio holdings as of 9/30/00. Portfolio holdings subject to change.
4
<PAGE>
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KENSINGTON STRATEGIC REALTY FUND
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MANAGEMENT'S DISCUSSION & ANALYSIS (Continued)
Attractive REIT Valuations - A compelling argument for real estate securities
becomes apparent when one looks at current valuations and future growth rates.
While valuations have moved up somewhat this year, REITs are still priced at
historically attractive levels as evidenced by two measures of value:
Stock Prices to Property Values
REIT prices are below the value of their underlying property portfolios and are
about 15% below their historical average of 105% of underlying property value.
This is at the low end of their historical range and well below the 25% premium
to property value at which REITs traded during their 1997 peak.
Earnings Multiples
REITs are currently trading at slightly over 9 times projected earnings (FFO),
versus nearly 14 times earnings (FFO) at their 1997 peak.
While we believe it is impossible to predict short-term REIT stock price
movements, it is clear that current valuations are well below the previous peak.
REIT prices would need to rise more than 35% before setting new valuation
records.
Solid Earnings and Dividend Growth - In addition to attractive valuations,
future growth prospects look strong. 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 REITs should produce 6% to 8% bottom line earnings growth. Combining
this earnings growth with the 7%+ dividend yield, we expect a 13% to 15% return
on equity from REITs over the next several years.
Further enhancing the growth prospects of REITs is the fact that many current
tenants are paying lease rates well below current market rates. As these leases
roll over during the next few years, there will be some significant revenue
growth as companies re-lease the space.
5
<PAGE>
Finally, current dividends are well covered by cash flow, and should increase
with earnings growth due to the requirement of REITs to pay out 95% of taxable
income in dividends.
CONCLUSION
We see a compelling story in the real estate securities sector and are looking
for upside in our portfolio from three sources:
- Continued growth in property level cash flow and property values over
time.
- REIT valuations trading back up to their historical averages from their
current below average levels.
- Strong REIT earnings growth from below market leases being rolled over to
current market rents.
We will continue to blend higher quality large REITs with smaller, value-driven
opportunities. As always, we will be opportunistic with the portfolio.
We are also confident that real estate securities will continue to play their
traditional role in helping investors diversify portfolios. This is evidenced by
the strong performance of real estate stocks amid the recent market turmoil. We
are looking forward to closing out the year and believe that 2001 has promising
prospects.
We are looking forward to working for you in the coming year.
/s/ PAUL GRAY
PAUL GRAY
Portfolio Manager
6
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KENSINGTON STRATEGIC REALTY FUND
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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 manager hopes 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 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.
7
<PAGE>
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.
LARGE CAPITALIZATION
The Fund will buy and hold high quality companies and focus the portfolio in
those REITs which are in under-valued sectors by property type and/or location.
SMALL CAP LARGE CAP
[GRAPH]
SPECIAL SITUATIONS
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.
8
<PAGE>
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KENSINGTON STRATEGIC REALTY FUND
--------------------------------------------------------------------------------
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 securities 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.
9
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 2000 (Unaudited)
SHARES MARKET VALUE
Common Stocks (8.8%)
Health Care (0.1%)
Capital Senior Living Corporation/1/ 21,000 $ 53,813
----------
Hotel/Restaurant (2.0%)
Starwood Hotels & Resorts Worldwide,
Incorporated 49,000 1,531,250
----------
Real Estate (6.7%)
Catellus Development Corporation/1/ 28,000 490,000
Trizec Hahn Corporation/2/ 67,700 1,138,206
W.P. Carey & Company LLC 7,000 122,938
Wellsford Real Properties, Incorporated/1/ 181,850 3,591,537
----------
5,342,681
----------
Total Common Stocks (Cost $6,332,129) 6,927,744
==========
Preferred Stocks (20.1%)
Real Estate Investment Trust (20.1%)
Apartment Investment & Management
Company, Series D, 8.75% 152,400 3,219,449
Corporate Office Properties, Series B, 10.00% 69,300 1,576,575
Crown American Realty Trust, Series A, 11.00% 151,500 5,832,749
Equity Residential Properties Trust, Series 40,900 981,600
A, 9.375%
Felcor Lodging Trust, Series B, 9.00% 1,800 35,550
Glimcher Realty Trust, Series B, 9.25% 62,100 1,172,138
Health Care Property Investors,
Incorporated, Series B, 8.70% 2,500 52,031
Health Care Property Investors,
Incorporated, Series C, 8.60% 8,100 159,469
iStar Financial, Incorporated, Series B, 51,900 992,588
9.375%
iStar Financial, Incorporated, Series C, 9.20% 25,000 457,813
Mid-America Apartment Communities,
Series A, 9.50% 4,800 99,900
Public Storage, Incorporated, Series A,
Deposit Shares 15,800 366,363
Sovran Self Storage, Incorporated, Series B, 18,600 399,900
9.85%
United Dominion Realty Trust, Series B, 8.60% 9,200 211,025
Winston Hotels, Incorporated, Series A, 9.25% 12,300 216,019
----------
Total Preferred Stocks (Cost $14,528,273) 15,773,169
==========
10
See notes to financial statements.
<PAGE>
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KENSINGTON STRATEGIC REALTY FUND
--------------------------------------------------------------------------------
SCHEDULE OF PORTFOLIO INVESTMENTS (Continued)
SHARES MARKET VALUE
Real Estate Investment Trusts (101.2%)
Apartments (8.3%)
Apartment Investment & Management Company 10,500 $ 483,656
Archstone Communities Trust 34,000 835,125
Equity Residential Properties Trust/3/ 59,700 2,865,600
Gables Residential Trust 19,700 535,594
Post Properties, Incorporated/2/ 5,000 217,813
United Dominion Realty Trust 147,800 1,607,325
-----------
6,545,113
-----------
Diversified (24.0%)
Banyan Strategic Realty Trust 750,950 4,458,765
Bedford Property Investors 44,500 903,906
Duke-Weeks Realty Corporation 27,000 651,375
First Union Real Estate/3/ 391,700 1,077,175
Glenborough Realty Trust 152,100 2,737,800
iStar Financial, Incorporated 202,200 4,536,862
Lexington Corporate Properties Trust 13,600 153,000
Liberty Property Trust 116,800 3,212,000
Vornado Realty Trust 29,500 1,095,188
-----------
18,826,071
-----------
Health Care (0.2%)
Health Care Property Investors, Incorporated 5,000 148,125
-----------
Hotel/Restaurant (14.9%)
Felcor Lodging Trust/2/ 74,500 1,722,813
Hospitality Properties Trust 126,300 2,952,262
Meristar Hospitality Corporation 76,900 1,557,225
RFS Hotel Investors, Incorporated 248,700 3,139,837
Winston Hotels, Incorporated 267,500 2,307,188
-----------
11,679,325
-----------
Office Property (29.2%)
Arden Realty Group, Incorporated 20,000 536,250
Boston Properties, Incorporated 18,100 777,169
Brandywine Realty Trust 101,500 2,055,375
Corporate Office Properties 41,700 414,394
Crescent Real Estate Equities Company/2/ 51,300 1,144,631
Equity Office Properties Trust 50,300 1,562,444
Highwoods Properties, Incorporated 70,600 1,667,925
HRPT Properties Trust 382,000 2,673,999
Koger Equity, Incorporated 146,050 2,482,850
Mack-Cali Realty Corporation 171,000 4,820,062
Parkway Properties, Incorporated 40,200 1,226,100
Prentiss Properties Trust 85,000 2,220,625
Prime Group Realty Trust 26,000 409,500
Spieker Properties, Incorporated 15,000 863,438
-----------
22,854,762
-----------
See notes to financial statements.
11
<PAGE>
SHARES MARKET VALUE
Regional Malls (3.7%)
Crown American Realty Trust 181,200 $ 1,098,525
Simon Property Group, Incorporated 59,300 1,389,844
Westfield America, Incorporated 33,000 453,750
-----------
2,942,119
-----------
Shopping Centers (13.3%)
Agree Realty Corporation 84,100 1,261,500
Burnham Pacific Properties/3/ 228,000 1,382,250
Developers Diversified Realty Corporation 34,000 437,750
Glimcher Realty Trust 169,900 2,537,880
Kimco Realty Corporation 13,000 549,250
Kramont Realty Trust 15,200 142,500
Malan Realty Investors, Incorporated/2/ 61,000 785,375
New Plan Excel Realty Trust 31,400 429,788
Philips International Realty Corporation 112,700 1,944,075
Ramco-Gershenson Properties Trust 63,000 933,188
-----------
10,403,556
-----------
Warehouse (7.6%)
American Industrial Properties 272,200 3,878,850
First Industrial Realty Trust, Incorporated 69,000 2,121,750
-----------
6,000,600
-----------
Total Real Estate Investment Trusts (Cost $75,272,985) 79,399,671
===========
Short Term Securities Purchased with Collateral (2.7%)
Repurchase Agreements (2.7%)
Bear Stearns, 3.38%, 10/02/00, (Collateralized by $10,000,
U.S. Treasury Strips, 9.875%, 11/15/08, market value $6,206) 5,367
Bear Stearns, 6.88%, 10/02/00, (Collateralized by $3,225,000,
FHLMC Notes, 5.56%, 12/15/08, market value $2,163,876) 2,118,400
-----------
Total Short Term Securities Purchased with Collateral
(Cost $2,123,767) 2,123,767
-----------
Total Investments (Cost $98,257,154) (a) - 132.8% 104,224,351
Liabilities in excess of other assets - (32.8)% (25,754,151)
-----------
TOTAL NET ASSETS - 100.0% $78,470,200
===========
See notes to financial statements.
12
<PAGE>
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KENSINGTON STRATEGIC REALTY FUND
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SCHEDULE OF PORTFOLIO INVESTMENTS (Continued)
SHARES MARKET VALUE
Securities Sold Short (0.9%)
Alexandria Real Estate Equities Incorporated (21,100) $ (723,994)
------------
Total Securities Sold Short [Proceeds ($678,459)] $ (723,994)
============
Percentages indicated are based on net assets of $78,470,200.
1 Represents non-income producing securities.
2 All or part of this security has been loaned at September 30, 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 ................................... $ 6,425,894
Unrealized depreciation ................................... (504,232)
------------
Net unrealized appreciation ............................... $ 5,921,662
============
See notes to financial statements.
13
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000 (Unaudited)
ASSETS
Investments, at value (cost $98,257,154) $ 104,224,351
Deposits with broker and custodian bank for 926,411
securities sold short
Interest and dividends receivable 1,153,600
Receivables from investment securities sold 572,912
Receivable for capital shares issued 271,144
Prepaid expenses and other assets 13,067
------------
Total Assets 107,161,485
------------
LIABILITIES
Payable to custodian 24,854,870
Securities sold short (proceeds $678,459) 723,994
Payable for return of collateral received for securities on loan 2,123,767
Payables for investments purchased 814,500
Accrued expenses and other payables
Investment advisory fees 134,500
Distribution fees 25,756
Other 13,898
------------
Total Liabilities 28,691,285
------------
NET ASSETS $ 78,470,200
============
Capital $ 70,008,850
Undistributed net investment income 743,296
Net unrealized appreciation on investments and short sales 5,921,662
Accumulated net realized gains 1,796,392
------------
Net Assets $ 78,470,200
============
Outstanding units of beneficial interest (shares)
Class A
Net Assets $ 60,005,327
Shares 1,650,902
------------
Redemption price per share $ 36.35
============
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 $ 38.57
============
Class B
Net Assets $ 6,166,996
Shares outstanding 170,137
------------
Offering price per share/1/ $ 36.25
============
Class C
Net Assets $ 12,297,877
Shares outstanding 339,432
------------
Offering price per share/1/ $ 36.23
============
/1/ Redemption price per share varies by length of time shares are held.
See notes to financial statements.
14
<PAGE>
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KENSINGTON STRATEGIC REALTY FUND
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STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 2000 (Unaudited)
INVESTMENT INCOME
Interest income $ 13,041
Dividend income 3,453,230
------------
Total income 3,466,271
------------
EXPENSES
Investment advisory fees 423,400
Administration fees 67,791
Distribution fees
Class A 51,048
Class B 17,665
Class C 38,234
Custodian fees 30,584
Transfer agent fees 29,335
Trustees' fees 1,544
Dividend expense 18,027
Other expenses 54,848
------------
Total expenses before expenses voluntarily reduced 732,476
Expenses voluntarily reduced/waivers (54,057)
------------
Net expenses 678,419
------------
Net investment income 2,787,852
------------
REALIZED/UNREALIZED GAINS
FROM INVESTMENTS
Net realized gains from investments and securities
sold short 1,667,960
Net change in unrealized appreciation
from investments and securities sold short 5,675,787
------------
Net realized/unrealized gains from investments
and securities sold short 7,343,747
------------
Change in net assets resulting from operations $ 10,131,599
============
See notes to financial statements.
15
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, 2000 MARCH 31, 2000
(Unaudited)
<S> <C> <C>
FROM INVESTMENT ACTIVITIES
OPERATIONS
Net investment income $ 2,787,852 $ 319,814
Net realized gains from investments and 1,667,960 135,524
securities sold short
Net change in unrealized appreciation from
investments and securities sold short 5,675,787 245,875
----------- -----------
Change in net assets resulting from operations 10,131,599 701,213
----------- -----------
DISTRIBUTIONS TO
CLASS A SHAREHOLDERS
From net investment income (1,667,754) (187,765)
From net realized gains from investments and
securities sold short - (3,922)
DISTRIBUTIONS TO
CLASS B SHAREHOLDERS
From net investment income (132,654) (31,902)
From net realized gains from investments and
securities sold short - (1,517)
DISTRIBUTIONS TO
CLASS C SHAREHOLDERS
From net investment income (284,387) (59,908)
From net realized gains from investments and
securities sold short - (1,653)
----------- -----------
Change in net assets from distributions
to shareholders (2,084,795) (286,667)
----------- -----------
CAPITAL TRANSACTIONS
Proceeds from shares issued 54,596,868 15,867,495
Shares issued in reinvestment of 1,266,645 264,328
distributions
Payments for shares redeemed (2,074,646) (1,840)
----------- -----------
Change in net assets from capital transactions 53,788,867 16,129,983
----------- -----------
Change in net assets 61,835,671 16,544,529
----------- -----------
NET ASSETS
Beginning of period 16,634,529 90,000
----------- -----------
End of period $78,470,200 $16,634,529
=========== ===========
</TABLE>
/1/Commencement of operations was September 15, 1999.
See notes to financial statements.
16
<PAGE>
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KENSINGTON STRATEGIC REALTY FUND
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FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
periods indicated.
<TABLE>
<CAPTION>
CLASS A
FOR THE FOR THE
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, 2000 MARCH 31, 2000/1/
(Unaudited)
---------------------------------------
<S> <C> <C>
NET ASSET VALUE -
BEGINNING OF PERIOD $ 29.46 $ 25.00
------------ ----------
INVESTMENT ACTIVITIES
Net investment income 1.44 1.48
Net realized and unrealized gains
from investments 6.63 4.48
------------ ----------
Total from Investment Activities 8.07 5.96
------------ ----------
DISTRIBUTIONS
Net investment income (1.18) (1.39)
Net realized gains - (0.11)
------------ ----------
Total Distributions (1.18) (1.50)
------------ ----------
NET ASSET VALUE -
END OF PERIOD $ 36.35 $ 29.46
============ ==========
Total Return (excludes sales charge) 27.60%(a) 24.36%(a)
RATIOS/SUPPLEMENTARY DATA
Net Assets, End of Period (000's) $ 60,005 $ 11,967
Ratio of expenses to average net assets
(excluding dividend expense) 2.37%(b) 2.25%(b)
Ratio of expenses to average net assets
(including dividend expense) 2.44%(b) 2.41%(b)
Ratio of net investment income
to average net assets 10.80%(b) 14.63%(b)
Ratio of expenses to average net assets
(excluding dividend expense)/2/ 2.58%(b) 11.03%(b)
Ratio of expenses to average net assets
(including dividend expense)/2/ 2.65%(b) 11.19%(b)
Portfolio Turnover 98.83% 240.19%
</TABLE>
/1/ Commencement of operations was September 15, 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) Not-Annualized.
(b) Annualized.
See notes to financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS C
FOR THE FOR THE FOR THE FOR THE
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, 2000 MARCH 31, 2000/1/ SEPTEMBER 30, 2000 MARCH 31, 2000/1/
(Unaudited) (Unaudited)
---------------------------------------- ----------------------------------------
<S> <C> <C> <C>
$ 29.42 $ 25.00 $ 29.40 $ 25.00
-------- -------- -------- --------
1.38 1.34 1.40 1.36
6.54 4.52 6.52 4.49
-------- -------- -------- --------
7.92 5.86 7.92 5.85
-------- -------- -------- --------
(1.09) (1.33) (1.09) (1.34)
- (0.11) - (0.11)
-------- -------- -------- --------
(1.09) (1.44) (1.09) (1.45)
-------- -------- -------- --------
$ 36.25 $ 29.42 $ 36.23 $ 29.40
======== ======== ======== ========
27.10%(a) 23.96%(a) 27.11%(a) 23.91%(a)
$ 6,167 $ 1,433 $ 12,298 $ 3,234
3.14%(b) 2.99%(b) 3.13%(b) 3.00%(b)
3.21%(b) 3.15%(b) 3.20%(b) 3.16%(b)
10.32%(b) 11.58%(b) 10.29%(b) 12.52%(b)
3.31%(b) 18.79%(b) 3.32%(b) 14.12%(b)
3.38%(b) 18.95%(b) 3.39%(b) 14.28%(b)
98.83% 240.19% 98.83% 240.19%
</TABLE>
18
<PAGE>
--------------------------------------------------------------------------------
KENSINGTON STRATEGIC REALTY FUND
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 (Unaudited)
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 15, 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 sales 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.
19
<PAGE>
SECURITIES VALUATION
The Fund invests primarily in real estate securities, including securities
issued by real estate investment trusts (REITs), 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. 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.
20
<PAGE>
--------------------------------------------------------------------------------
KENSINGTON STRATEGIC REALTY FUND
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (Continued)
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,
which could be substantial and potentially unlimited, 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. The Fund is also at risk of
incurring dividend expense if a security that has been sold short declares a
dividend. The Fund must pay the dividend to the lender of the security. All
short sales must be 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 September 30, 2000, the
value of securities sold short amounted to $723,994 against which collateral
held by the broker and custodian, in the form of securities and cash, of
$2,102,143 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.
21
<PAGE>
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 Fund may lend up to 33.33% of securities in
which it is 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 Fund continues 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 Fund may invest
such cash in short-term U.S. government securities, repurchase agreements, or
other short-term corporate securities. The cash or subsequent short-term
investments are recorded as assets of the Fund, 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
22
<PAGE>
--------------------------------------------------------------------------------
KENSINGTON STRATEGIC REALTY FUND
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (Continued)
established by the Group's 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
Fund or the borrower at any time, and are, therefore, not considered to be
illiquid investments. As of September 30, 2000, the Fund had securities on loan
with market values of $2,039,594.
The loaned securities were fully collateralized by cash which was invested in
repurchase agreements at September 30, 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
period ending September 30, 2000 were $135,871,650 and $59,775,150,
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 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
23
<PAGE>
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. On September 15, 2000, the management fee was
increased from the base fee due to the fulcrum-type performance fee that went
into effect. As a result, the expense limitations for Class A, B, and C were
increased to 3.25%, 4.00%, and 4.00%, respectively, to account for the increase
in 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 $54,057 in
management fees to the Fund for the period ended September 30, 2000.
BISYS Fund Services Ohio, Inc. d/b/a BISYS Fund Services ("BISYS Ohio") and
BISYS Fund Services Limited Partnership ("BISYS") are subsidiaries 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
24
<PAGE>
--------------------------------------------------------------------------------
KENSINGTON STRATEGIC REALTY FUND
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (Continued)
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 Ohio's 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 is in
accordance with Rule 12b-1 under the 1940 Act. Under the Plan, the Fund 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 periods ending
September 30, 2000 and March 31, 2000:
PERIOD ENDING SEPTEMBER 30, 2000(Unaudited)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNTS
<S> <C> <C> <C> <C> <C> <C>
Beginning Shares 406,145 $11,654,927 48,719 $1,396,292 109,998 $ 3,168,764
Shares issued 1,278,096 42,855,698 118,672 4,077,887 224,781 7,663,283
Shares reinvested 26,077 914,653 2,923 102,481 7,132 249,511
Shares redeemed 59,416 1,980,209 177 6,324 2,479 88,113
--------- ----------- ------- ---------- -------- -----------
Net increase 1,244,757 41,790,142 121,418 4,174,044 229,434 7,824,681
--------- ----------- ------- ---------- -------- -----------
Ending Shares 1,650,902 $53,445,069 170,137 $5,570,336 339,432 $10,993,445
========= =========== ======= ========== ======== ===========
</TABLE>
25
<PAGE>
PERIOD ENDING MARCH 31, 2000
CLASS A CLASS B CLASS C
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
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
======= =========== ====== ========== ======= ==========
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 on 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.
26
<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
1100 Huntington Center
41 South High Street
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.
