<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission File Number 0-18944
THE SECTOR STRATEGY FUND/SM/ IV L.P.
--------------------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3648784
- - ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
(formerly ML Futures Investment Partners Inc.)
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
212-236-4161
----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
This document contains 14 pages.
There are no exhibits and no exhibit index filed with this document.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE SECTOR STRATEGY FUND/SM/ IV L.P.
--------------------------------------
(a Delaware limited partnership)
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- ------------
<S> <C> <C>
ASSETS
- - ------
Accrued interest (Note 2) $ 25,805 $ 32,078
Equity in commodity futures trading accounts
Cash and option premiums 6,714,031 7,732,274
Net unrealized gain on open contracts 151,219 320,748
---------- ----------
TOTAL $6,891,055 $8,085,100
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
- - ---------------------------------
LIABILITIES:
Redemptions payable $ 107,780 $ 312,195
Brokerage commissions payable (Note 2) 49,885 56,042
Profit shares payable 2,337 9,701
Administrative expense payable 1,312 -
---------- ----------
Total liabilities 161,314 377,938
---------- ----------
PARTNERS' CAPITAL:
General Partner:
(671 and 671 Series A Units outstanding) 74,611 79,108
(214 and 214 Series B Units outstanding) 25,181 26,769
Limited Partners:
(46,148 and 48,856 Series A Units outstanding) 5,134,273 5,762,501
(12,731 and 14,723 Series B Units outstanding) 1,495,676 1,838,784
---------- ----------
Total partners' capital 6,729,741 7,707,162
---------- ----------
TOTAL $6,891,055 $8,085,100
========== ==========
NET ASSET VALUE PER UNIT
SERIES A $111.26 $117.95
========== ==========
SERIES B $117.49 $124.89
========== ==========
</TABLE>
See notes to financial statements.
2
<PAGE>
THE SECTOR STRATEGY FUND/SM/ IV L.P.
------------------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
March 31, March 31,
1996 1995
---- ----
<S> <C> <C>
REVENUES:
Trading (loss) profits:
Realized $(157,126) $698,034
Change in unrealized (169,529) 76,247
----------- -----------
Total trading results (326,655) 774,281
Interest income (Note 2) 80,751 144,459
----------- -----------
Total revenues (245,904) 918,740
----------- -----------
EXPENSES:
Profit shares 2,337 35,406
Brokerage commissions (Note 2) 158,880 230,511
Administrative expense 4,185 -
----------- -----------
Total expenses 165,402 265,917
----------- -----------
NET (LOSS) INCOME $(411,306) $652,823
=========== ===========
NET (LOSS) INCOME PER UNIT:
Weighted average number of Units
outstanding (Note 4) 62,307 100,954
========= ========
Weighted average net (loss) income
per Unit $(6.60) $6.47
========= ========
</TABLE>
See notes to financial statements.
3
<PAGE>
THE SECTOR STRATEGY FUND/SM/ IV L.P.
--------------------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
-------------------------------------------
For the three months ended March 31, 1996 and 1995
--------------------------------------------------
<TABLE>
<CAPTION>
Units Limited Partners General Partner
----- ---------------- ---------------
Series A Series B Series A Series B Series A Series B Total
----------- ---------- --------------- -------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1994 79,651 25,053 $ 8,427,977 $2,751,817 $130,084 $41,743 $11,351,621
Net income - - 454,376 187,783 7,627 3,037 652,823
Redemptions (10,952) (4,468) (1,206,080) (521,872) - - (1,727,952)
--------- -------- ------------- ------------ ---------- --------- -------------
PARTNERS' CAPITAL,
MARCH 31, 1995 68,699 20,585 $ 7,676,273 $2,417,928 $137,711 $44,780 $10,276,492
========= ======== ============= ============ ========== ========= =============
PARTNERS' CAPITAL,
DECEMBER 31, 1995 49,527 14,937 $ 5,762,501 $1,838,784 $ 79,108 $26,769 $ 7,707,162
Net loss - - (312,779) (92,442) (4,497) (1,588) (411,306)
Redemptions (2,708) (1,992) (315,449) (250,666) - - (566,115)
--------- -------- ------------- ------------ ---------- --------- -------------
PARTNERS' CAPITAL,
MARCH 31, 1996 46,819 12,945 $ 5,134,273 $1,495,676 $ 74,611 $25,181 $ 6,729,741
========= ======== ============= ============ ========== ========= =============
</TABLE>
See notes to financial statements.
4
<PAGE>
THE SECTOR STRATEGY FUND/SM/ IV L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The SECTOR Strategy Fund/SM/ IV L.P. (the "Partnership" or the "Fund") was
organized under the Delaware Revised Uniform Limited Partnership Act on February
13, 1992 and commenced trading activities on July 1, 1992. The Partnership
engages in the speculative trading of futures, options and forward contracts on
a wide range of commodities. The Partnership raised $89,000,000 for its initial
capitalization of which $75,646,400 is for the Guaranteed Units ("Series A
Units") and $13,353,600 for the non-Guaranteed Units ("Series B Units"). These
capitalization balances included investments from The SECTOR Strategy/SM/ Fund"
International IV Ltd. (the "Company"). On April 1, 1994, the Company redeemed
its investments from the Partnership with respect to both the Series A Units and
Series B Units to become a stand-alone trading company. Merrill Lynch
Investment Partners Inc. (formerly ML Futures Investment Partners Inc.) ("MLIP"
or the "General Partner"), a wholly-owned subsidiary of Merrill Lynch Group,
Inc., which in turn is a wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch",) is the general partner of the Partnership, and Merrill Lynch
Futures Inc. ("MLF"), also a Merrill Lynch affiliate, is its commodity broker.
The General Partner has agreed to maintain a general partner's interest of at
least 1% of the total capital in the Partnership. The General Partner and each
Limited Partner share in the profits and losses of the Partnership in proportion
to their respective interest in it.
The financial information included herein has been prepared by management
without audit by independent certified public accountants who do not express an
opinion thereon. The statement of financial condition as of December 31, 1995
has been derived from but does not include all the disclosures contained in the
audited financial statements for the year ended December 31, 1995. The
information furnished includes all adjustments which are, in the opinion of
management, necessary for a fair statement of results for the interim period.
The results of operations as presented, however, should not be considered
indicative of the results to be expected for the entire year.
MLIP selects independent advisors (the "Advisors" or the "Trading Advisors") to
manage the Partnership's assets, and allocate and reallocate the Partnership's
trading assets among existing, replacement and additional Advisors.
MLIP also determines what percentage of the Series A total capital to allocate
to trading from time to time (all assets of Series B are allocated to trading),
attempting to balance the desirability of reducing the opportunity costs of the
Series A "principal protection" structure by allocating 100% (or more) of the
Series A assets to trading against the necessity of preventing Merrill Lynch
from ever being required to make any payments to the Partnership under the
Merrill Lynch guarantee. (See Note 5.)
Estimates
- - ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
- - -------------------
Commodity futures, options and forward contract transactions are recorded on the
trade date and open contracts are reflected in the financial statements at the
fair value on the last business day of the reporting period. The difference
between the original contract amount and fair value is reflected in income as an
unrealized gain or loss. Fair value is based on quoted market prices. All
commodity futures, options and forward contracts are reflected at fair value in
the financial statements.
Operating Expenses
- - ------------------
MLIP pays for all routine operating expenses (including legal, accounting,
postage and similar administrative expenses) of the Partnership. MLIP receives
a portion of the brokerage commissions paid to MLF by the Partnership as
reimbursement for the foregoing expenses.
5
<PAGE>
Income Taxes
- - ------------
No provision for income taxes has been made in the accompanying financial
statements as each partner is individually responsible for reporting income or
loss based on their respective share of the Partnership's income and expenses as
reported for income tax purposes.
Distributions
- - -------------
The Unitholders are entitled to receive, equally per Unit, any distribution
which may be made by the Partnership. No such distributions have been made as
of March 31, 1996.
Redemptions
- - -----------
A Limited Partner may require the Partnership to redeem some or all of such
partner's Units of limited partnership interest at Net Asset Value as of the
close of business on the last business day of any month upon ten calendar days'
notice.
Dissolution of the Partnership
- - ------------------------------
The Partnership will terminate on December 31, 2022 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
All of the Partnership's assets are deposited with MLF as a means of
approximating the interest rate which would be earned by the partnership had
100% of its Net Assets on deposit with MLF been invested in 91-day Treasury
bills, MLF pays the Partnership interest on its account equity on deposit with
MLF at a rate of 0.5 of 1% per Annum below the prevailing 91-day Treasury bill
rate. In the case of its trading in certain foreign futures contracts, the Fund
deposits margin in foreign currency denominated instruments or cash and earns
interest generally at the prevailing short-term government interest rate in the
country in question. The additional economic benefit derived from possession of
the Partnership's assets accrues to MLF or its affiliates.
The Partnership pays brokerage commissions to MLF at a flat rate of 0.833 of 1%
on the Series A Units (a 10% annual rate) and 0.75 of 1% on the Series B Units
(a 9% annual rate) of the Partnership's month-end assets. Effective January 1,
1996, the brokerage commission the Partnership pays to the Commodity Broker was
reduced to .8125% (a 9.75% annual rate), for Series A Units and .729% (a 8.75%
annual rate) for Series B Units, and each of the Partnership's Series began to
pay an administrative fee to the General Partner of .020833% (a .25% annual
rate). The General Partner estimates that the round-turn equivalent commission
rates charged to the Partnership during the quarters ended March 31, 1996 and
1995 was approximately $57 and $20, respectively (not including, in calculating
round-turn equivalents, forward contracts on a futures-equivalent basis).
MLF pays the Advisors annual Consulting Fees ranging from 3% to 4% of the
Partnership's average month-end assets after reduction for a portion of the
brokerage commissions.
The Partnership trades forward contracts through a Foreign Exchange Desk (the
"F/X Desk") established by MLIP that contacts at least two counterparties, along
with Merrill Lynch International Bank ("MLIB") for all of the Partnership's
currency trades. All counterparties other than MLIB are unaffiliated with any
Merrill Lynch entity. The F/X Desk charges a service fee equal (at current
exchange rates) to approximately $5.00 to $12.50 on each purchase or sale of a
futures-contract equivalent face amount of a foreign currency. No service fees
are charged on trades awarded to MLIB (which receives a "bid-ask" spread on such
trades). MLIB is awarded trades only if its price (which includes the no
service fee) is equal to or better than the best price (including the service
fee) offered by any of the other counterparties contacted.
The F/X Desk trades on the basis of credit lines provided by a Merrill Lynch
entity. The Partnership is not required to margin or otherwise guarantee its
F/X Desk trading.
Certain of the Partnership's currency trades are executed in the form of
"exchange of futures for physical" ("EFP") transactions involving MLIB and MLF.
In these transactions, a spot or forward (collectively referred to as "cash")
currency position is acquired and exchanged for an equivalent futures position
on the Chicago Mercantile Exchange's International Monetary Market. In its EFP
trading, the Partnership acquires cash currency positions through the F/X Desk
in the same manner and on the same terms as in the case of the Partnership's
other F/X Desk trading. When the Partnership exchanges these positions for
futures, there is a "differential" between the prices of these two positions.
This "differential" reflects, in part, the different settlement dates of the
cash and the futures contracts as well as prevailing interest rates, but also
includes a pricing spread in favor of MLIB or another Merrill Lynch entity.
6
<PAGE>
The Partnership's F/X Desk service fee and EFP differential costs have, to date,
totaled no more than 0.25 of 1% per annum of the Partnership's average month-end
Net Assets.
3. AGREEMENTS
The Partnership and the Advisors have each entered into Advisory Agreements.
The Advisory Agreements generally terminate one year after they are entered
into, subject to certain renewal rights exercisable by the Partnership. The
Advisors determine the commodity futures and forward contract trades to be made
on behalf of their respective Partnership accounts, subject to certain
Partnership trading policies and to certain rights reserved for the General
Partner.
Profit shares, generally ranging from 15% to 25% of any New Trading Profit, as
defined, recognized by each Advisor considered individually irrespective of the
overall performance of the Partnership, as of the end of each calendar quarter
are paid by the Partnership to each Advisor. Profit shares are also paid out in
respect of Units redeemed as of the end of interim months during a calendar
quarter to the extent of the applicable percentage of any New Trading Profit
attributable to such Units.
4. WEIGHTED AVERAGE UNITS
The weighted average number of Units outstanding was computed for purposes of
disclosing net income per weighted average Unit. The weighted average number of
Units outstanding at March 31, 1996 and 1995 equals the Units outstanding as of
such date, adjusted proportionately for Units redeemed based on the respective
length of time each was outstanding during the preceding period.
5. SERIES A MERRILL LYNCH & CO., INC. GUARANTEE
Merrill Lynch has guaranteed to the Partnership that it will have sufficient Net
Assets as of the Principal Assurance Date for the Series A Units, as defined,
that the Net Asset Value per Series A Unit as of such Principal Assurance Date
will equal, after adjustment for all liabilities to third parties, not less than
$100.
6. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades futures, options and forward contracts in financial
instruments, stock indices, commodities, currencies, energy and metals. The
Partnership's revenues by reporting category for the quarter ended March 31,
1996 was as follows:
<TABLE>
<CAPTION>
1996
----------
<S> <C>
Financial Instruments $(296,484)
Stock indices 9,912
Commodities (65,877)
Currencies 89,226
Energy (30,757)
Metals (32,675)
-----------
$(326,655)
===========
</TABLE>
Market Risk
- - -----------
Derivative instruments involve varying degrees of off-balance sheet market risk,
and changes in the level or volatility of interest rates, foreign currency
exchange rates or the market values of the financial instruments or commodities
underlying such derivative instruments frequently result in changes in the
Partnership's unrealized gain or loss on such derivative instruments as
reflected in the Statements of Financial Condition. The Partnership's exposure
to market risk is influenced by a number of factors, including the relationships
among the derivative instruments held by the Partnership as well as the
volatility and liquidity of the markets in which the derivative instruments are
traded.
The General Partner has procedures in place intended to control market risk,
although there can be no assurance that they will, in fact, succeed in doing so.
These procedures focus primarily on monitoring the trading of the Advisors
selected from time to time for the Partnership, adjusting the percentage of the
Partnership's total assets allocated to trading, calculating the Net Asset Value
of the Advisors' respective Partnership accounts as of the close of business on
each day and reviewing outstanding positions for over-concentration both on an
Advisor-by-Advisor and on an overall Partnership basis. While the General
Partner will not itself intervene in the markets to hedge or diversify the
Partnership's market exposure (although the General Partner does adjust the
percentage of the Partnership's total assets allocated to trading), the General
Partner may urge Advisors to reallocate positions, or itself reallocate
Partnership assets among Advisors (although
7
<PAGE>
typically only as of the end of a month) in an attempt to avoid over-
concentrations. However, such interventions are unusual. Except in cases in
which it appears that an Advisor has begun to deviate from past practice or
trading policies or to be trading erratically, the General Partner's basic risk
control procedures consist simply of the ongoing process of Advisor monitoring
and selection, with the market risk controls being applied by the Advisors
themselves.
Fair Value
- - ----------
The derivative instruments used in the Partnership's trading activities are
marked to market daily with the resulting unrealized gains or losses recorded in
the Statement of Financial Condition and the related profit loss reflected in
trading revenues in the Statements of Operations The contract/notional values
of the Partnership's open derivative instrument positions as of March 31, 1996
and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------- ----------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- --------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Financial
Instruments $ 6,037,225 $35,602,446 $60,423,117 $12,775,061
Stock indices 1,299,870 141,558 1,298,009 -
Commodities 1,169,148 191,160 2,371,584 314,641
Currencies 3,187,336 5,668,709 1,809,197 4,175,157
Energy 407,446 - 1,253,705 649,123
Metals 558,656 847,701 1,122,026 1,094,973
--------------- ---------------- ---------------- ------------
$12,659,681 $42,451,574 $68,277,638 $19,008,955
=============== ================ ================ ============
</TABLE>
Substantially all of the Partnership's derivative instruments outstanding as of
March 31, 1996 expire within one year.
The contract/notional value of the Trading Partnership's exchange-traded and
non-exchange-traded derivative instrument positions as of March 31, 1996 and
December 31, 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------- -----------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Exchange
traded $10,727,778 $38,512,036 $65,942,066 $14,598,247
Non-Exchanged
traded 1,931,903 3,939,538 2,335,572 4,410,708
------------- ---------------- --------------- ----------------
$12,659,681 $42,451,574 $68,277,638 $19,008,955
============= ================ =============== ================
</TABLE>
The average fair value of the Partnership's derivative instrument positions
which were open as of the end of each calendar month during the quarter ended
March 31, 1996 and the year ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------- ----------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Financial
Instruments $23,124,304 $41,181,108 $45,598,130 $ 8,975,238
Stock indices 1,780,812 141,557 1,268,891 666,144
Commodities 1,685,862 256,910 1,356,870 248,020
Currencies 4,724,446 8,151,176 9,023,216 8,502,644
Energy 336,475 529,411 643,850 483,785
Metals 1,503,599 627,993 1,493,806 1,852,858
--------------- ---------------- ---------------- ----------------
$33,155,498 $50,888,155 $59,384,763 $20,728,689
=============== ================ ================ ================
</TABLE>
8
<PAGE>
A portion of the amounts indicated as off-balance sheet risk reflects offsetting
commitments to purchase and sell the same derivative instrument on the same date
in the future. These commitments are economically offsetting but are not, as a
technical matter, offset in the forward market until the settlement date.
Credit Risk
- - -----------
The risks associated with exchange-traded contracts are typically perceived to
be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases limited
in amount, in some cases not) of the members of the exchange is pledged to
support the financial integrity of the exchange. In over-the-counter
transactions, on the other hand, traders must rely solely on the credit of their
respective individual counterparties. Margins, which may be subject to loss in
the event of a default, are generally required in exchange trading, and
counterparties may also require margin in the over-the-counter markets.
The fair value amounts in the above tables represent the extent of the
Partnership's market exposure in the particular class of derivative instrument
listed, but not the credit risk associated with counterparty nonperformance.
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized gain, if any, included in the Statements of
Financial Condition. The Partnership also has credit risk because the sole
counterparty or broker with respect to most of the Partnership's assets is MLF.
As of March 31, 1996 and December 31, 1995, $4,086,532 and $5,355,684 of the
Partnership's assets, respectively, were held in segregated accounts at MLF in
accordance with Commodity Futures Trading Commission regulations.
The gross unrealized gain and the net unrealized gain (loss) on the
Partnership's open derivative instrument positions as of March 31, 1996 and
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Gain Gain (Loss) Gain Gain (Loss)
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Exchange
traded $201,118 $151,212 $456,205 $338,056
Non-Exchanged
traded 29,862 7 46,430 (17,308)
------------ -------- -------- --------
$230,980 $151,219 $502,635 $320,748
=================================================
</TABLE>
The Partnership controls credit risk by dealing almost exclusively with Merrill
Lynch entities as brokers and counterparties.
7. NET INCOME (LOSS) PER SERIES
The profit and loss of the Series A and Series B units for the quarters ended
March 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ------------------
Series A Series B Series A Series B
---------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profits:
Realized $(123,041) $(34,085) $494,436 $203,598
Change in unrealized (130,983) (38,546) 50,643 25,604
--------- -------- -------- --------
Total trading results (254,024) (72,631) 545,079 229,202
Interest income 61,932 18,819 108,996 35,463
--------- -------- -------- --------
Total revenues (192,092) (53,812) 654,075 264,665
--------- -------- -------- --------
EXPENSES:
Profit shares 1,008 1,329 24,382 11,024
Brokerage commissions 121,071 37,809 167,690 62,821
Administrative expense 3,105 1,080 - -
--------- -------- -------- --------
Total expenses 125,184 40,218 192,072 73,845
--------- -------- -------- --------
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $(317,276) $(94,030) $462,003 $190,820
========= ======== ======== ========
NET INCOME (LOSS) PER UNIT:
Weighted average number of
units outstanding 48,373 13,934 76,649 24,304
--------- -------- -------- --------
Weighted average net (loss)
income per Unit $(6.56) $(6.75) $6.03 $7.85
========= ======== ======== ========
</TABLE>
Item 2: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Operational Overview: Advisor Selections
- - ----------------------------------------
Due to the nature of the Fund's business, its results of operations depend
on MLIP's ability to select Advisors and determine the appropriate percentage of
each series' assets to allocate to them for trading, as well as the Advisors'
ability to recognize and capitalize on trends and other profit opportunities in
different sectors of the world commodity markets. MLIP's Advisor selection
procedure and leveraging analysis, as well as the Advisors' trading methods, are
confidential, so that substantially the only information that can be furnished
regarding the Fund's results of operations is contained in the performance
record of its trading. Unlike operating businesses, general economic or
seasonal conditions do not directly affect the profit potential of the Fund, and
its past performance is not necessarily indicative of future results. Because
of the speculative nature of its trading, operational or economic trends have
little relevance to the Fund's results. MLIP believes, however, that there are
certain market conditions, for example, markets with strong price trends, in
which the Fund has a better likelihood of being profitable than in others.
As of April 1, 1996, the Partnership's assets were allocated as follows:
SERIES A UNITS:
--------------
<TABLE>
<CAPTION>
%
TRADING ADVISOR SECTOR ALLOCATION
- - --------------- ----------- -----------
<S> <C> <C>
John W. Henry & Co., Inc. Financial/
Metals 26.37
Chesapeake Capital Corporation Diversified 25.40
SJO. Inc. Financials 37.10
Cash 11.13
------
100.00%
</TABLE>
SERIES B UNITS:
--------------
<TABLE>
<CAPTION>
%
TRADING ADVISOR SECTOR ALLOCATION
- - --------------- -------- -----------
<S> <C> <C>
John W. Henry & Co., Inc. Financial/
Metals 32.58
Chesapeake Capital Corporation Diversified 31.29
SJO. Inc. Financials 36.13
------
100.00%
</TABLE>
MLIP expects to continue to change both allocations and Advisor selections
from time to time without advance notice to existing investors.
Results of Operations - General
- - -------------------------------
MLIP believes that multi-Advisor futures funds should be regarded as
medium- to long-term investments but, unlike an operating business, it is
difficult to identify "trends" in the Fund's operations and virtually impossible
to make any predictions regarding future results based on results to date.
Markets in which sustained price trends occur with some frequency tend to
be more favorable to managed futures investments than "whipsaw," "choppy"
markets, but (i) this is not always the case, (ii) it is impossible to predict
when trending markets will occur and (iii) different Advisors are affected
differently by trends in general as well as by particular types of trends.
The Fund controls credit risk in its trading in the derivatives markets by
trading only through Merrill Lynch entities which MLIP believes to be
creditworthy. The Fund attempts to control the market risk inherent in its
derivatives trading by utilizing a multi-advisor, multi-strategy structure.
This structure purposefully attempts to diversify the Fund's Advisor group among
different strategy
10
<PAGE>
types and market sectors in an effort to reduce risk (although the Fund's
portfolio currently emphasizes technical and trend-following approaches).
Performance Summary
- - -------------------
SERIES A UNITS:
--------------
During the first quarter of 1995, the Fund's average month-end Net Assets
equalled $6,670,996, and the Fund recognized gross trading gains of $545,079 or
9.80% of such average month-end Net Assets. Brokerage commissions of $167,690
or 2.5% and Profit Shares of $24,382 or .37% of average month-end Net Assets
were paid. Interest income of $108,996 or 1.63% of average month-end Net Assets
resulted in a net gain of $462,003 or 5.79% of average month-end Net Assets,
which resulted in a 5.86% increase in the Net Asset Value per Unit since
December 31, 1994.
During the first quarter of 1996, the Fund's average month-end Net Assets
equalled $5,598,857, and the Fund recognized gross trading losses of $(254,024)
or (4.54)% of such average month-end Net Assets. Brokerage commissions of
$121,071 or 2.16%, Administrative expenses of $3,105 or 0.06% and Profit Shares
of $1,008 or 0.02% of average month-end Net Assets were paid. Interest income
of $61,932 or 1.11% of average month-end Net Assets resulted in a net loss of
$317,276 or 5.67% of average month-end Net Assets, which resulted in a (5.69)%
decrease in the Net Asset Value per Unit since December 31, 1995.
During the first quarter of 1996 and 1995, the Fund experienced 3
profitable months and 3 unprofitable months.
MONTH-END NET ASSET VALUE PER SERIES A UNIT
Jan. Feb. Mar.
------- ------- -------
1995 $105.35 $109.07 $113.74
------- ------- -------
1996 $121.53 $113.75 $111.26
------- ------- -------
SERIES B UNITS:
--------------
During the first quarter of 1995, the Fund's average month-end Net Assets
equalled $2,183,067, and the Fund recognized gross trading gains of $229,202 or
10.50% of such average month-end Net Assets. Brokerage commissions of $62,821
or 2.88% and Profit Shares of $11,024 or .43% of average month-end Net Assets
were paid. Interest income of $35,463 or 1.62% of average month-end Net Assets
resulted in net income of $190,820 or 8.74% of average month-end Net Assets,
which resulted in a 7.28% increase in the Net Asset Value per Unit since
December 31, 1994.
During the first quarter of 1996, the Fund's average month-end Net Assets
equalled $1,684,083, and the Fund recognized gross trading losses of $(72,631)
or (4.31)% of such average month-end Net Assets. Brokerage commissions of
$37,809 or 2.25%, Administrative expenses of $1,080 or 0.06% and Profit Shares
of $1,329 or .08% of average month-end Net Assets were paid. Interest income of
$18,819 or 1.12% of average month-end Net Assets resulted in a net loss of
$(94,030) or (5.58)% of average month-end Net Assets, which resulted in a 5.93%
decrease in the Net Asset Value per Unit since December 31, 1995.
During the first quarter of 1996 and 1995, the Fund experienced 3
profitable months and 3 unprofitable months.
MONTH-END NET ASSET VALUE PER SERIES B UNIT
Jan. Feb. Mar.
------- ------- -------
1995 $108.73 $113.56 $119.63
------- ------- -------
1996 $129.52 $120.41 $117.49
------- ------- -------
Importance of Market Factors
- - ----------------------------
Comparisons between the Fund's performance in a given period in one fiscal
year to the same period in a prior year are unlikely to be meaningful, given the
uncertainty of price movements in the markets traded by the Fund. In general,
MLIP expects that the Fund is most likely to trade successfully in markets which
exhibit strong and sustained price trends. The current Advisor group emphasizes
technical and trend-following methods. Consequently, one would expect that in
trendless, "choppy" markets the Fund would likely be unprofitable, while in
markets in which major price movements occur, the Fund would have its best
profit potential (although there could be no assurance that the Fund would, in
fact, trade profitably). However, trend-followers not infrequently will miss
major price movements, and market corrections can result in rapid and material
losses (sometimes as much as 5% in a single day). Although MLIP monitors market
conditions and Advisor performance on an ongoing basis in overseeing the Fund's
trading, MLIP does not attempt to "market forecast" or to "match" trading styles
with predicted market conditions. Rather, MLIP concentrates on quantitative and
qualitative analysis of prospective Advisors, as well as on statistical studies
of the historical performance parameters of different Advisor combinations in
selecting Advisors and allocating and reallocating Fund assets among them.
11
<PAGE>
Because managed futures advisors' strategies are proprietary and
confidential and market movements unpredictable, selecting advisors to implement
speculative trading strategies involves considerable uncertainty. Furthermore,
the concentration of the Fund's current Advisor portfolio, both in terms of the
number of managers retained and the common emphasis of their strategies on
technical and trend-following methods, increases the risk that unexpectedly bad
performance, turbulent market conditions or a combination of the two will result
in significant losses.
MLIP's Advisor Selections
- - -------------------------
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally intends to make a medium- to long-term commitment
to all Advisors selected. However, there can be no assurance as to the
frequency or number of the Advisor changes which may take place in the future,
or as to how long any of the current Advisors will continue to manage assets for
the Fund.
Liquidity
- - ---------
Most of the Partnership's assets are held as cash which, in turn, is used
to margin its futures positions and earns interest income and is withdrawn, as
necessary, to pay redemptions and fees.
The futures contracts in which the Partnership trades may become illiquid
under certain market conditions. Commodity exchanges limit fluctuations in
futures prices during a single day by regulations referred to as "daily limits."
During a single day no trades may be executed at prices beyond the daily limit.
Once the price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
generally neither be taken nor liquidated unless traders are willing to effect
trades at or within the limit. Futures contracts have occasionally moved to the
daily limit for several consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly liquidating its futures
(including its options) positions. There are no limitations on the daily price
moves in trading foreign currency forward contracts through banks, although
illiquidity may develop in the forward markets due to large spreads between
"bid" and "ask" prices quoted. (Forward contracts are the bank version of
currency futures contracts and are not traded on exchanges.)
Capital Resources
- - -----------------
The Partnership does not have, nor does it expect to have, any capital
assets and has no material commitments for capital expenditures. The
Partnership uses its assets to supply the necessary margin or premiums for, and
to pay any losses incurred in connection with, its trading activity and to pay
redemptions and fees.
Inflation is not a significant factor in the Fund's profitability,
although inflationary cycles can give rise to the type of major price movements
which can have a materially favorable or adverse impact on the Fund's
performance.
Changes in the level of prevailing interest rates (a factor generally
associated with inflation) could have a material effect on the percentage of the
total capital attributable to various series of Units which is committed to
trading, as interest rates affect the calculation of the discounted minimum Net
Asset Value per Unit which Merrill Lynch & Co., Inc. has guaranteed to
investors.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
12
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
There are no exhibits required to be filed as part of this document.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the first quarter of fiscal
1996.
13
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SECTOR STRATEGY FUND/SM/ IV L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: May 13, 1996 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: May 13, 1996 By /s/JAMES M. BERNARD
-------------------
James M. Bernard
Chief Financial Officer,
Treasurer and Senior Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS OF OPERATIONS,
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000883974
<NAME> The Sector Strategy Fund IV L.P.
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
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