<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 September 30, 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 12 pages.
1
<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>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
- ------
Accrued interest $ 18,391 $ 32,078
Equity in commodity futures trading accounts
Cash and option premiums 5,028,153 7,732,274
Net unrealized gain on open contracts 395,903 320,748
-------------- ---------------
TOTAL $5,442,447 $8,085,100
============== ===============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $ 201,536 $ 312,195
Brokerage commissions payable (Note 2) 39,474 56,042
Profit shares payable - 9,701
Administrative expense payable (Note 2) 1,033 -
-------------- ---------------
Total liabilities 242,043 377,938
-------------- ---------------
PARTNERS' CAPITAL:
General Partner:
(671 and 671 Series A Units outstanding) 77,917 79,108
(214 and 214 Series B Units outstanding) 26,483 26,769
Limited Partners:
(35,696 and 48,856 Series A Units outstanding) 4,147,467 5,762,501
(7,677 and 14,723 Series B Units outstanding) 948,537 1,838,784
-------------- ---------------
Total partners' capital 5,200,404 7,707,162
-------------- ---------------
TOTAL $5,442,447 $8,085,100
============== ===============
NET ASSET VALUE PER UNIT
SERIES A $116.19 $117.95
======= =======
SERIES B $123.56 $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 For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
----------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $ 20,194 $(232,877) $(32,952) $1,558,372
Change in unrealized 254,884 (223,364) 75,155 (834,677)
----------------- ---------------- --------------- -----------------
Total trading results 275,078 (456,241) 42,203 723,695
----------------- ---------------- --------------- -----------------
Interest income 58,276 114,170 212,047 389,552
----------------- ---------------- --------------- -----------------
Total revenues 333,354 (342,071) 254,250 1,113,247
----------------- ---------------- --------------- -----------------
EXPENSES:
Profit shares - - 3,194 82,529
Brokerage commissions (Note 2) 115,248 185,502 413,550 627,987
Administrative expense (Note 2) 3,018 - 10,867 -
----------------- ---------------- --------------- -----------------
Total expenses 118,266 185,502 427,611 710,516
----------------- ---------------- --------------- -----------------
NET INCOME (LOSS) $215,088 $(527,573) $(173,361) $ 402,731
================= ================ =============== =================
NET INCOME (LOSS) PER UNIT:
Weighted average number of units
outstanding 46,896 80,015 55,113 89,104
====== ======= ======= ======
Weighted average net income
(loss) per Limited Partner unit
and General Partner unit $4.59 $(6.59) $(3.15) $4.52
===== ======= ======= =====
</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 nine months ended September 30, 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 - - 281,098 116,330 3,870 1,433 402,731
Redemptions (24,437) (7,468) (2,734,143) (883,112) - - (3,617,255)
------------ ------------ ------------ ------------ ------------ ------------ -------------
PARTNERS' CAPITAL,
SEPTEMBER 30, 1995 55,214 17,585 $5,974,932 $1,985,035 $133,954 $43,176 $ 8,137,097
============ ============ ============ =========== ============ ============ =============
PARTNERS' CAPITAL, 49,527 14,937 $5,762,501 $1,838,784 $ 79,108 $26,769 $ 7,707,162
DECEMBER 31, 1995
Net loss - - (125,495) (46,389) (1,191) (286) (173,361)
Redemptions (13,160) (7,046) (1,489,539) (843,858) - - (2,333,397)
------------ ------------ ------------ ------------ ------------ ------------ -------------
PARTNERS' CAPITAL,
SEPTEMBER 30, 1996 36,367 7,891 $4,147,467 $ 948,537 $ 77,917 $26,483 $ 5,200,404
============ ============ ============ =========== ============ ============ =============
</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
These financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present
fairly the financial position of The SECTOR Strategy Fund(SM) IV L.P. (the
"Partnership") as of September 30, 1996 and the results of its operations
for the nine months ended September 30, 1996 and 1995. However, the
operating results for the interim periods may not be indicative of the
results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with general accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in the Partnership's Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1995 (the "Annual Report").
2. RELATED PARTY TRANSACTIONS
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 Partnership began to pay 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 nine months ended September 30, 1996 and
1995 was approximately $74 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.
3. 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 nine months ended
September 30, 1996 were as follows:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Interest rates and
stock indices $(143,248)
Commodities (31,689)
Currencies 132,388
Energy 51,907
Metals 32,845
---------------
$ 42,203
===============
</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
5
<PAGE>
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 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 September 30,
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>
Interest rates $53,865,145 $1,074,013 $60,423,117 $12,775,061
Stock indices 376,854 - 1,298,009 -
Commodities 328,945 66,352 2,371,584 314,641
Currencies 3,384,510 3,916,420 1,809,197 4,175,157
Energy 278,238 - 1,253,705 649,123
Metals 82,924 2,622,671 1,122,026 1,094,973
---------------- -------------- ---------------- --------------
$58,316,616 $7,679,456 $68,277,638 $19,008,955
================ ============== ================ ===============
</TABLE>
Substantially all of the Partnership's derivative instruments outstanding as of
September 30, 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 September 30, 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 $55,741,276 $5,191,233 $65,942,066 $14,598,247
Non-Exchange
traded 2,575,340 2,488,223 2,335,572 4,410,708
---------------- --------------- ----------------- ---------------
$ 58,316,616 $7,679,456 $68,277,638 $19,008,955
================ =============== ================= ===============
</TABLE>
6
<PAGE>
The average fair value of the Partnership's derivative instrument
positions which were open as of the end of each calendar month during the
nine months ended September 30, 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>
Interest rates $31,958,244 $20,013,892 $45,598,130 $8,975,238
Stock indices 1,336,865 443,178 1,268,891 666,144
Commodities 1,003,748 198,242 1,356,870 248,020
Currencies 5,873,336 7,535,296 9,023,216 8,502,644
Energy 332,274 529,411 643,850 483,785
Metals 708,332 1,443,103 1,493,806 1,852,858
---------------- ---------------- ----------------- ----------------
$41,212,799 $30,163,122 $59,384,763 $20,728,689
================ ================ ================= ================
</TABLE>
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 September 30, 1996 and December 31, 1995, $5,259,548 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
September 30, 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 $419,836 $379,892 $456,205 $338,056
Non-Exchange
traded 44,086 16,011 46,430 (17,308)
------------------ ------------------ ------------------ ------------------
$463,922 $395,903 $502,635 $320,748
================== ================== ================== ==================
</TABLE>
The Partnership controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
The Partnership through its normal course of business enters into various
contracts with MLF acting as its commodity broker. Pursuant to the
brokerage arrangement with MLF, such trading which results in receivables
from and payables to MLF will be offset and reported as a net receivable
or payable.
7
<PAGE>
7. NET INCOME PER SERIES
The profit and loss of the Series A and Series B units for the three and
nine months ended September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ----------------------------------
Sector A Sector B Sector A Sector B
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ 18,257 $ 1,937 $(169,300) $ (63,577)
Change in unrealized 202,805 52,079 (162,139) (61,225)
-------------- -------------- -------------- --------------
Total trading results 221,062 54,016 (331,439) (124,802)
Interest income 47,640 10,636 87,409 26,761
-------------- -------------- -------------- --------------
Total revenues 268,702 64,652 (244,030) (98,041)
-------------- -------------- -------------- --------------
EXPENSES:
Profit shares - - - -
Brokerage commissions 93,838 21,410 138,316 47,186
Administrative expense 2,406 612 - -
-------------- -------------- -------------- --------------
Total expenses 96,244 22,022 138,316 47,186
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $172,458 $42,630 $(382,346) $(145,227)
============== ============== ============== ==============
NET INCOME (LOSS) PER UNIT:
Weighted average number
of units outstanding 38,649 8,247 61,984 18,031
============== ============== ============== ==============
Weighted average net
income (loss) per
Limited Partner unit and
General Partner unit $4.46 $5.17 $(6.17) $(8.05)
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ----------------------------------
Sector A Sector B Sector A Sector B
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ (25,359) $ (7,593) $1,118,591 $439,781
Change in unrealized 65,382 9,773 (610,147) (224,530)
-------------- -------------- -------------- --------------
Total trading results 40,023 2,180 508,444 215,251
Interest income 166,741 45,306 296,984 92,568
-------------- -------------- -------------- --------------
Total revenues 206,764 47,486 805,428 307,819
-------------- -------------- -------------- --------------
EXPENSES:
Profit shares 1,325 1,869 56,781 25,748
Brokerage commissions 323,822 89,728 463,679 164,308
Administrative expense 8,303 2,564 - -
-------------- -------------- -------------- --------------
Total expenses 333,450 94,161 520,460 190,056
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $(126,686) $(46,675) $284,968 $117,763
============== ============== ============== ==============
NET INCOME (LOSS) PER UNIT:
Weighted average number
of units outstanding 43,827 11,286 68,470 20,634
============== ============== ============== ==============
Weighted average net
income (loss) per
Limited Partner unit and
General Partner unit $(2.89) $(4.14) $4.16 $5.71
============== ============== ============== ==============
</TABLE>
8
<PAGE>
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 October 1, 1996, the Partnership's assets were allocated
as follows:
<TABLE>
<CAPTION>
SERIES A Units
--------------
%
Trading Advisor Sector Allocation
--------------- ------ ----------
<S> <C> <C>
John W. Henry & Co., Inc. Financial/
Metals 25.96
Chesapeake Capital Corporation Diversified 25.99
Sjo, Inc. Financials 37.13
Cash 10.92
--------
100.00%
<CAPTION>
SERIES B Units:
--------------
%
Trading Advisor Sector Allocation
--------------- ------ ----------
<S> <C> <C>
John W. Henry & Co., Inc. Financial/
Metals 31.75
Chesapeake Capital Corporation Diversified 31.65
Sjo, Inc. Financials 36.60
--------
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 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 nine months of 1995, the Fund's average
month-end Net Assets equalled $7,053,053, and the Fund recognized gross trading
gains of $508,444 or 7.21% of such average month-end Net Assets. Brokerage
commissions of $463,679 or 6.57% and Profit Shares of $56,781 or .81% of average
month-end Net Assets were paid. Interest income of $296,984 or 4.21% of
9
<PAGE>
average month-end Net Assets resulted in a net gain of $284,968 or 4.04% of
average month-end Net Assets, which resulted in a 2.98% increase in the Net
Asset Value per Unit since December 31, 1994.
During the first nine months of 1996, the Fund's average
month-end Net Assets equalled $4,887,212, and the Fund recognized gross trading
losses of $40,023 or .82% of such average month-end Net Assets. Brokerage
commissions of $323,822 or 6.63%, Administrative expenses of $8,303 or .17% and
Profit Shares of $1,325 or .03% of average month-end Net Assets were paid.
Interest income of $166,741 or 3.41% of average month-end Net Assets resulted in
a net loss of $126,686 or 2.59% of average month-end Net Assets, which resulted
in a 1.49% decrease in the Net Asset Value per Unit since December 31, 1995.
During the first nine months of 1996 and 1995, the Fund
experienced 10 profitable months and 8 unprofitable months.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES A UNIT
- ---------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept.
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $105.35 $109.07 $113.74 $115.03 $121.12 $116.68 $110.90 $110.52 $110.64
- ---------------------------------------------------------------------------------------
1996 $121.53 $113.75 $111.26 $113.45 $111.14 $111.57 $108.83 $109.36 $116.19
- ---------------------------------------------------------------------------------------
</TABLE>
SERIES B Units:
--------------
During the first nine months of 1995, the Fund's average
month-end Net Assets equalled $2,217,277, and the Fund recognized gross trading
gains of $215,251 or 9.71% of such average month-end Net Assets. Brokerage
commissions of $164,308 or 7.41% and Profit Shares of $25,748 or 1.16% of
average month-end Net Assets were paid. Interest income of $92,568 or 4.17% of
average month-end Net Assets resulted in net income of $117,763 or 5.31% of
average month-end Net Assets, which resulted in a 3.43% increase in the Net
Asset Value per Unit since December 31, 1994.
During the first nine months of 1996, the Fund's average
month-end Net Assets equalled $1,310,597, and the Fund recognized gross trading
gains of $2,180 or .17% of such average month-end Net Assets. Brokerage
commissions of $89,728 or 6.85%, Administrative expenses of $2,564 or .20% and
Profit Shares of $1,869 or .14% of average month-end Net Assets were paid.
Interest income of $45,306 or 3.46% of average month-end Net Assets resulted in
a net loss of $46,675 or 3.56% of average month-end Net Assets, which resulted
in a 1.06% decrease in the Net Asset Value per Unit since December 31, 1995.
During the first nine months of 1996 and 1995, the Fund
experienced 10 profitable months and 8 unprofitable months.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES B UNIT
- ---------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept.
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $108.73 $113.56 $119.63 $121.28 $129.15 $123.24 $115.75 $115.23 $115.34
- ---------------------------------------------------------------------------------------
1996 $129.52 $120.41 $117.49 $120.07 $117.44 $117.93 $114.71 $115.38 $123.56
- ---------------------------------------------------------------------------------------
</TABLE>
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.
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.
10
<PAGE>
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 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.
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 nine months
of fiscal 1996.
11
<PAGE>
SIGNATURES
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: November 11, 1996 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: November 11, 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>
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<NAME> SECTOR STRATEGY FUND IV L.P.
<S> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
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