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THE PREFERRED GROUP
OF MUTUAL FUNDS
Semiannual Report
December 31, 1998
(unaudited)
<PAGE>
Performance Data 1
Our Message to You 2
Funds & Investment Objectives 4
Performance Information & Benchmarks 5
Investment Review 6
Statements of Assets & Liabilities 22
Statements of Operations 24
Statements of Changes in Net Assets 26
Financial Highlights 30
Schedules of Investments 34
Notes to Financial Statements 54
Shareholder Privileges 63
<PAGE>
The Preferred Group of Mutual Funds
<TABLE>
<CAPTION>
Performance Data
Beginning Ending Total Current Income Capital Gains
Fund Name NAV NAV Return* Yield + Dividends Distributions
(per share) (per share) (per share) (per share)
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Growth $21.97 $19.76 12.50% - - $4.96
- --------------------------------------------------------------------------------------------------------------------
Value 26.49 24.81 (1.39) - $.26 1.05
- --------------------------------------------------------------------------------------------------------------------
International 16.18 14.95 (3.66) - .17 .47
- --------------------------------------------------------------------------------------------------------------------
Small Cap 15.59 13.14 (11.95) - .02 .57
- --------------------------------------------------------------------------------------------------------------------
Asset Allocation 15.65 16.61 14.20 - .46 1.02
- --------------------------------------------------------------------------------------------------------------------
Fixed Income 10.42 10.22 2.81 5.82% .62 .19
- --------------------------------------------------------------------------------------------------------------------
S.T. Gov't. Securities 9.77 9.77 2.55 4.67 .52 -
- --------------------------------------------------------------------------------------------------------------------
Money Market++ 1.00 1.00 2.56 4.61 .05 -
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total return includes reinvestment of dividends and capital gains
distributions (not annualized).
+ The yield shown for the Fixed Income and Short-Term Government Securities
Funds is the 30-day current yield as of 12/31/98. The yield shown for the
Money Market Fund is a seven-day current yield as of 12/31/98, in accordance
with Securities and Exchange Commission rules for reporting yields of money
market funds.
++ An investment in the Money Market Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
The seven-day current yield for the Money Market Fund more closely reflects the
current earnings of the Fund than does the total return quotation.
The performance data quoted represents past performance and does not guarantee
future results. Investment return and principal value will fluctuate so that,
when redeemed, an investor's shares may be worth more or less than their
original cost.
<PAGE>
Our Message To You
December 31, 1998 (unaudited)
PHOTO OF:Ronald R. Rossmann
Ronald R. Rossmann
President
Dear Preferred Group Shareholder:
I am pleased to present you with The Preferred Group's semiannual report for the
six-month period ended December 31, 1998. This report provides detailed
information on your Funds' performance including fund holdings, financial data
and commentary from each of the portfolio managers.
Market Commentary
The second half of 1998 continued to test investors' tolerance for wild swings
and uncertainty. Stocks began plummeting in the third quarter, with the Dow
Jones Industrial Average of 30 stocks hitting a low for the six-month period of
7,615 on September 10--signaling what many thought to be the beginning of a bear
market. The Federal Reserve responded by further lowering interest rates. This
set the stage for a small group of large stocks to post strong returns, and
allowed large cap indices to recover in the fourth quarter. Technology and
pharmaceutical stocks were among the sector winners, while oil stocks posted big
losses.
The Dow Jones Industrials ended the six-month period up 2.6%, while the S&P 500
ended with a 9.4% gain. Analysts attribute the wide spread to the fact that the
S&P holds more pure growth stocks than does the Dow. Many investors continued to
be concerned about the narrowing of the markets, with a small band of large cap
stocks driving the U.S. market's gains. Indeed, it was a difficult period for
small caps and other less prominent stocks. The Russell 2000 fell a staggering
20% in the third quarter; despite a fourth quarter rally, the small cap index
finished the six-month period down 7.1%.
Global turmoil in Asia dominated third quarter international returns, but
foreign stocks rallied during the fourth quarter. European stocks provided a
haven for foreign investors, while Latin America floundered. Foreign markets, as
measured by the EAFE Index, gained 3.7% for the six-month period.
Bond markets continued to benefit from investors' flight-to-quality. On October
1, as jittery investors moved toward Treasury securities, bond yields briefly
fell below 5% for the first time since 1967. Salomon Bros. BIG Index--a common
benchmark for investment grade bonds--was up 4.6% for the six-month period.
A Sign of the Times
The violent ups and downs of today's markets are enough to make even the most
dedicated investor a bit edgy and seem to call for a word of encouragement. You
might find that taking a historical perspective and moderating your expectations
may help settle your nerves. It's true that since 1926, large company stocks (as
measured by the S&P 500) have averaged a compound annual growth rate of 11%.*
However, this is an average return. And since there have never been four
consecutive years of such
2
<PAGE>
Our Message To You
The Preferred Group of Mutual Funds
outstanding large stock returns like the ones we've enjoyed from 1995-98, it's
reasonable to expect a correction or at least a return to a more "average"
return. It may also help to remember that the market doesn't always go up from
year to year. Since 1926, on average, large company stocks have had a negative
return nearly one out of every three years. And of the years with negative
returns, 40% were in double-digits.*
What's an investor to do? Studies show that it's asset allocation and length of
time invested that have the greatest impact on returns. So it's important to
make sure your asset allocation matches your overall risk tolerance and time
horizon. Remind yourself that the longer you can stay invested, the less
significant short-term ups and downs really are--then adjust your allocation to
match your time horizon. Take a long-view when appropriate.
Preferred Group Highlights
On November 1, 1998, the Preferred Small Cap Fund celebrated its third
anniversary and has developed a respected track record. For the Fund's returns
on various time periods, please see page 13. The Preferred Small Cap Fund is a
value-oriented fund investing in companies with small equity capitalizations.
Our Fund family continued to enjoy recognition during the last six months in
such publications as Bloomberg Personal Finance, Forbes, Fortune, Investor's
Business Daily, Kiplinger's Personal Finance Magazine, Money Magazine, Pensions
& Investments, The Chicago Tribune, The Wall Street Journal and Worth.
As I reflect on The Preferred Group's recent achievements, I am reminded of the
new year that lies ahead. Serving you--our shareholder---continues to be our
number one priority. Please call Investor Services at 1-800-662-GROW with your
suggestions and comments.
Thank you for your confidence and continued support.
Sincerely,
/s/Ronald R. Rossmann
Ronald R. Rossmann
*Source: Ibbotson Associates
3
<PAGE>
Funds & Investment Objectives
December 31, 1998 (unaudited)
Preferred Growth Fund
Seeks long-term capital appreciation by investing its assets primarily in equity
securities believed to offer the potential for capital appreciation, including
stocks of companies experiencing above-average earnings growth.
Preferred Value Fund
Seeks capital appreciation and current income. The Fund invests primarily in
equity securities believed to be undervalued and that offer above-average
potential for capital appreciation.
Preferred International Fund
Seeks long-term capital appreciation by investing its assets primarily in equity
securities traded principally on markets outside the United States.
Preferred Small Cap Fund
Seeks long-term capital appreciation through investments in companies with small
equity capitalizations.
Preferred Asset Allocation Fund
Seeks both capital appreciation and current income by allocating its assets
among stocks, bonds and high quality money market instruments.
Preferred Fixed Income Fund
Seeks a high level of current income consistent with investment in a diversified
portfolio of high quality debt securities.
Preferred Short-Term
Government Securities Fund
Seeks high current income consistent with preservation of capital, primarily
through investment in U.S. Government Securities.
Preferred Money Market Fund
Seeks the maximum current income believed to be consistent with preservation of
capital and maintenance of liquidity by investing in a portfolio of short-term,
fixed income instruments.
4
<PAGE>
The Preferred Group of Mutual Funds
Performance Information
Historical performance:
Historical performance can be evaluated in several ways. At the end of each
Fund's Discussion & Analysis section, we have provided a look at the total
percentage change in value, the average annual percentage change and the
growth of a hypothetical $10,000 investment. A comparison of this historical
data to an appropriate benchmark is also provided. These performance figures
include changes in a Fund's share price, plus reinvestment of any dividends
(or income) and any capital gains (profits the Fund earns when it sells
securities that have grown in value).
Cumulative total returns:
Cumulative total returns reflect the Fund's actual performance over a set
period: six months, one year, five years, and since inception.
Average annual total returns:
Average annual total returns are hypothetical. A Fund's actual (or
cumulative) return indicates what would have happened if the Fund had
performed at a constant rate each year. For your information, all Funds must
provide average annual total returns as of the most recent calendar quarter
-- in this case, December 31, 1998. This allows you to compare Funds from
different complexes on an equal basis.
$10,000 hypothetical investment:
The "$10,000 investment since inception" illustrates the value of your
investment as of December 31, 1998, had you invested $10,000 when the Fund
started.
Benchmarks - What Are They and What Do They Tell Me?
Benchmarks are simply a point of reference for comparison. Mutual funds
typically compare themselves to a suitable stock or bond market index to gauge
their performance over the long term (3-5 years). An index is really a
fictitious unmanaged portfolio. It does not trade or incur any expenses. In that
sense, a fund must actually outperform its benchmark (gross return) by the
amount of its management fees and other expenses in order for its reported
performance (net of fees) to match its benchmark. Because the Funds are managed
portfolios investing in a wide range of securities, the securities owned by a
Fund will not match those included in the relevant benchmark. (Please refer to
the Investment Review section of this report for detailed descriptions of each
Fund's benchmark.)
- --------------------------------------------------------------------------------
Preferred Growth Fund
S&P 500 Index
- --------------------------------------------------------------------------------
Preferred Value Fund
S&P 500 Index
- --------------------------------------------------------------------------------
Preferred International Fund
EAFE Index
- --------------------------------------------------------------------------------
Preferred Small Cap Fund
Russell 2000 Index
- --------------------------------------------------------------------------------
Preferred Asset Allocation Fund
65% - S&P 500 Index
30% - Lehman Brothers Long-Term Treasury Index
5% - 90-Day Treasury Bills
- --------------------------------------------------------------------------------
Preferred Fixed Income Fund
Salomon Brothers Broad Investment Grade (BIG) Index
- --------------------------------------------------------------------------------
Preferred Short-Term Government Securities Fund
Merrill Lynch 1-3 Year Treasury Index
- --------------------------------------------------------------------------------
Preferred Money Market Fund
IBC's Money Fund Report Average/All Taxable
- --------------------------------------------------------------------------------
5
<PAGE>
Investment Review
December 31, 1998 (unaudited)
Preferred Growth Fund
Investment Objective:
The Preferred Growth Fund seeks long-term capital appreciation by investing
its assets primarily in equity securities believed to offer the potential
for capital appreciation, including stocks of companies experiencing
above-average earnings growth.
Portfolio Manager Profile:
Portfolio Manager: Robert B. Corman, CFA, CPA
- --------------------------------------------------------------------------------
Title: Director/Senior Vice President,
Jennison Associates LLC
- --------------------------------------------------------------------------------
Last Five Years' Experience: Portfolio Manager/Research Analyst at
Jennison Associates. Bob assumed management of the Preferred Growth Fund
in January 1998.
- --------------------------------------------------------------------------------
Education: B.A. - University of Wisconsin; MBA - University of Chicago;
Chartered Financial Analyst; Certified Public Accountant
Discussion & Analysis:
For the six-month period ended December 31, 1998, the Preferred Growth Fund
advanced by 12.5%, compared with a gain of 9.4% for the S&P 500 Index.
Since inception, the Fund has advanced at an average rate of 22.3% per
year, compared to 21.3% for the benchmark.
The second half of 1998 was first defined by a sell-off that pushed the S&P
500 down 9.9% during the third quarter, then by an impressive rebound which
lifted the index to an astounding 21.3% during the fourth quarter. In late
August, fears of a global financial crisis erupted in the wake of Russia's
currency devaluation, pushing yields of U.S. Treasuries down to historic
lows as investors fled to the relative security of U.S. bonds. Sizable
losses realized by hedge funds during this time period also exacerbated the
market's anxiety, adding further downside pressure to stocks. In
mid-October, however, confidence returned in the form of a 25 basis point
interest rate cut--the first of three such moves by the Federal Reserve.
Technology stocks led the market's advance during the period.
Communications, computer software and networking stocks all outperformed
the market by a wide margin during this time period. This is evidenced by
the performance of MCI WorldCom, Inc. (4.8% of net assets), Oracle
Corporation (2.6%) and Cisco Systems, Inc. (2.9%), which comprised the
portfolio's top three performance contributors. Strong consumer spending
also benefited the retail sector, with Home Depot, Inc. (3.1%) and Gap,
Inc. (2.0%) enjoying strong revenue growth. On the negative side, CIENA
Corporation, which was eliminated from the portfolio, declined sharply
after its proposed merger with Tellabs, Inc. was terminated. Other stocks
we eliminated include Monsanto, suffering from a breakdown in merger talks
with American Home Products Corporation, and Schlumberger Limited,
adversely affected as oil prices slumped to new lows during the later part
of the year.
The U.S. economy exited the year in a strong position. We believe growth
will likely moderate to a more sustainable rate over the course of 1999.
This growth may be offset by Latin America--which we think is likely to
experience a difficult year, particularly after Brazil's devaluation.
Addition-ally we believe Asia, while improving from 1998, may not be a
positive contributor to growth until the later portion of the year. We feel
that corporate profit growth will be challenged throughout 1999, as global
demand struggles to recover. However, we believe that continued benefits
from the restructuring in the form of lower costs and improved productivity
may allow profits to expand, allowing further gains despite the
historically high level of current valuations.
- Jennison Associates
6
<PAGE>
The Preferred Group of Mutual Funds
Investment Review
Top Ten Holdings: (% of total net assets)
- --------------------------------------------------------------------------------
1. MCI Worldcom Inc. 4.8%
- --------------------------------------------------------------------------------
2. Microsoft Corp. 3.2%
- --------------------------------------------------------------------------------
3. Home Depot Inc. 3.1%
- --------------------------------------------------------------------------------
4. General Electric Co. 3.0%
- --------------------------------------------------------------------------------
5. Chase Manhattan Corp. 3.0%
- --------------------------------------------------------------------------------
6. Cisco Systems Inc. 2.9%
- --------------------------------------------------------------------------------
7. Citigroup Inc. 2.7%
- --------------------------------------------------------------------------------
8. Oracle Corp. 2.6%
- --------------------------------------------------------------------------------
9. Schering Plough Corp. 2.6%
- --------------------------------------------------------------------------------
10. Morgan Stanley Dean Witter & Co. 2.2%
Performance:
The following information illustrates the historical
performance of the Preferred Growth Fund compared with the S&P 500 Index.
The S&P 500 Index is the most common index for the overall U.S. stock market.
It comprises 500 of the leading U.S. companies representing major industries.
The Fund may be more concentrated and subject to greater risk than other common
stock mutual funds having a greater number of holdings.
Past performance is not necessarily indicative of future results. Investment
return and principal value will fluctuate, so that, when redeemed, an investor's
shares may be worth more or less than their original cost. The Preferred Growth
Fund's inception date was July 1, 1992. This report will provide ten-year
performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
Cumulative Total Return:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
Preferred
Growth Fund 12.50% 35.58% 168.49% 271.29%
S&P 500 Index 9.35% 28.75% 193.98% 250.43%
* July 1, 1992
Average Annual Total Return:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
Preferred 35.58% 21.84% 22.34%
Growth Fund
S&P 500 Index 28.75% 24.07% 21.28%
* July 1, 1992
CHART
A $10,000 Investment Since Inception:
Preferred Growth Fund S&P 500 Index
7/1/92 10000 10000
12/31/92 11915 10837
6/30/93 12425 11359
12/31/93 13828 11921
6/30/94 12468 11514
12/31/94 13676 12074
6/30/95 16733 14510
12/31/95 17554 16599
6/30/96 19237 18291
12/31/96 20868 20429
6/30/97 27732 24612
12/31/97 27385 27218
6/30/98 33003 32046
12/31/98 37129 35043
7
<PAGE>
Investment Review
December 31, 1998 (unaudited)
Preferred Value Fund
Investment Objective:
The Preferred Value Fund seeks capital appreciation and current income. The
Fund invests primarily in equity securities believed to be undervalued and
that offer above-average potential for capital appreciation.
Portfolio Manager Profile:
Portfolio Manager: John G. Lindenthal
- --------------------------------------------------------------------------------
Title: Managing Director of Oppenheimer Capital
- --------------------------------------------------------------------------------
Last Five Years' Experience: Portfolio Manager at Oppenheimer Capital.
John has managed the Preferred Value Fund since its inception on
July 1, 1992.
- --------------------------------------------------------------------------------
Education: B.S., MBA - University of Santa Clara
Discussion & Analysis:
During the six-month period ended December 31, 1998, the Preferred Value
Fund returned -1.4%, compared to a 9.4% advance by the S&P 500 Index. Since
its inception, the Fund has delivered an average annual return of 18.6%,
compared to a 21.3% average annual increase in the benchmark.
During the six month period, the market was characterized by exceptionally
strong crosscurrents, including wide performance disparities among
individual stocks. The performance of the S&P 500 Index was driven by a
limited number of very large cap growth stocks. Market cycles that favor
one type of investing (growth vs. value) are common, and we are confident
that the pendulum will swing back to value investing in time.
Two stocks which hurt the Fund's performance during the period were AMR
Corporation (2.9% of net assets) and Boeing (1.9%). AMR, the parent of
American Airlines, performed poorly despite the fact it registered record
earnings performance. This occurred as the market reacted to concerns that
the global economic slowdown and airline capacity increases will damage
1999 results. We believe that airlines are more focused on balancing
supply/demand and will earn solid returns throughout the economic cycle. In
the case of Boeing, the stock performed poorly as the company's production
difficulties and impact of the Asian economy became more evident. While we
are disappointed in the turn of events, we believe that the stock is
trading at a very low valuation. Our opinion is that its problems are
mostly cost-related and within their control to correct.
Several stocks made significant contributions to the Fund's performance.
Federal Home Loan Mortgage Corp. (5.7%), one of two dominant companies in
the business of insuring home mortgages, has been able to consistently
generate returns on equity in excess of 20% with little fear of being
undercut by new competition. In the case of Aflac Inc. (3.8%), new product
introductions and dominance in supplemental health insurance in Japan
allowed the company to grow rapidly despite that nation's economic
travails. Sprint Corp.'s (3.7%) stock also continued to perform well.
We focus on individual companies and try to understand where their
businesses are going over the next several years, not on where the stock
market is heading in the next few months. We want to invest in superior
businesses that are underpriced in the stock market. We define a superior
business as one which is extremely well managed, earns high returns on
capital, has a dominant competitive position to protect those returns and
uses the free cash flow resulting from those returns to create shareholder
value, such as through astute acquisitions or share repurchase.
As we enter 1999, the outlook for the economy and for corporate earnings is
more unsettled than is usually the case. We think the rate of economic
growth in the U.S. is likely to slow in the coming year and that corporate
earnings will be under pressure. The positives include an
8
<PAGE>
The Preferred Group of Mutual Funds
Investment Review
information age that is transforming the way every business works,
favorable demographics, a federal budget surplus and essentially no
inflation. To us, this scenario dictates a careful investment approach. We
believe the challenge for investors will be to chart a course that captures
favorable returns while guarding against economic and market uncertainty.
- Oppenheimer Capital
Top Ten Holdings: (% of total net assets)
- --------------------------------------------------------------------------------
1. Citigroup Inc. 7.2%
- --------------------------------------------------------------------------------
2. Federal Home Loan Mortgage Corp. 5.7%
- -------------------------------------------------------------------------------
3. Exel Limited 4.6%
- --------------------------------------------------------------------------------
4. Intel Corp. 4.2%
- --------------------------------------------------------------------------------
5. Wells Fargo & Co. 4.1%
- --------------------------------------------------------------------------------
6. Aflac Inc. 3.8%
- --------------------------------------------------------------------------------
7. Sprint Corp. 3.7%
- --------------------------------------------------------------------------------
8. Ace Ltd. 3.4%
- --------------------------------------------------------------------------------
9. Monsanto Co. 3.4%
- --------------------------------------------------------------------------------
10. General Electric Co. 3.4%
Performance:
The following information illustrates the historical
performance of the Preferred Value Fund compared with the S&P 500 Index.
The S&P 500 Index is the most common index for the overall U.S. stock market.
It comprises 500 of the leading U.S. companies representing major industries.
The Fund may be more concentrated and subject to greater risk than other common
stock mutual funds having a greater number of holdings.
Past performance is not necessarily indicative of future results. Investment
return and principal value will fluctuate, so that, when redeemed, an investor's
shares may be worth more or less than their original cost. The Preferred Value
Fund's inception date was July 1, 1992. This report will provide ten-year
performance history in the future as the Fund matures.
Cumulative Total Return:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
Preferred
Value Fund -1.39% 14.31% 153.76% 203.11%
S&P 500 Index 9.35% 28.75% 193.98% 250.43%
* July 1, 1992
Average Annual Total Return:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
Preferred 14.31% 20.47% 18.58%
Value Fund
S&P 500 Index 28.75% 24.07% 21.28%
* July 1, 1992
CHART
A $10,000 Investment Since Inception:
Preferred Value Fund S&P 500 Index
7/1/92 10000 10000
12/31/92 10980 10837
6/30/93 11673 11359
12/31/93 11945 11921
6/30/94 11707 11514
12/31/94 12001 12074
6/30/95 14718 14510
12/31/95 16258 16599
6/30/96 18322 18291
12/31/96 20712 20429
6/30/97 24612 24298
12/31/97 27218 26515
6/30/98 30740 32046
12/31/98 30311 35043
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
9
<PAGE>
Investment Review
December 31, 1998 (unaudited)
Preferred International Fund
Investment Objective:
The Preferred International Fund seeks long-term capital appreciation by
investing its assets primarily in equity securities traded principally on
markets outside the United States.
Portfolio Manager Profile:
Portfolio Manager: Peter F. Spano, CFA
- --------------------------------------------------------------------------------
Title: President, PXS Corp., General Partner,
Mercator Asset Management, L.P.
- --------------------------------------------------------------------------------
Last Five Years' Experience: Portfolio Manager at Mercator. Pete has
managed the Preferred International Fund since its inception on July 1, 1992.
- --------------------------------------------------------------------------------
Education: BBA - St. John's University; MBA - Baruch College
(City University of New York); Chartered Financial Analyst
Discussion & Analysis:
The Preferred International Fund dropped 3.7% for the six-month period
ended December 31, 1998, versus a 3.7% gain in the EAFE Index.
The Fund's underperformance relative to the benchmark is attributable to
the economically sensitive issues in the portfolio, as investors reacted to
the possibility of a global recession. We were also underweight relative to
EAFE in the Japanese market, which rallied--mostly due to the strong yen.
Also, the concerns over the global financial situation impacted bank stocks
where we had a heavy weighting.
Major events of the period were Russia's debt default and currency
devaluation followed by a major U.S. hedge fund going bust. These events
caused a panic in the global financial system. The U.S. Federal Reserve
initiated a move to lower interest rates to increase liquidity to banks and
capital markets; many other central banks around the world quickly
followed. Stock markets responded positively from the October lows, as
concerns eased over a financial debacle.
Activity in the portfolio was low for the period. We eliminated Nissan
Motor (Japan), Samsung Electronics (Korea) and Coats Viyella (United
Kingdom) based on deteriorating fundamentals. Additionally, we reduced
Banca Popolare di Brescia (3.0% of net assets) (Italy), based on its high
price level. We slightly increased stock positions in Japan, France and
Spain based on attractive valuations. Over the near term, we continue to
favor stocks in Europe, but believe the best long-term stock values may
soon be in Asia. However, Asian economies need to stabilize before we can
increase our confidence in earnings projections.
We remain cautious for the short term as slower economic growth may result
in more profit warnings and earnings downgrades. We believe the markets
have begun discounting this event. We expect to see more mergers and
acquisitions as companies fight for market share and increase efforts to
lower costs. We believe Europe should do relatively well with the new Euro
currency, low interest rates and investors' developing appetite for stocks.
Asian economies, Japan being the main exception, may have hit bottom. A
number of stock markets in the region have rallied, but it may prove to
be premature.
We believe volatile markets will continue for a while. We also believe the
earnings expectations of many analysts are too high, based on consensus
economic growth. We think more forecasts will be adjusted downward. Our
value stocks may remain under pressure a while longer. Value investors must
be patient as our emphasis is on long-term opportunities. We believe the
portfolio remains well positioned.
- Mercator Asset Management, L.P.
10
<PAGE>
The Preferred Group of Mutual Funds
Investment Review
Top Ten Holdings: (% of total net assets)
1. British Telecom United Kingdom 4.2%
2. Bouygues France 3.3%
3. Iberdrola SA Spain 3.1%
4. Banca Popolare di Brescia Italy 3.0%
5. Pharmacia & UpJohn Sweden 2.9%
6. ING Groep NV Netherlands 2.9%
7. Banco Bilbao Vizcaya Spain 2.7%
8. National Westminster United Kingdom 2.7%
9. Electrolux AB Sweden 2.6%
10. Novartis AG Switzerland 2.5%
Geographic Allocation: (% of total net assets)
United Kingdom 15.6%
Switzerland 10.7%
France 9.7%
Netherlands 9.2%
Italy 7.8%
Australia 7.6%
Spain 7.4%
Sweden 7.3%
Japan 5.7%
Canada 3.6%
New Zealand 2.6%
Argentina 2.4%
South Korea 2.1%
Norway 0.7%
Performance:
The following information illustrates the historical performance of the
Preferred International Fund compared with the Europe, Australasia & Far East
(EAFE) Index. The EAFE Index contains over 1000 stocks from 20 different
countries with Japan (approx. 21%), the United Kingdom, France and Germany being
the most heavily weighted.
There are special risk considerations associated with foreign investing,
including political and currency risks. (See "Risk Factors of Foreign
Investments" in the current prospectus.)
The Fund may be more concentrated and subject to greater risk than other common
stock mutual funds having a greater number of holdings.
Past performance is not necessarily indicative of future results. Investment
return and principal value will fluctuate, so that, when redeemed, an investor's
shares may be worth more or less than their original cost. The Preferred
International Fund's inception date was July 1, 1992. This report will provide
ten-year performance history in original cost. The Preferred International
Fund's inception date was July 1, 1992. This report will provide ten-year
performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
Cumulative Total Return:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
Preferred
International Fund -3.66% 10.55% 56.98% 87.04%
EAFE Index 3.66% 20.32% 57.43% 104.64%
* July 1, 1992
Average Annual Total Return:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
Preferred
International Fund 10.55% 9.44% 10.10%
EAFE Index 20.32% 9.50% 11.65%
* July 1, 1992
CHART
A $10,000 Investment Since Inception:
Preferred International Fund EAFE Index
7/1/92 10000 10000
12/31/92 8419 9779
6/30/93 9623 12072
12/31/93 11915 12999
6/30/94 12189 14159
12/31/94 12305 14047
6/30/95 13004 14433
12/31/95 13526 15668
6/30/96 14787 16400
12/31/96 15845 16664
6/30/97 18558 18114
12/31/97 17007 16918
6/30/98 19414 19742
12/31/98 18704 20464
11
<PAGE>
Investment Review
December 31, 1998 (unaudited)
Preferred Small Cap Fund
Investment Objective:
The Preferred Small Cap Fund seeks long-term capital appreciation through
investments in companies with small equity capitalizations.
Portfolio Manager Profile:
Portfolio Manager: Todd M. Sheridan, CFA
- --------------------------------------------------------------------------------
Title: Portfolio Manager, Caterpillar Investment Management Ltd. (CIML)
- --------------------------------------------------------------------------------
Last Five Years' Experience: Portfolio Manager at CIML. Todd has managed
the Preferred Small Cap Fund since its inception on November 1, 1995.
- --------------------------------------------------------------------------------
Education: B.S. - University of Illinois; Chartered Financial Analyst
Discussion & Analysis:
The Preferred Small Cap Fund returned -12.0% for the six months ended
December 31, 1998, compared to -7.1% for the Russell 2000 benchmark. Though
results in this short period were somewhat disappointing, Fund performance
since inception remains strong. Since inception, the Fund has provided an
average annual return of 15.5% against a gain of 13.3% for the benchmark.
There were some instances of extremely strong positive performance in the
Fund's portfolio during the six-month period. However, the decline in the
portfolio was fairly widespread. While most of the damage was done during
the August decline, small cap stocks essentially underperformed throughout
the entire third quarter. Relative valuations have declined to levels not
witnessed since 1990--the beginning of the last major period of small cap
stock outperformance.
We believe that at present, U.S. markets are being driven more by capital
flows than by valuation. August saw the peak of this activity as the
Russian debt moratorium and the bail-out of Long Term Capital drove
frightened investors into very safe, very liquid U.S. Treasury securities.
An expected easing of monetary policy by the Federal Reserve late in
September was not sufficient to stem the tide, and was followed with an
inter-meeting move early in October. Those moves may have restored a
measure of confidence to the market, but volatility remains high.
Since September, internet and technology stocks have enjoyed spectacular
gains--perhaps too spectacular. We recently analyzed a group of stocks that
had outperformed small caps during September-October. Many were internet or
technology stocks, but all had one thing in common: they reported negative
earnings for the preceding 12 months. Even after adjusting back to
operating earnings, only a handful of these companies appeared to be
financially successful. As a group, these stocks traded at a multiple of 45
times 1999 earnings expectations. Some traded at even more extreme
multiples, and many of them are years from being able to produce a profit.
Although these stocks produced brief periods of robust gains for some
investors, in the long run we believe they are likely to result in poor
performance. Our research indicates that investing in stocks of successful,
growing companies trading at reasonable earnings multiples can create much
better results over time. Our process combines strong valuation with the
pursuit of companies with growing earnings. Implementation of this strategy
results in portfolios that routinely have approximately half of the price/
earnings ratio of the Russell 2000, while still providing nearly the same
long-term expected earnings growth rate.
We still believe the table is set for small caps and their attractive
relative valuations to outperform the market. We are just uncertain what
the catalyst will be and when the broadening of the market will occur.
- Caterpillar Investment Management Ltd.
12
<PAGE>
The Preferred Group of Mutual Funds
Investment Review
Top Ten Holdings: (% of total net assets)
- --------------------------------------------------------------------------------
1. Arvin Industries Inc. 1.9%
- --------------------------------------------------------------------------------
2. Stewart Information Services 1.8%
- --------------------------------------------------------------------------------
3. Jefferies Group Inc. 1.8%
- --------------------------------------------------------------------------------
4. Hollinger International Inc. 1.8%
- --------------------------------------------------------------------------------
5. D.R. Horton Inc. 1.7%
- --------------------------------------------------------------------------------
6. Ames Department Stores Inc. 1.7%
- --------------------------------------------------------------------------------
7. Furniture Brands International Inc. 1.7%
- --------------------------------------------------------------------------------
8. Centex Corp. 1.5%
- --------------------------------------------------------------------------------
9. CHS Electronics Inc. 1.5%
- --------------------------------------------------------------------------------
10. First American Financial Corp. 1.5%
Performance:
The following information illustrates the historical performance of the
Preferred Small Cap Fund compared with the Russell 2000 Index. The Russell 2000
Index contains the 2000 smallest of the 3000 largest U.S. domiciled
corporations, ranked by market capitalization.
Securities of small-capitalization companies often trade less frequently and in
more limited volume, and may be subject to greater volatility than securities of
larger, more established companies.
Past performance is not necessarily indicative of future results. Investment
return and principal value will fluctuate, so that, when redeemed, an investor's
shares may be worth more or less than their original cost. The Preferred Small
Cap Fund's inception date was November 1, 1995. This report will provide five-
and ten-year performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
Cumulative Total Return:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 3 YEARS INCEPTION*
Preferred
Small Cap Fund -11.95% -5.01% 50.37% 57.97%+
Russell 2000 Index -7.12% -2.55% 38.92% 48.58%
* November 1, 1995
+ Total return would have been lower if a portion of the management fee
(0.35%) had not been waived for the period November 1, 1995 through October
31, 1996.
Average Annual Total Return:
PAST PAST SINCE
1 YEAR 3 YEARS INCEPTION*
Preferred
Small Cap Fund -5.01% 14.57%+ 15.53%+
Russell 2000 Index -2.55% 11.58% 13.32%
* November 1, 1995
+ Total return would have been lower if a portion of the management fee
(0.35%) had not been waived for the period November 1, 1995 through October
31, 1996.
CHART
A $10,000 Investment Since Inception:
Preferred Small Cap Fund Russell 2000 Index
11/1/95 10000 10000
12/31/95 10506 10695
6/30/96 11267 11804
12/31/96 12653 12460
6/30/97 14534 13731
12/31/97 16629 15246
6/30/98 17942 15997
12/31/98 15797 14858
13
<PAGE>
Investment Review
December 31, 1998 (unaudited)
Preferred Asset Allocation Fund
Investment Objective:
The Preferred Asset Allocation Fund seeks both capital appreciation and
current income by allocating its assets among stocks, bonds and high
quality money market instruments.
Portfolio Managers Profiles:
Mellon Capital Management Corporation
Portfolio Manager: Thomas B. Hazuka
- --------------------------------------------------------------------------------
Title: Chief Investment Officer, Mellon Capital Management Corporation
- --------------------------------------------------------------------------------
Last Five Years' Experience: Portfolio Manager at Mellon Capital.
Tom has been involved in the management of the Preferred Asset Allocation
Fund since its inception on July 1, 1992.
- --------------------------------------------------------------------------------
Education: B.S. - Stevens Institute of Technology;
MBA - University of Connecticut;
Ph.D. - Stanford University
PanAgora Asset Management
Portfolio Manager: Edgar E. Peters
- --------------------------------------------------------------------------------
Title: Director, Asset Allocation, and Chief Investment Strategist,
PanAgora Asset Management
- --------------------------------------------------------------------------------
Last Five Years' Experience: Portfolio Manager at PanAgora Asset
Management. Ed has been involved in the management of the Preferred Asset
Allocation Fund since its inception on July 1, 1992.
- --------------------------------------------------------------------------------
Education: B.S. - Montclair State College;
MBA - Rutgers University
Discussion & Analysis:
The Preferred Asset Allocation Fund returned 14.2% for the six-month period
ended December 31, 1998. By comparison, the Fund's blended benchmark
consisting of 65% - S&P 500 Index, 30% - Lehman Brothers Long-Term Treasury
Index and 5% - 90-Day Treasury Bills returned 8.9% for the period. The Fund
has provided an average annual return of 16.6% since inception, compared to
17.5% for the benchmark.
Equity and credit market volatility continued to be extreme during the
second half of 1998, reaching levels not seen since 1987. The combination
of high valuations due to high earnings expectations, coupled with tight
monetary policy by the Fed made the stock market a very risky place. The
stock market's sharp sell-off in August reflected investors' fears that the
collapse of Russian financial assets and the economic crisis in Asia could
have a contagious effect on other economies--and ultimately U.S. corporate
profits. Other factors weighing on the markets included the economic status
quo in Japan and the absence of a serious effort at structural
reform--particularly related to their banking system.
Reflecting the increasing interdependence among global economies, events in
emerging markets and Japan eventually played a role change in U.S. monetary
policy. These events led to very unsettled credit markets. This prompted
the Federal Reserve to lower the target Fed Funds rate below the 5.25-5.50%
range it had maintained since December 1995, despite healthy GDP growth and
an unemployment rate near 28-year lows. A marked slowdown in manufacturing
activity and continued low inflation provided the Fed with the flexibility
to act decisively, lowering the target Fed Funds by 75 basis points in
three successive moves.
Persistent market volatility has caused temporary misvaluations in the
relative pricing of stocks, bonds and cash, making it very profitable to be
a contrarian and shift frequently. The current environment of high
volatility and
14
<PAGE>
The Preferred Group of Mutual Funds
Investment Review
low correlation between stocks and bonds is the best habitat for our
investment strategy. We believe we can expect continued good performance in
the coming months if these conditions persist.
- Mellon Capital Management
- PanAgora Asset Management
Portfolio Allocation* (% of portfolio)
- --------------------------------------------------------------------------------
12/31/98 6/30/98 12/31/97
- --------------------------------------------------------------------------------
Stocks 44% 41% 42%
- --------------------------------------------------------------------------------
Bonds 30% 22% 29%
- --------------------------------------------------------------------------------
Short-Term 26% 37% 29%
(maturities less than one year)
* Allocations do not consider the effect of futures contracts. See Note 4 of
the notes to the financial statements for open futures contracts at
December 31, 1998.
Performance:
The following information illustrates the historical performance of the
Preferred Asset Allocation Fund compared with a blended benchmark consisting of:
65% - S&P 500 Index; 30% - Lehman Brothers Long-Term Treasury Index; and 5% -
90-Day Treasury Bills. The S&P 500 Index is the most common index for the
overall U.S. stock market. It comprises 500 of the leading U.S. companies
representing major industries. The Lehman Brothers Long-Term Treasury Index is a
market weighted index of all publicly held Treasury issues with maturities
greater than 10 years. The 90-Day Treasury Bill benchmark is a performance
calculation using recently issued 90-Day Treasury Bills.
The Asset Allocation Fund has a blended benchmark to reflect its flexibility to
invest in stocks, bonds and short-term investments.
Past performance is not necessarily indicative of future results. Investment
return and principal value will fluctuate, so that, when redeemed, an investor's
shares may be worth more or less than their original cost. The Preferred Asset
Allocation Fund's inception date was July 1, 1992. This report will provide
ten-year performance history in the future as the Fund matures.
Cumulative Total Return:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
Preferred Asset
Allocation Fund 14.20% 27.01% 128.84% 171.61%
65/30/5 Benchmark 8.90% 23.61% 136.36% 184.97%
* July 1, 1992
Average Annual Total Return:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
Preferred Asset
Allocation Fund 27.01% 18.01% 16.60%
65/30/5 Benchmark 23.61% 18.77% 17.48%
* July 1, 1992
CHART
A $10,000 Investment Since Inception:
Preferred Asset Allocation Fund 65/30/5 Benchmark
7/1/92 10000 10000
12/31/92 10731 10781
6/30/93 11357 11523
12/31/93 11869 12057
6/30/94 11212 11483
12/31/94 11563 11848
6/30/95 13643 14057
12/31/95 15354 15849
6/30/96 16132 16429
12/31/96 17685 18021
6/30/97 19521 20789
12/31/97 21384 23054
6/31/98 23784 26167
12/31/98 27161 28497
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
15
<PAGE>
Investment Review
December 31, 1998 (unaudited)
Preferred Fixed Income Fund
Investment Objective:
The Preferred Fixed Income Fund seeks a high level of current income
consistent with investment in a diversified portfolio of high quality debt
securities.
Portfolio Manager Profile:
Portfolio Manager: Paul L. Zemsky, CFA
- --------------------------------------------------------------------------------
Title: Managing Director, J. P. Morgan Investment Management Inc.
- --------------------------------------------------------------------------------
Last Five Years' Experience: Portfolio Manager at J. P. Morgan Investment
Management. Paul has been involved in the management of the Preferred
Fixed Income Fund since January 1, 1994.
- --------------------------------------------------------------------------------
Education: B.S., B.S.E.E. - University of Pennsylvania; Chartered
Financial Analyst
Discussion & Analysis:
The Preferred Fixed Income Fund's return was 2.8% for the six-month period
ended December 31, 1998, compared to 4.6% for the Salomon Brothers Broad
Investment Grade (BIG) Bond Index. Since its inception, the Fund has
returned on average 7.3%, compared to 7.9% for its benchmark.
During the second half of calendar year 1998, the Asian situation deepened
into a global financial and economic crisis with a breadth and magnitude
not previously experienced in the post-WWII era. The crisis escalated to a
new level of concern when it appeared that an impending credit crunch and
related severe economic slowdown might be at hand. A number of financial
institutions appeared at risk. Forced liquidation of assets threatened the
stability of the global financial system and provided the catalyst for
coordinated action. Led by the prompt and successive easing moves by the
U.S. Federal Reserve, central banks, governments and supranational
institutions around the world collectively responded to the crisis, calming
fears of an uncontrolled unwinding of financial positions. By the end of
the year, investors returned to the markets, marking the beginning of the
recovery process.
During the period, with fragile international financial markets and a
benign U.S. inflation outlook, we maintained a long duration position. As
the period progressed, we extended the long duration position to the
maximum duration deviation from the benchmark index. The Fund's allocation
to U.S. Treasuries enhanced performance in the third quarter, as this
sector outperformed. In addition, as we approached the last quarter, we
opportunistically increased the Fund's corporate holdings, focusing on high
quality, liquid credits. However, as several of these corporate holdings
performed particularly well, we modestly reduced the Fund's exposure near
calendar year-end. Within residential mortgages, the Fund was underweighted
in the beginning of the period, which contributed positively to
performance. Residential mortgages were adversely impacted by large new
issuances and supply from refinancings. However, going into the year-end,
we took advantage of the historically wide yield spreads and increased the
Fund's holdings in residential mortgages. We actively traded this sector as
it offered significant tactical opportunities.
We believe the 1999 global economy will see sluggish overall growth in
global GDP and no growth in manufacturing. In the U.S., while we are
impressed with the persistent strength we are currently seeing, we continue
to believe that the ongoing slowdown in manufacturing will lead to more
modest growth in the coming year.
- J. P. Morgan Investment Management
16
<PAGE>
The Preferred Group of Mutual Funds
Investment Review
Portfolio Statistics: (as of December 31, 1998)
- --------------------------------------------------------------------------------
Portfolio Holdings 101
- --------------------------------------------------------------------------------
Average Maturity 13.4 years
- --------------------------------------------------------------------------------
Average Duration 5.0 years
- --------------------------------------------------------------------------------
Average Quality AA
- --------------------------------------------------------------------------------
Allocation (% of portfolio*):
- --------------------------------------------------------------------------------
Treasury/Agency 19%
- --------------------------------------------------------------------------------
Corporates 23%
- --------------------------------------------------------------------------------
Mortgages/Asset Backed 45%
- --------------------------------------------------------------------------------
Foreign Corporates & Govt. 2%
- --------------------------------------------------------------------------------
Short-Term 11%
(maturities less than one year)
*Allocations do not consider the effect of futures contracts. See Note 4 of the
notes to the financial statements for open futures contracts at
December 31, 1998.
Performance:
The following information illustrates the historical
performance of the Preferred Fixed Income Fund compared with the Salomon
Brothers Broad Investment Grade (BIG) Index. The Index contains 5,000
U.S. Treasury, Agency, Mortgage and Corporate Bonds. Credit quality must
be investment grade (AAA-BBB by Standard & Poor's).
Past performance is not necessarily indicative of future results. Investment
return and principal value will fluctuate, so that, when redeemed, an investor's
shares may be worth more or less than their original cost. The Preferred Fixed
Income Fund's inception date was July 1, 1992. This report will provide ten-year
performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
Cumulative Total Return:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
Preferred Fixed
Income Fund 2.81% 6.97% 37.22% 58.48%
Salomon Bros.
BIG Index 4.57% 8.71% 42.20% 63.48%
* July 1, 1992
Average Annual Total Return:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
Preferred Fixed
Income Fund 6.97% 6.53% 7.33%
Salomon Bros. 8.71% 7.30% 7.86%
BIG Index
* July 1, 1992
CHART
A $10,000 Investment Since Inception:
Preferred Fixed Income Fund Salomon Bros. BIG Index
7/1/92 10000 10000
12/31/92 10471 10461
6/30/93 11259 11198
12/31/93 11549 11496
6/30/94 11207 11065
12/31/94 11273 11169
6/30/95 12494 12454
12/31/95 13264 13238
6/30/96 13009 13071
12/31/96 13660 13717
6/30/97 14101 14138
12/31/97 14814 15038
6/30/98 15416 15634
12/31/98 15848 16348
17
<PAGE>
Investment Review
December 31, 1998 (unaudited)
Preferred Short-Term Government Securities Fund
Investment Objective:
The Preferred Short-Term Government Securities Fund seeks high current
income consistent with preservation of capital, primarily through
investment in U.S. Government Securities.
Portfolio Manager Profile:
Portfolio Manager: Todd M. Sheridan, CFA
- --------------------------------------------------------------------------------
Title: Portfolio Manager, Caterpillar Investment Management Ltd. (CIML)
- --------------------------------------------------------------------------------
Last Five Years' Experience: Portfolio Manager at CIML. Todd has managed
the Preferred Short-Term Government Securities Fund since June 1, 1998.
- --------------------------------------------------------------------------------
Education: B.S. - University of Illinois;
Chartered Financial Analyst
Discussion & Analysis:
The Preferred Short-Term Government Securities Fund returned 2.6% for the
six months ended December 31, 1998, compared to a 3.9% advance for the
Merrill Lynch 1-3 Year Treasury Index. Since inception, the Fund's average
annual return has been 4.9% versus 5.9% for the benchmark.
Most of the Fund's performance deficit occurred in the August through
September time period. A Russian debt moratorium and the near collapse of
hedge fund Long Term Capital sent U.S. Treasury security yields to historic
lows in a massive flight-to-quality. Most of the gains occurred in
`on-the-run' Treasury securities, while the portfolio was significantly
invested in mortgage-related securities. The portfolio lost ground as high
volatility caused the yield spread on these securities to widen. The
mortgage-related securities in the portfolio have tightened since then, but
remain well wide of our initial entry points. The securities we own have
not been adversely affected due to recent prepayment experience. We are
very comfortable with them in the portfolio, currently trading at spreads
of 110-130 basis points more than Treasuries. We've been reinvesting the
cash flow from these bonds into Treasuries, bringing the mortgage exposure
in the portfolio at year-end to 43%.
As most short-term rates declined below the 5% area, we reduced maturity
within the portfolio. It turned out we were a little early, as rates
continued through the 4.50% level. However, as rates returned to higher
levels later in the period, we gradually extended maturities, closing the
year with duration of 1.9 years in the portfolio versus approximately 1.6
years for the benchmark.
For 1999, we anticipate further moderate growth in the U.S. economy. We
believe this non-inflationary growth combined with international weakness
in South and Central American economies should keep short-term rates from
moving higher this year. We believe strong cash flows from budget surpluses
may reduce Treasury borrowings this year, reducing supply and potentially
pushing short-term interest rates lower.
- Caterpillar Investment Management Ltd.
18
<PAGE>
The Preferred Group of Mutual Funds
Investment Review
Portfolio Statistics: (as of December 31, 1998)
- --------------------------------------------------------------------------------
Portfolio Holdings 24
- --------------------------------------------------------------------------------
Average Maturity 2.2 years
- --------------------------------------------------------------------------------
Average Duration 1.9 years
Performance:
The following information illustrates the historical performance of the
Preferred Short-Term Government Securities Fund compared with the Merrill Lynch
1-3 Year Treasury Index. The Index comprises primarily U.S. Treasury Notes and
Bonds with remaining maturities of one to three years.
Past performance is not necessarily indicative of future results. Investment
return and principal value will fluctuate, so that, when redeemed, an investor's
shares may be worth more or less than their original cost. The Preferred
Short-Term Government Securities Fund's inception date was July 1, 1992. This
report will provide ten-year performance history in the future as the Fund
matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
Cumulative Total Return:
PAST PAST PAST SINCE
6 MONTHS 1 YEAR 5 YEARS INCEPTION*
Preferred
Short-Term Government
Securities Fund 2.55% 4.76% 26.16% 36.67%
ML 1-3 Yr.
Treasury Index 3.86% 7.00% 33.73% 45.44%
* July 1, 1992
Average Annual Total Return:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
Preferred Short-Term
Government
Securities Fund 4.76% 4.76% 4.92%
ML 1-3 Yr.
Treasury Index 7.00% 5.99% 5.93%
* July 1, 1992
CHART
A $10,000 Investment Since Inception:
Preferred Short-Term Gov't. Sec. Fund ML 1-3 Yr. Treasury Index
7/1/92 10000 10000
12/31/92 10261 10317
6/30/93 10632 10658
12/31/93 10833 10875
6/30/94 10723 10830
12/31/94 10757 10938
6/30/95 11336 11666
12/31/95 11735 12140
6/30/96 11914 12303
12/31/96 12287 12744
6/30/97 12606 13111
12/31/97 13046 13593
6/30/98 13327 14003
12/31/98 13667 14544
19
<PAGE>
Investment Review
December 31, 1998 (unaudited)
Preferred Money Market Fund
Investment Objective:
The Preferred Money Market Fund seeks the maximum current income believed
to be consistent with preservation of capital and maintenance of liquidity
by investing in a portfolio of short-term, fixed income instruments.
Portfolio Manager Profile:
Portfolio Manager: Robert (Skip) R. Johnson
- --------------------------------------------------------------------------------
Title: Vice President, J. P. Morgan Investment Management Inc.
- --------------------------------------------------------------------------------
Last Five Years' Experience: Portfolio Manager at J. P. Morgan Investment
Management. Skip has been involved with the management of the Preferred
Money Market Fund since its inception on July 1, 1992.
- --------------------------------------------------------------------------------
Education: B.A. - Dartmouth College
Discussion & Analysis:
The Preferred Money Market Fund returned 2.6% for the six-month period
ended December 31, 1998, compared to a 2.4% return for IBC's Money Fund
Report Average/All Taxable. Since inception, the fund's average annual
return has been 4.5% versus 4.4% for the benchmark.
Throughout the six-month period, the U.S. economy continued its strong
growth. While the Asian financial crisis seemed to be settling early on in
the period, the Russian currency breakdown forced liquidations by leveraged
funds and caused all major sectors of the U.S. stock market to decline. The
ongoing Asian contagion brought liquidity concerns causing investors to
seek the relative safety of U.S. Treasuries, which outperformed almost
everything else except money market securities in the third quarter. The
Federal Reserve cut interest rates three times in the space of six weeks
during September, October and November. Such action eased liquidity
constraints and helped to restore investor confidence.
During the period, the Fund's performance was positively enhanced by the
addition of asset-backed commercial paper and by continuing to hold
floating rate notes. In addition, effective liquidity and duration
management were key factors in the Fund's favorable performance. As the
yield curve inverted in the third quarter, the Fund was positively affected
by having enough liquidity to purchase 1-3 month commercial paper. We
increased the Fund's holdings in asset-backed commercial paper and floating
rate notes in the last quarter of the year. This decision was a result of
the response we saw from the flat and inverted yield curve earlier in the
year. We were sensitive to liquidity to take advantage of year-end
pressures. In addition, we maintained a laddered portfolio throughout the
second half of the year.
From a global perspective during 1999, we expect to see sluggish overall
growth in the global GDP and no growth in manufacturing. Domestically, we
are impressed with the current persistent strength of the U.S. economy, but
believe the ongoing slowdown in manufacturing will lead to more modest
growth in the coming year. Although the risk of an abrupt slowdown is
present, prompted by either a stock market correction or a current account
induced currency crisis, we believe the more likely outcome is an
anticlimactic slowing of activity. We also expect the Fed to be responsive
to the slowing economy by continuing to ease monetary policy throughout the
coming year.
- J. P. Morgan Investment Management
20
<PAGE>
The Preferred Group of Mutual Funds
Investment Review
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
Performance:
The following information illustrates the historical performance of the
Preferred Money Market Fund compared to IBC's Money Fund Report Average/All
Taxable. This benchmark is used for taxable money market funds.
Past performance is not necessarily indicative of future results. Investment
return and principal value will fluctuate, so that, when redeemed, an investor's
shares may be worth more or less than their original cost. The Preferred Money
Market Fund's inception date was July 1, 1992. This report will provide ten-year
performance history in the future as the Fund matures.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. An investment fund must outperform its benchmark by the amount of its
management fees and other expenses for its reported performance to match its
benchmark.
Cumulative Total Return:
PAST 7-DAY CURRENT PAST PAST SINCE
6 MONTHS YIELD++ 1 YEAR 5 YEARS INCEPTION*
Preferred Money
Market Fund 2.56% 4.61% 5.38% 27.98%+ 33.18%+
IBC's Money Fund
Report Avg./
All Taxable 2.44% 4.53% 5.03% 26.76% 32.11%
* July 1, 1992
+ Total return would have been lower if a portion of the management fee (0.15%)
had not been waived for the period January 1, 1993 through October 31, 1995.
+ + The seven-day current yield for the Money Market Fund more closely reflects
the current earnings of the Fund than does the total return quotation. The yield
for IBC's Money Fund Report Avg./All Taxable represents the seven-day current
yield as of December 29, 1998.
Average Annual Total Return:
PAST PAST SINCE
1 YEAR 5 YEARS INCEPTION*
Preferred Money
Market Fund 5.38% 5.06%+ 4.50%+
IBC's Money Fund
Report Avg./All Taxable 5.03% 4.86% 4.38%
* July 1, 1992
+ Total return would have been lower if a portion of the management fee
(0.15%) had not been waived for the period January 1, 1993 through October 31,
1995.
CHART
A $10,000 Investment Since Inception:
Preferred Money Market Fund IBC's Money Fund Report Avg/All Taxable
7/1/92 10000 10000
12/31/92 10140 10148
6/30/93 10271 10284
12/31/93 10406 10422
6/30/94 10569 10583
12/31/94 10814 10813
6/30/95 11126 11113
12/31/95 11438 11407
6/30/96 11719 11690
12/31/96 12018 11974
6/30/97 12319 12259
12/31/97 12638 12579
6/30/97 12986 12896
12/31/98 13318 13211
21
<PAGE>
Statements of Assets & Liabilities
December 31, 1998 (unaudited)
<TABLE>
<CAPTION>
December 31, 1998 (unaudited)
Growth Value International Small Cap
<S> <C> <C> <C> <C>
Assets
Investments at value $552,744,662 $378,541,562 $251,827,855 $122,090,429
Short-term obligations at amortized cost 4,204,000 14,591,008 21,859,000 2,361,937
Cash 905 490
Foreign currency at value 236,668
Receivable for investments sold 545,409 656,903 1,427,174
Receivable for fund shares sold 95,100 188,611 554,837 506,075
Receivable for variation margin
Dividends and interest receivable 254,092 263,398 796,504 100,400
Receivable for open forward foreign currency contracts
Prepaid expenses and other assets 6,577 13,273 5,493 13,153
------------ ------------ ------------ ------------
Total assets 557,850,745 393,597,852 275,937,750 126,499,168
------------ ------------ ------------ ------------
Liabilities
Payable for investments purchased 1,750,585 1,447,298
Payable for fund shares redeemed 64,874 2,263,477 1,339
Payable for distributions 2,846
Payable for variation margin
Payable for:
Management fees 325,856 243,264 215,028 74,038
Audit fees 21,429 18,825 21,542 17,085
Custodian fees 16,195 10,009 60,206 13,417
Legal fees 12,465 10,608 8,090 2,474
Trustees' fees 386 37 1,015
Transfer agent fees 8,507 3,736 10,985 2,760
Other fees 10,297 7,973 10,454
------------ ------------ ------------ ------------
Total liabilities 2,145,720 362,172 2,590,797 1,558,411
------------ ------------ ------------ ------------
Net assets $555,705,025 $393,235,680 $273,346,953 $124,940,757
============ ============ ============ ============
Shares of beneficial interest outstanding 28,126,536 15,850,316 18,284,487 9,509,725
============ ============ ============ ============
Offering and redemption price per share $19.76 $24.81 $14.95 $13.14
============ ============ ============ ============
Composition of Net Assets:
Paid-in capital $364,418,145 $191,138,530 $220,424,716 $114,825,760
Undistributed (Distributions in excess of)
net investment income (188,573) 22,825 1,202,106 88,560
Accumulated net realized gains (losses) on
investments, futures and foreign currency 11,706,410 794,611 (6,508,932) (11,563,628)
Net unrealized appreciation (depreciation) on:
Investments 179,769,043 201,279,714 58,220,227 21,590,065
Futures
Forwards
Foreign denominated other assets,
liabilities & currency 8,836
------------ ------------ ------------ ------------
Net assets $555,705,025 $393,235,680 $273,346,953 $124,940,757
============ ============ ============ ============
Investments and short-term obligations at cost $377,179,619 $191,852,856 $215,466,628 $102,862,301
Foreign currency holdings at cost $ 239,755
See notes to financial statements
22
<PAGE>
<CAPTION>
The Preferred Group of Mutual Funds
Statement of Assets & Liabilities
December 31, 1998 (unaudited) Asset Fixed Short-Term Money
Allocation Income Government Market
<S> <C> <C> <C> <C>
Assets
Investments at value $156,755,809 $152,085,538 $58,210,651
Short-term obligations at amortized cost 54,882,028 18,041,487 5,609,048 $126,022,636
Cash 126,365 285 6,012
Foreign currency at value
Receivable for investments sold 530,538 18,853,650
Receivable for fund shares sold 152,901 26,792 33,833 1,953,460
Receivable for variation margin 84,275
Dividends and interest receivable 1,107,578 1,632,274 523,402 690,080
Receivable for open forward foreign currency contracts 95,742
Prepaid expenses and other assets 5,794 2,284 561 5,455
----------- ----------- ---------- -----------
Total assets 213,645,288 190,738,052 64,377,495 128,677,643
----------- ---------- ---------- -----------
Liabilities
Payable for investments purchased 1,737,909 27,357,539
Payable for fund shares redeemed 141 6 122,756
Payable for distributions 10,679 4,982 92 1,938
Payable for variation margin 9,125
Payable for:
Management fees 121,243 69,594 19,342 33,264
Audit fees 20,065 17,979 18,660 16,020
Custodian fees 6,838 11,963 5,800 7,186
Legal fees 2,142 3,489 853 2,322
Trustees' fees 6 486 853
Transfer agent fees 3,106 7,555 4,089 6,112
Other fees 14,013 4,161
------------ ------------ ------------ ------------
Total liabilities 1,902,123 27,496,251 53,483 190,451
------------ ------------ ------------ ------------
Net assets $211,743,165 $163,241,801 $64,324,012 $128,487,192
============ ============ ============ ============
Shares of beneficial interest outstanding 12,746,596 15,975,849 6,585,206 128,487,192
============ ============ ============ ============
Offering and redemption price per share $16.61 $10.22 $9.77 $1.00
============ ============ ============ ============
Composition of Net Assets:
Paid-in capital $158,927,525 $162,239,136 $65,285,192 $128,487,192
Undistributed (Distributions in excess of)
net investment income 125,759
Accumulated net realized gains (losses) on
investments, futures and foreign currency 813,145 (525,948) (822,834)
Net unrealized appreciation (depreciation) on:
Investments 50,239,263 1,449,490 (138,346)
Futures 1,763,232 (142,361)
Forwards 95,725
Foreign denominated other assets,
liabilities & currency
------------ ------------ ------------ ------------
Net assets $211,743,165 $163,241,801 $64,324,012 $128,487,192
============ ============ ============ ============
Investments and short-term obligations at cost $161,398,574 $168,677,535 $63,958,045 $126,022,636
Foreign currency holdings at cost
See notes to financial statements
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Statements of Operations
December 31, 1998 (unaudited)
Six Month Period Ended
December 31, 1998 (unaudited) Growth Value International Small Cap
<S> <C> <C> <C> <C>
Investment Income
Dividends $ 1,479,017 $ 2,456,626 $2,758,913 $ 613,849
Interest 363,313 787,479 597,062 43,750
------------ ------------ ---------- -------------
1,842,330 3,244,105 3,355,975 657,599
Less foreign taxes withheld at source (5,802) (286,870) (670)
------------ ------------ ---------- -------------
Total income 1,842,330 3,238,303 3,069,105 656,929
------------ ------------ ---------- -------------
Expenses
Management fees 1,817,503 1,444,898 1,273,423 444,001
Audit fees 17,824 15,807 18,652 15,123
Custodian fees 66,920 47,242 262,659 46,774
Registration fees 8,551 7,327 9,583 8,354
Legal fees 20,525 16,833 12,134 6,050
Trustees' fees 7,562 6,050 4,375 2,017
Transfer agent fees 61,123 57,702 40,977 15,087
Insurance fees 6,050 5,204 4,033 1,513
Other expenses 24,845 25,691 13,503 5,384
------------ ------------ ---------- -------------
Total expenses 2,030,903 1,626,754 1,639,339 544,303
------------ ------------ ---------- -------------
Net investment income (loss) (188,573) 1,611,549 1,429,766 112,626
------------ ------------ ---------- -------------
Net Realized and Unrealized Gain
(Loss) on Investments, Futures, Forwards
and Foreign Currency
Net realized gain (loss) on:
Investments 21,408,182 5,648,450 (6,193,571) (11,559,450)
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency (84,889)
Change in net unrealized appreciation
(depreciation) on:
Investments 40,387,542 (13,653,246) (3,653,635) (4,088,808)
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency 5,697
------------ ------------ ---------- -------------
Net gain (loss) 61,795,724 (8,004,796) (9,926,398) (15,648,258)
------------ ------------ ---------- -------------
Net increase (decrease) in net assets
resulting from operations $61,607,151 ($ 6,393,247) ($8,496,632) ($15,535,632)
=========== ============ ========== =============
See notes to financial statements
24
<PAGE>
<CAPTION>
The Preferred Group of Mutual Funds
Statements of Operations
December 31, 1998 (unaudited)
Six Month Period Ended Asset Fixed Short-Term Money
December 31, 1998 (unaudited) Allocation Income Government Market
<S> <C> <C> <C> <C>
Investment Income
Dividends $ 555,323
Interest 2,984,826 $5,072,194 $1,748,127 $3,305,766
------------ ------------ ---------- -----------
3,540,149 5,072,194 1,748,127 3,305,766
Less foreign taxes withheld at source (2,615)
------------ ------------ ---------- -----------
Total income 3,537,534 5,072,194 1,748,127 3,305,766
------------ ------------ ---------- -----------
Expenses
Management fees 643,789 397,447 109,667 181,436
Audit fees 17,644 16,131 17,140 14,115
Custodian fees 92,036 55,650 26,225 34,279
Registration fees 8,030 10,208 7,633 8,030
Legal fees 7,886 7,058 2,521 4,862
Trustees' fees 2,521 2,521 1,008 1,513
Transfer agent fees 34,459 30,696 13,611 29,184
Insurance fees 2,017 2,017 1,008 1,512
Other expenses 13,863 9,433 3,025 5,365
------------ ------------ ---------- -----------
Total expenses 822,245 531,161 181,838 280,296
------------ ------------ ---------- -----------
Net investment income (loss) 2,715,289 4,541,033 1,566,289 3,025,470
------------ ------------ ---------- -----------
Net Realized and Unrealized Gain
(Loss) on Investments, Futures, Forwards
and Foreign Currency
Net realized gain (loss) on:
Investments 788,574 553,231 108,529
Futures 11,957,679 702,413
Forward contracts
Foreign denominated other assets,
liabilities & currency (9,103)
Change in net unrealized appreciation
(depreciation) on:
Investments 9,035,257 (1,178,974) (117,490)
Futures 1,153,337 (351,817)
Forward contracts (48,848)
Foreign denominated other assets,
liabilities & currency 2,402
------------ ------------ ---------- -----------
Net gain (loss) 22,934,847 (330,696) (8,961)
------------ ------------ ---------- -----------
Net increase (decrease) in net assets
resulting from operations $25,650,136 $4,210,337 $1,557,328 $3,025,470
============ ============ ========== ===========
See notes to financial statements
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
December 31, 1998 (unaudited)
Growth Value
PERIOD+ YEAR PERIOD+ YEAR
ENDED ENDED ENDED ENDED
12/31/98 6/30/98 12/31/98 6/30/98
----------------- ---------------- --------------- ---------------
Increase in net assets
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) ($ 188,573) ($ 410,386) $ 1,611,549 $ 3,996,435
Net realized gain (loss) on:
Investments 21,408,182 143,439,200 5,648,450 39,129,419
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation
(depreciation) on:
Investments 40,387,542 (4,397,983) (13,653,246) 47,165,553
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
----------------- ---------------- --------------- ---------------
Net increase (decrease) in net assets
resulting from operations 61,607,151 138,630,831 (6,393,247) 90,291,407
----------------- ---------------- --------------- ---------------
Distributions to shareholders from:
Net investment income (3,999,062) (3,250,000)
Net realized gains (111,232,130) (86,312,238) (15,869,613)
----------------- ---------------- --------------- ---------------
(111,232,130) (86,312,238) (19,868,675) (3,250,000)
----------------- ---------------- --------------- ---------------
Fund share transactions:
Receipts for shares sold 299,168,455 271,215,829 66,381,178 209,248,942
Value of distributions reinvested 110,140,457 85,946,784 19,641,855 3,234,091
Cost of shares redeemed (310,809,399) (357,672,592) (80,135,274) (259,587,965)
----------------- ---------------- --------------- ---------------
Net increase (decrease) in net assets
from fund share transactions 98,499,513 (509,979) 5,887,759 (47,104,932)
----------------- ---------------- --------------- ---------------
Total increase (decrease) 48,874,534 51,808,614 (20,374,163) 39,936,475
Net assets
Beginning of period 506,830,491 455,021,877 413,609,843 373,673,368
----------------- ---------------- --------------- ---------------
End of period $555,705,025 $506,830,491 $393,235,680 $413,609,843
================= ================ =============== ===============
Undistributed (distributions in
excess of) net investment
income at end of period ($ 188,573) $ 22,825 $ 2,410,338
================= ================ =============== ===============
Number of fund shares
Sold.......................... 14,337,178 12,681,087 2,672,420 8,741,834
Issued for distributions reinvested 5,636,665 4,842,045 802,363 144,310
Redeemed...................... (14,912,003) (16,742,714) (3,238,452) (10,951,287)
----------------- ---------------- --------------- ---------------
Net increase in shares outstanding 5,061,840 780,418 236,331 2,065,143
Outstanding at:
Beginning of period........... 23,064,696 22,284,278 15,613,985 17,679,128
----------------- ---------------- --------------- ---------------
End of period................. 28,126,536 23,064,696 15,850,316 15,613,985
================= ================ =============== ===============
+ Unaudited for six-month period ended December 31, 1998.
See notes to financial statements
26
<PAGE>
<CAPTION>
International Small Cap
PERIOD+ YEAR PERIOD+ YEAR
ENDED ENDED ENDED ENDED
12/31/98 6/30/98 12/31/98 6/30/98
----------------- ---------------- --------------- ---------------
Increase in net assets
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) $ 1,429,766 $ 4,619,323 $ 112,626 $ 354,199
Net realized gain (loss) on:
Investments (6,193,571) 15,916,879 (11,559,450) 15,998,484
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency (84,889) (260,093)
Change in net unrealized appreciation
(depreciation) on:
Investments (3,653,635) 368,326 (4,088,808) 6,609,372
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency 5,697 11,111
----------------- ---------------- --------------- ---------------
Net increase (decrease)
in net assets
resulting from operations (8,496,632) 20,655,546 (15,535,632) 22,962,055
----------------- ---------------- --------------- ---------------
Distributions to shareholders from:
Net investment income (2,900,000) (3,800,000) (150,000) (630,000)
Net realized gains (8,299,909) (11,334,089) (5,076,272) (13,550,134)
----------------- ---------------- --------------- ---------------
(11,199,909) (15,134,089) (5,226,272) (14,180,134)
----------------- ---------------- --------------- ---------------
Fund share transactions:
Receipts for shares sold 243,092,069 235,904,014 69,477,792 78,592,510
Value of distributions reinvested 11,065,946 15,067,423 5,207,967 14,167,942
Cost of shares redeemed (245,170,624) (237,729,186) (65,286,561) (50,116,715)
----------------- ---------------- --------------- ---------------
Net increase (decrease) in net assets
from fund share transactions 8,987,391 13,242,251 9,399,198 42,643,737
----------------- ---------------- --------------- ---------------
Total increase (decrease) (10,709,150) 18,763,708 (11,362,706) 51,425,658
Net assets
Beginning of period 284,056,103 265,292,395 136,303,463 84,877,805
----------------- ---------------- --------------- ---------------
End of period $273,346,953 $284,056,103 $124,940,757 $136,303,463
================= ================ =============== ===============
Undistributed (distributions
in excess of) net
investment income
at end of period $ 1,202,106 $ 2,672,340 $ 88,560 $ 125,934
================= ================ =============== ===============
Number of fund shares
Sold 16,536,184 15,075,789 5,435,805 4,932,192
Issued for distributions reinvested 747,699 1,072,399 417,639 1,008,381
Redeemed (16,554,255) (15,054,821) (5,087,933) (3,133,590)
----------------- ---------------- --------------- ---------------
Net increase in shares outstanding 729,628 1,093,367 765,511 2,806,983
Outstanding at:
Beginning of period 17,554,859 16,461,492 8,744,214 5,937,231
----------------- ---------------- --------------- ---------------
End of period 18,284,487 17,554,859 9,509,725 8,744,214
================= ================ =============== ===============
+ Unaudited for six-month period ended December 31, 1998.
See notes to financial statements
<CAPTION>
Asset Allocation
PERIOD+ YEAR
ENDED ENDED
12/31/98 6/30/98
Increase in net assets
Operations:
<S> <C> <C>
Net investment income (loss) $ 2,715,289 $ 4,660,600
Net realized gain (loss) on:
Investments 788,574 3,219,993
Futures 11,957,679 4,179,437
Forward contracts
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation
(depreciation) on:
Investments 9,035,257 17,834,579
Futures 1,153,337 (975,261)
Forward contracts
Foreign denominated other assets,
liabilities & currency
----------------- ----------------
Net increase (decrease)
in net assets
resulting from operations 25,650,136 28,919,348
----------------- ----------------
Distributions to shareholders from:.
Net investment income (2,715,289) (4,660,600)
Net realized gains (12,057,120) (12,219,032)
----------------- ----------------
(14,772,409) (16,879,632)
----------------- ----------------
Fund share transactions:
Receipts for shares sold 34,499,630 32,320,319
Value of distributions reinvested 14,682,047 16,807,794
Cost of shares redeemed (20,149,805) (18,219,019)
----------------- ----------------
Net increase (decrease)
in net assets from fund
share transactions 29,031,872 30,909,094
----------------- ----------------
Total increase (decrease) 39,909,599 42,948,810
Net assets
Beginning of period 171,833,566 128,884,756
----------------- ----------------
End of period $211,743,165 $171,833,566
================= ================
Undistributed (distributions
in excess of) net investment
income at end of period
================= ================
Number of fund shares
Sold 2,134,801 2,147,829
Issued for distributions reinvested 890,507 1,159,620
Redeemed (1,259,152) (1,201,202)
----------------- ----------------
Net increase in shares outstanding 1,766,156 2,106,247
Outstanding at:
Beginning of period 10,980,440 8,874,193
----------------- ----------------
End of period 12,746,596 10,980,440
================= ================
+ Unaudited for six-month period ended December 31, 1998.
See notes to financial statements
27
<PAGE>
<CAPTION>
Statements of Changes in Net Assets
December 31, 1998 (unaudited)
Fixed Income Short-Term Government
PERIOD+ YEAR PERIOD+ YEAR
ENDED ENDED ENDED ENDED
12/31/98 6/30/98 12/31/98 6/30/98
----------------- ---------------- --------------- ---------------
Increase in net assets
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) $ 4,541,033 $ 9,185,129 $ 1,566,289 $ 3,234,893
Net realized gain (loss) on:
Investments 553,231 1,799,943 108,529 (88,914)
Futures 702,413 527,799
Forward contracts 48,557
Foreign denominated other assets,
liabilities & currency (9,103) (51,081)
Change in net unrealized appreciation
(depreciation) on:
Investments (1,178,974) 1,515,003 (117,490) 3,372
Futures (351,817) 212,014
Forward contracts (48,848) 130,096
Foreign denominated other assets,
liabilities & currency 2,402 (2,410)
----------------- ---------------- --------------- ---------------
Net increase (decrease)
in net assets resulting
from operations 4,210,337 13,365,050 1,557,328 3,149,351
----------------- ---------------- --------------- ---------------
Distributions to shareholders from:
Net investment income (4,520,086) (9,184,514) (1,566,289) (3,234,893)
Net realized gains (3,004,179) (1,541,898)
----------------- ---------------- --------------- ---------------
(7,524,265) (10,726,412) (1,566,289) (3,234,893)
----------------- ---------------- --------------- ---------------
Fund share transactions:
Receipts for shares sold 25,868,241 24,788,038 6,726,374 6,856,161
Value of distributions reinvested 7,473,993 10,675,319 1,564,982 3,231,487
Cost of shares redeemed (17,990,779) (27,056,203) (4,194,664) (4,573,234)
----------------- ---------------- --------------- ---------------
Net increase (decrease) in net assets
from fund share transactions 15,351,455 8,407,154 4,096,692 5,514,414
----------------- ---------------- --------------- ---------------
Total increase (decrease) 12,037,527 11,045,792 4,087,731 5,428,872
Net assets
Beginning of period 151,204,274 140,158,482 60,236,281 54,807,409
----------------- ---------------- --------------- ---------------
End of period $163,241,801 $151,204,274 $64,324,012 $60,236,281
================= ================ =============== ===============
Undistributed net investment income
at end of period $ 125,759 $ 104,812
================= ================ =============== ===============
Number of fund shares
Sold 2,475,337 2,386,283 687,267 699,315
Issued for distributions reinvested 723,993 1,028,283 159,850 329,506
Redeemed (1,729,415) (2,600,762) (428,523) (466,213)
----------------- ---------------- --------------- ---------------
Net increase in shares outstanding 1,469,915 813,804 418,594 562,608
Outstanding at:
Beginning of period 14,505,934 13,692,130 6,166,612 5,604,004
----------------- ---------------- --------------- ---------------
End of period 15,975,849 14,505,934 6,585,206 6,166,612
================= ================ =============== ===============
+ Unaudited for six-month period ended December 31, 1998.
See notes to financial statements
28
<PAGE>
<CAPTION>
Money Market
PERIOD+ YEAR
ENDED ENDED
12/31/98 6/30/98
----------------- ----------------
Increase in net assets
Operations:
<S> <C> <C>
Net investment income (loss) $ 3,025,470 $ 5,234,484
Net realized gain (loss) on:
Investments
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
Change in net unrealized appreciation
(depreciation) on:
Investments
Futures
Forward contracts
Foreign denominated other assets,
liabilities & currency
----------------- ----------------
Net increase (decrease)
in net assets resulting
from operations 3,025,470 5,234,484
----------------- ----------------
Distributions to shareholders from:
Net investment income (3,025,470) (5,234,484)
Net realized gains
----------------- ----------------
(3,025,470) (5,234,484)
----------------- ----------------
Fund share transactions:
Receipts for shares sold 531,514,024 431,368,703
Value of distributions reinvested 2,867,200 5,149,937
Cost of shares redeemed (510,061,556) (442,033,262)
----------------- ----------------
Net increase (decrease) in net assets
from fund share transactions 24,319,668 (5,514,622)
----------------- ----------------
Total increase (decrease) 24,319,668 (5,514,622)
Net assets
Beginning of period 104,167,524 109,682,146
----------------- ----------------
End of period $128,487,192 $104,167,524
================= ================
Undistributed net investment income
at end of period
================= ================
Number of fund shares
Sold 531,514,024 431,368,703
Issued for distributions reinvested 2,867,200 5,149,937
Redeemed (510,061,556) (442,033,262)
----------------- ----------------
Net increase in shares outstanding 24,319,668 (5,514,622)
Outstanding at:
Beginning of period 104,167,524 109,682,146
----------------- ----------------
End of period 128,487,192 104,167,524
================= ================
</TABLE>
+ Unaudited for six-month period ended december 31, 1998.
See notes to financial statements
29
<PAGE>
Financial Highlights
December 31, 1998 (unaudited)
(Selected data for a share
of beneficial interest
outstanding throughout the year)
<TABLE>
<CAPTION>
Income (Loss) From Investment Operations Less Distributions
--------------------------------------------- ------------------------------------------------------
Net
Net Asset Net Realized Total From Net
Value, Investment and from From Net Realized In Excess
Beginning Income Unrealized Investment Investment Gains on of Realized Total
of Year (Loss) Gain (Loss) Operations Income Investments Gains Distributions
====================================================================================================================================
GROWTH
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $10.00 $0.01 $2.42 $2.43 $(0.01) $ - $ - $(0.01)
1994 12.42 0.01 0.03 0.04 - - - -
1995 12.46 0.01 4.24 4.25 (0.02) (0.06) - (0.08)
1996 16.63 0.00 2.44 2.44 (0.01) (0.54) - (0.55)
1997 18.52 0.00 4.76 4.76 - (2.86) - (2.86)
1998 20.42 0.00 5.93 5.93 - (4.38) - (4.38)
Six-months Ended 21.97 (0.01) 2.76 2.75 - (4.96) - (4.96)
12/31/98 (unaudited)
====================================================================================================================================
VALUE
Year Ended June 30,
1993 10.00 0.19 1.44 1.63 (0.11) - - (0.11)
1994 11.52 0.19 (0.12) 0.07 (0.16) (0.10) - (0.26)
1995 11.33 0.21 2.62 2.83 (0.20) (0.14) - (0.34)
1996 13.82 0.20 3.13 3.33 (0.21) (0.29) - (0.50)
1997 16.65 0.19 5.10 5.29 (0.20) (0.58) (0.02) (0.80)
1998 21.14 0.28 5.29 5.57 (0.22) - - (0.22)
Six-months Ended 26.49 0.11 (0.48) (0.37) (0.26) (1.05) - (1.31)
12/31/98 (unaudited)
====================================================================================================================================
INTERNATIONAL
Year Ended June 30,
1993 10.00 0.15 (0.53) (0.38) (0.03) - - (0.03)
1994 9.59 0.08 2.47 2.55 (0.07) (0.05) - (0.12)
1995 12.02 0.18 0.60 0.78 (0.13) (0.26) (0.17) (0.56)
1996 12.24 0.19 1.47 1.66 (0.17) (0.01) - (0.18)
1997 13.72 0.33 2.67 3.00 (0.35) (0.25) - (0.60)
1998 16.12 0.26 0.76 1.02 (0.24) (0.72) - (0.96)
Six-months Ended 16.18 0.09 (0.68) (0.59) (0.17) (0.47) - (0.64)
12/31/98 (unaudited)
====================================================================================================================================
SMALL CAP (Commenced investment operations on November 1, 1995)
Period Ended June 30,
1996+ 10.00 0.05 1.22 1.27 (0.02) - - (0.02)
1997 11.25 0.06 3.18 3.24 (0.03) (0.16) - (0.19)
1998 14.30 0.03 3.17 3.20 (0.08) (1.83) - (1.91)
Six-months Ended $15.59 $0.02 $(1.88) $(1.86) $(0.02) $(0.57) $ - $(0.59)
12/31/98 (unaudited)
30
<PAGE>
<CAPTION>
Ratios to Average Net Assets
----------------------------------------
Operating
Net Asset Total Expenses Net
Value, Return at Before Investment Portfolio
End of Net Asset Net Assets, Operating Voluntary Income Turnover
Year Value(1) End of Year Expenses Waiver (Loss) Rate
==========================================================================================================================
GROWTH
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C>
1993 $12.42 24.25% $117,706,665 1.00% - 0.07% 58.12%
1994 12.46 0.34% 171,467,064 0.91% - 0.13% 51.56%
1995 16.63 34.21% 374,592,700 0.87% - 0.13% 55.32%
1996 18.52 14.96% 411,688,146 0.86% - (0.16%) 75.24%
1997 20.42 28.57% 455,021,877 0.84% - (0.13%) 58.31%
1998 21.97 33.44% 506,830,491 0.84% - (0.08%) 70.35%
Six-months Ended 19.76 12.50%++ 555,705,025 0.84%+++ - (0.08%)+++ 41.58%++
12/31/98 (unaudited)
==========================================================================================================================
VALUE
Year Ended June 30,
1993 11.52 16.37% 121,511,090 0.96% - 1.79% 17.77%
1994 11.33 0.60% 121,088,130 0.93% - 1.64% 11.95%
1995 13.82 25.72% 212,678,363 0.89% - 1.95% 29.02%
1996 16.65 24.49% 267,581,693 0.85% - 1.23% 17.04%
1997 21.14 32.62% 373,673,368 0.85% - 1.06% 7.23%
1998 26.49 26.51% 413,609,843 0.84% - 1.03% 10.14%
Six-months Ended 24.81 (1.39%)++ 393,235,680 0.84%+++ - 0.84%+++ 6.15%++
12/31/98 (unaudited)
==========================================================================================================================
INTERNATIONAL
Year Ended June 30,
1993 9.59 (3.77%) 39,126,841 1.60% - 1.83% 16.21%
1994 12.02 26.66% 94,933,414 1.38% - 1.37% 27.78%
1995 12.24 6.70% 118,216,038 1.32% - 1.65% 29.47%
1996 13.72 13.70% 157,627,409 1.31% - 1.64% 19.61%
1997 16.12 22.50% 265,292,395 1.25% - 2.66% 13.16%
1998 16.18 7.18% 284,056,103 1.22% - 1.76% 17.08%
Six-months Ended 14.95 (3.66%)++ 273,346,953 1.22%+++ - 1.07%+++ 3.33%++
12/31/98 (unaudited)
==========================================================================================================================
SMALL CAP (Commenced investment operations on November 1, 1995)
Period Ended June 30,
1996+ 11.25 12.67%*++ 45,692,712 0.88%+++ 1.23%+++ 0.75%+++ 65.70%++
1997 14.30 29.00%* 84,877,805 0.88% 0.98% 0.66% 104.45%
1998 15.59 23.45% 136,303,463 0.90% - 0.29% 105.32%
Six-months Ended $13.14 (11.95%)++ $124,940,757 0.92%+++ - 0.19%+++ 53.49%++
12/31/98 (unaudited)
1 Total return at net asset value assumes reinvestment of dividends and
capital gains distributions.
* Total return for Small Cap would have been lower if a portion of the
fees had not been waived/reimbursed by the advisor.
+ Eight-month period ended June 30, 1996.
++ Not annualized
+++ Annualized
See notes to financial statements
31
<PAGE>
<CAPTION>
Financial Highlights
December 31, 1998 (unaudited)
(Selected data for a share of beneficial interest outstanding
throughout the year)
Income (Loss) From Investment Operations Less Distributions
---------------------------------------- ------------------------------------------------------
Net
Net Asset Net Realized Total From Net
Value, Investment and from From Net Realized In Excess
Beginning Income Unrealized Investment Investment Gains on of Realized Total
of Year (Loss) Gain (Loss) Operations Income Investments Gains Distributions
====================================================================================================================================
ASSET ALLOCATION
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $10.00 $0.34 $0.99 $1.33 $(0.34) $(0.09) $ - $(0.43)
1994 10.90 0.30 (0.42) (0.12) (0.30) (0.21) - (0.51)
1995 10.27 0.38 1.79 2.17 (0.38) (0.09) - (0.47)
1996 11.97 0.40 1.72 2.12 (0.40) (0.81) - (1.21)
1997 12.88 0.44 2.17 2.61 (0.44) (0.53) - (0.97)
1998 14.52 0.47 2.51 2.98 (0.47) (1.38) - (1.85)
Six-months Ended 15.65 0.46 1.98 2.44 (0.46) (1.02) - (1.48)
12/31/98 (unaudited)
====================================================================================================================================
FIXED INCOME
Year Ended June 30,
1993 10.00 0.51 0.71 1.22 (0.51) (0.11) - (0.62)
1994 10.60 0.47 (0.50) (0.03) (0.47) (0.14) (0.16) (0.77)
1995 9.80 0.58 0.50 1.08 (0.58) - - (0.58)
1996 10.30 0.58 (0.16) 0.42 (0.58) (0.05) - (0.63)
1997 10.09 0.64 0.19 0.83 (0.64) (0.04) - (0.68)
1998 10.24 0.64 0.29 0.93 (0.64) (0.11) - (0.75)
Six-months Ended 10.42 0.62 (0.01) 0.61 (0.62) (0.19) - (0.81)
12/31/98 (unaudited)
====================================================================================================================================
SHORT-TERM GOVERNMENT SECURITIES
Year Ended June 30,
1993 10.00 0.39 0.23 0.62 (0.39) (0.15) - (0.54)
1994 10.08 0.37 (0.29) 0.08 (0.37) - (0.02) (0.39)
1995 9.77 0.51 0.03 0.54 (0.51) - - (0.51)
1996 9.80 0.53 (0.04) 0.49 (0.53) - - (0.53)
1997 9.76 0.53 0.02 0.55 (0.53) - - (0.53)
1998 9.78 0.56 (0.01) 0.55 (0.56) - - (0.56)
Six-months Ended 9.77 0.52 - 0.52 (0.52) - - (0.52)
12/31/98 (unaudited)
====================================================================================================================================
MONEY MARKET
Year Ended June 30,
1993 1.00 0.03 - 0.03 (0.03) - - (0.03)
1994 1.00 0.03 - 0.03 (0.03) - - (0.03)
1995 1.00 0.05 - 0.05 (0.05) - - (0.05)
1996 1.00 0.05 - 0.05 (0.05) - - (0.05)
1997 1.00 0.05 - 0.05 (0.05) - - (0.05)
1998 1.00 0.05 - 0.05 (0.05) - - (0.05)
Six-months Ended $1.00 $0.05 $ - $0.05 $(0.05) $ - $ - $(0.05)
12/31/98 (unaudited)
32
<PAGE>
<CAPTION>
Ratios to Average Net Assets
------------------------------------------
Operating
Net Asset Total Expenses Net
Value, Return at Before Investment Portfolio
End of Net Asset Net Assets, Operating Voluntary Income Turnover
Year Value(1) End of Year Expenses Waiver (Loss) Rate
==========================================================================================================================
ASSET ALLOCATION
Year Ended June 30,
<S> <C> <C> <C> <C> <C> <C> <C>
1993 $10.90 13.57% $48,420,381 1.27% - 3.25% 34.10%
1994 10.27 (1.28%) 58,961,139 1.25% - 2.76% 24.71%
1995 11.97 21.70% 77,745,018 1.11% - 3.52% 18.27%
1996 12.88 18.23% 96,889,348 1.04% - 3.21% 38.25%
1997 14.52 21.01% 128,884,756 0.99% - 3.29% 27.73%
1998 15.65 21.84% 171,833,566 0.92% - 3.19% 27.90%
Six-months Ended 16.61 14.20%++ 211,743,165 0.89%+++ - 2.95%+++ 4.46%++
12/31/98 (unaudited)
==========================================================================================================================
FIXED INCOME
Year Ended June 30,
1993 10.60 12.59% 35,889,454 1.05% - 4.91% 316.06%
1994 9.80 (0.46%) 45,872,668 0.97% - 4.53% 254.92%
1995 10.30 11.48% 57,911,899 0.95% - 5.94% 330.55%
1996 10.09 4.12% 111,184,492 0.93% - 5.65% 313.51%
1997 10.24 8.39% 140,158,482 0.74% - 6.32% 105.98%
1998 10.42 9.32% 151,204,274 0.67% - 6.16% 143.66%
Six-months Ended 10.22 2.81%++ 163,241,801 0.67%+++ - 5.71%+++ 75.51%++
12/31/98 (unaudited)
=========================================================================================================================
SHORT-TERM
GOVERNMENT SECURITIES
Year Ended June 30,
1993 10.08 6.32% 27,027,485 0.78% - 3.87% 268.36%
1994 9.77 0.86% 30,271,535 0.74% - 3.75% 134.34%
1995 9.80 5.71% 32,121,171 0.71% - 5.27% 256.44%
1996 9.76 5.10% 51,755,317 0.66% - 5.37% 79.04%
1997 9.78 5.81% 54,807,409 0.63% - 5.49% 183.73%
1998 9.77 5.72% 60,236,281 0.60% - 5.67% 263.47%
Six-months Ended 9.77 2.55%++ 64,324,012 0.58%+++ - 4.99%+++ 42.38%++
12/31/98 (unaudited)
==========================================================================================================================
MONEY MARKET
Year Ended June 30,
1993 1.00 2.71%* 18,146,496 0.80% 0.87% 2.67% N/A
1994 1.00 2.91%* 45,605,598 0.53% 0.68% 2.97% N/A
1995 1.00 5.27%* 79,585,753 0.39% 0.54% 5.24% N/A
1996 1.00 5.32%* 90,482,435 0.49% 0.54% 5.25% N/A
1997 1.00 5.14% 109,682,146 0.48% - 5.03% N/A
1998 1.00 5.40% 104,167,524 0.48% - 5.28% N/A
Six-months Ended $1.00 2.56%++ $128,487,192 0.46%+++ - 5.00%+++ N/A
12/31/98 (unaudited)
</TABLE>
1 Total return at net asset value assumes reinvestment of dividends and
capital gains distributions.
* Total return for the Money Market Fund would have been lower if a
portion of the fees had not been waived/reimbursed by the advisor.
++ Not annualized
+++ Annualized
See notes to financial statements
33
<PAGE>
Schedules of Investments
December 31, 1998 (Unaudited)
Preferred Growth Fund
- --------------------------------------------------------
Common Stock-99.47% Shares Value
- --------------------------------------------------------
Aerospace - 1.18%
Raytheon Co Class A 59,700 $3,085,744
Raytheon Co Class B 65,500 3,487,875
----------
6,573,619
----------
Banks - 5.68%
Chase Manhattan Corp 243,292 16,559,062
Citigroup Inc 302,600 14,978,700
----------
31,537,762
----------
Computer Software - 7.98%
Compuware Corp * 75,100 5,867,188
Microsoft Corp * 128,500 17,821,344
Oracle Corp * 336,800 14,524,500
Platinum Technology Inc * 319,800 6,116,175
----------
44,329,207
----------
Discount & Fashion Retailing - 8.96%
Dollar General Corp 177,300 4,188,713
Gap Inc 193,800 10,901,250
Home Depot Inc 282,498 17,285,346
Kohls Corp * 193,100 11,863,581
Wal Mart Stores Inc 67,900 5,529,606
----------
49,768,496
----------
Electrical & Electronics - 9.75%
General Electric Co 165,500 16,891,344
Intel Corp 104,900 12,437,206
KLA Tencor Corp * 122,000 5,291,750
Symbol Technologies Inc 139,025 8,888,911
Texas Instruments Inc 125,000 10,695,313
----------
54,204,524
----------
Finance-Other - 8.41%
Associates First Capital
Corp Class A 258,200 10,941,225
MBNA Corp 416,162 10,378,040
Morgan Stanley Dean Witter & Co 175,920 12,490,320
Schwab (Charles) Corp 124,450 6,992,534
Washington Mutual Inc 155,700 5,945,794
----------
46,747,913
----------
Food - 2.01%
McDonalds Corp 145,500 11,148,938
----------
- ---------------------------------------------------------
Common Stock Shares Value
- ---------------------------------------------------------
Health Care - 13.87%
American Home Products Corp 204,400 $ 11,510,275
Eli Lilly & Co 80,000 7,110,000
Merck & Co Inc 76,100 11,239,019
Pfizer Inc 83,800 10,511,663
Pharmacia & UpJohn Inc 101,400 5,741,775
Rite Aid Corp 121,100 6,002,019
Schering Plough Corp 258,200 14,265,550
Warner Lambert Co 142,500 10,714,219
----------
77,094,520
----------
Insurance - 5.03%
Ace Ltd 220,300 7,586,581
American International
Group Inc 103,400 9,991,025
Provident Cos Inc 106,500 4,419,750
Unum Corp 101,700 5,936,738
----------
27,934,094
----------
Leisure Time Industries - .98%
Promus Hotel Corp * 168,300 5,448,713
----------
Manufacturing - 1.13%
Applied Materials Inc * 147,400 6,292,138
----------
Office Equipment & Computers - 17.24%
3Com Corp * 120,500 5,399,906
Ascend Communications Inc * 84,600 5,562,450
Cadence Design Systems Inc * 224,900 6,690,775
Cisco Systems Inc * 175,075 16,249,148
Compaq Computer Corp 202,100 8,475,569
Dell Computer Corp * 122,100 8,936,194
HBO & Co 280,100 8,035,369
Hewlett Packard Co 134,900 9,215,356
International Business Machines 53,300 9,847,175
Staples Inc * 197,100 8,610,806
Xerox Corp 74,400 8,779,200
----------
95,801,948
----------
Publishing & Broadcasting - 6.57%
CBS Corp * 365,900 11,983,225
Clear Channel Communications * 182,700 9,957,150
Infinity Broadcasting
Corp Class A * 223,300 6,112,838
Omnicom Group 145,900 8,462,200
----------
36,515,413
----------
See notes to financial statements and notes to schedules of investments
34
<PAGE>
The Preferred Group of Mutual Funds
Schedules of Investments
- ----------------------------------------------------------
Common Stock Shares Value
- ----------------------------------------------------------
Telecommunications - 10.68%
Airtouch Communications Inc * 145,500 $ 10,494,188
MCI Worldcom Inc * 374,900 26,899,075
Nokia Corp ADR 67,600 8,141,574
Qwest Communications
International Inc * 162,300 8,114,998
Tellabs Inc * 83,100 5,697,542
----------
59,347,377
----------
Total Common Stock
(Cost $372,975,619) 552,744,662
===========
- ----------------------------------------------------------
Short Term Investments - .75% Par Value
- ----------------------------------------------------------
Commercial Paper - .75%
Chevron USA Inc
4.80% January 4, 1999 $ 4,204,000 4,204,000
----------
Total Short Term Investments
(Cost $4,204,000) 4,204,000
==========
Total Investments - 100.22%
(Cost $377,179,619) 556,948,662
=============
Other Assets and Liabilities - (.22%) (1,243,637)
=============
Total Net Assets - 100% $555,705,025
=============
Preferred Value Fund
- ----------------------------------------------------------
Common Stock-96.26% Shares Value
- ----------------------------------------------------------
Aerospace - 4.24%
Boeing Co 225,000 $ 7,340,625
Lockheed Martin Corp 110,000 9,322,500
-------------
16,663,125
-------------
Banks - 11.30%
Citigroup Inc 575,000 28,462,500
Wells Fargo & Co 400,000 15,975,000
-------------
44,437,500
-------------
- ----------------------------------------------------------
Common Stock Shares Value
- ----------------------------------------------------------
Chemicals - 3.55%
Du Pont E I de Nemours & Co 140,000 $ 7,428,750
Freeport McMoran Copper &
Gold Class B * 261,000 2,724,188
Hercules Inc 139,000 3,805,125
-------------
13,958,063
-------------
Consumer Products - 6.69%
Anheuser Busch Cos Inc 110,000 7,218,750
Avon Products Inc 280,000 12,390,000
Philip Morris Cos Inc 125,000 6,687,500
-------------
26,296,250
-------------
Discount & Fashion Retailing - 2.15%
May Department Stores Co 140,000 8,452,500
-------------
Electrical & Electronics - 7.59%
General Electric Co 130,000 13,268,125
Intel Corp 140,000 16,598,750
-------------
29,866,875
-------------
Finance-Other - 15.87%
Conseco Inc 200,000 6,112,500
Countrywide Credit
Industries Inc 260,000 13,048,750
Federal Home Loan Mortgage Corp 350,000 22,553,125
Morgan Stanley Dean Witter & Co 150,000 10,650,000
Transamerica Corp 87,000 10,048,500
-------------
62,412,875
-------------
Food - 4.40%
Diageo PLC ADR 194,400 8,991,000
Dole Food Inc 200,000 6,000,000
McDonalds Corp 30,000 2,298,750
-------------
17,289,750
-------------
Health Care - 5.99%
Becton Dickinson & Co 240,000 10,245,000
Monsanto Co 280,000 13,300,000
-------------
23,545,000
-------------
Insurance - 15.11%
Ace Ltd 390,000 13,430,625
Aflac Inc 340,000 14,960,000
American International
Group Inc 135,000 13,044,375
Exel Limited Class A 240,000 18,000,000
-------------
59,435,000
-------------
See notes to financial statements and notes to schedules of investments
35
<PAGE>
Schedules of Investments December 31, 1998 (unaudited)
Preferred Value Fund (continued)
- ----------------------------------------------------------
Common Stock Shares Value
- ----------------------------------------------------------
Leisure Time Industries - 3.17%
Carnival Corp 260,000 $ 12,480,000
-------------
Manufacturing - 4.55%
Caterpillar Inc 150,000 6,900,000
Dover Corp 135,000 4,944,375
Minnesota Mining &
Manufacturing Co 85,000 6,045,625
-------------
17,890,000
-------------
Publishing & Broadcasting - 1.59%
News Corp Ltd ADR 125,000 3,085,938
Reed International PLC ADR 100,000 3,150,000
-------------
6,235,938
-------------
Service Industries - 2.00%
Arrow Electronics Inc * 295,000 7,872,813
-------------
Telecommunications - 4.23%
Sprint Corp 261,000 14,637,750
Sprint Corp PCS Series 1 * 174,000 2,011,875
-------------
16,649,625
-------------
Transportation - 3.83%
AMR Corp * 190,000 11,281,248
Canadian Pacific Ltd 200,000 3,775,000
-------------
15,056,248
-------------
Total Common Stock
(Cost $177,261,848) 378,541,562
============
- ----------------------------------------------------------
Short Term Investments - 3.71% Par/Shares Value
- ----------------------------------------------------------
Commercial Paper - 2.29%
CIT Group Holdings Inc
5.76% January 4, 1999 @ $4,000,000 3,998,080
5.99% January 7, 1999 @ 5,000,000 4,995,009
-------------
8,993,089
-------------
Short Term Investment Fund - 1.42%
State Street Global Advisors
Money Market Fund 5,597,919 5,597,919
-------------
- ----------------------------------------------------------
Short Term Investments Par/Shares Value
- ----------------------------------------------------------
Total Short Term Investments
(Cost $14,591,008) $ 14,591,008
============
Total Investments - 99.97%
(Cost $191,852,856) 393,132,570
============
Other Assets and Liabilities - .03% 103,110
============
Total Net Assets - 100% $393,235,680
============
Preferred International Fund
- ----------------------------------------------------------
Common Stock & Equivalents-92.13% Shares Value
- ----------------------------------------------------------
ARGENTINA - 2.40%
Communication Services - 1.09%
Telecom Argentina Stet
France Class B ADR 108,000 $ 2,970,000
International Oil - 1.31%
YPF Sociedad Anomina
Class D ADR 128,300 3,584,381
-------------
Total Argentina 6,554,381
============
- ----------------------------------------------------------
AUSTRALIA - 7.55%
Banks - 2.20%
National Australia Bank 399,000 6,014,707
Conglomerates - 1.22%
CSR Limited 1,365,000 3,337,429
Construction Materials - 1.36%
Pioneer International Ltd 1,759,000 3,718,702
Telephone - 1.32%
Cable & Wireless Optus * 1,715,200 3,605,084
Trucking & Freight - 1.45%
Mayne Nickless Ltd 1,072,000 3,974,263
------------
Total Australia 20,650,185
============
See notes to financial statements and notes to schedules of investments
36
<PAGE>
The Preferred Group of Mutual Funds Schedules of Investments
- ----------------------------------------------------------
Common Stock & Equivalents Shares Value
- ----------------------------------------------------------
CANADA - 3.59%
Aluminum - 1.65%
Alcan Aluminum Ltd 166,000 $ 4,507,033
Banks - 1.94%
Bank Nova Scotia Halifax 240,000 5,299,313
-------------
Total Canada 9,806,346
=============
- ----------------------------------------------------------
FRANCE - 9.72%
Apparel & Textiles - 2.04%
Christian Dior 50,300 5,559,900
Automobiles - 2.31%
Peugeot SA 40,800 6,312,288
Gas Exploration - 2.04%
Elf Aquitaine 48,300 5,580,719
Homebuilders - 3.33%
Bouygues 44,200 9,107,208
-------------
Total France 26,560,115
=============
- ----------------------------------------------------------
ITALY - 7.80%
Apparel & Textiles - 2.39%
Benetton Group SPA 3,250,000 6,545,405
-------------
Banks - 5.41%
Banca Pop Bergam CV 275,000 6,669,388
Banca Popolare di Brescia 332,700 8,108,990
-------------
14,778,378
-------------
Total Italy 21,323,783
=============
- ----------------------------------------------------------
JAPAN - 5.66%
Electrical Equipment - 1.22%
Hitachi 540,000 3,343,653
-------------
Household Appliances - 4.44%
Matsushita Electric
Industries 369,000 6,524,821
Sony Corp 77,000 5,605,573
-------------
12,130,394
-------------
Total Japan 15,474,047
=============
- ----------------------------------------------------------
Common Stock & Equivalents Shares Value
- ----------------------------------------------------------
NETHERLANDS - 9.22%
Air Travel - 2.14%
KLM Royal Dutch Air Lines 193,300 $ 5,844,169
Chemicals - 2.33%
Akzo Nobel NV 140,000 6,371,427
Financial Services - 2.85%
ING Groep NV 128,000 7,801,139
Industrial Machinery - .88%
Stork NV 105,000 2,397,669
Petroleum - 1.02%
Pakhoed NV Kon 110,000 2,775,323
------------
Total Netherlands 25,189,727
=============
- ----------------------------------------------------------
NEW ZEALAND - 2.57%
Food & Beverages - .93%
Lion Nathan Ltd 996,000 2,531,404
Forest Products - .72%
Carter Holt Harvey 2,200,000 1,968,007
Household Appliances - .92%
Fisher & Paykel 700,000 2,523,153
-------------
Total New Zealand 7,022,564
=============
- ----------------------------------------------------------
NORWAY - .65%
Petroleum Services - .65%
Saga Petroleum Series A 195,200 1,785,405
------------
Total Norway 1,785,405
=============
- ----------------------------------------------------------
SOUTH KOREA - 2.09%
Electric Utilities - 1.63%
Korea Electric Power 179,400 4,443,990
Steel - .46%
Pohang Iron & Steel 20,280 1,261,305
------------
Total South Korea 5,705,295
=============
See notes to financial statements and notes to schedules of investments
37
<PAGE>
Preferred International Schedules of Investments
December 31, 1998 (unaudited)
Preferred International Fund (continued)
- ---------------------------------------------------------
Common Stock & Equivalents Shares Value
- ---------------------------------------------------------
SPAIN - 7.36%
Banks - 4.27%
Banco Bilbao Vizcaya 480,000 $ 7,514,776
Banco de Andalucia 92,000 4,168,871
------------
11,683,647
------------
Electric Utilities - 3.09%
Iberdrola SA 452,000 8,443,991
------------
Total Spain 20,127,638
=============
- ---------------------------------------------------------
SWEDEN - 7.32%
Drugs & Health Care - 2.90%
Pharmacia & UpJohn 142,100 7,940,306
Household Appliances - 2.58%
Electrolux AB Series B 410,000 7,039,558
Industrial Machinery - .83%
SKF AB Series B 195,000 2,268,056
Mining - 1.01%
Svedala Industrial 190,000 2,759,453
-----------
Total Sweden 20,007,373
===========
- ---------------------------------------------------------
SWITZERLAND - 10.65%
Banks - 2.30%
UBS AG * 20,461 6,285,610
Drugs & Health Care - 2.51%
Novartis AG 3,500 6,879,231
Industrial Machinery - 1.64%
Sulzer AG 7,360 4,479,115
Retail Trade - 2.08%
Valora Holding AG 21,000 5,679,188
Toys & Amusements - 2.12%
Swatch Group 9,375 5,800,939
------------
Total Switzerland 29,124,083
=============
- ----------------------------------------------------------
Common Stock & Equivalents Shares Value
- ----------------------------------------------------------
UNITED KINGDOM - 15.55%
Banks - 2.73%
National Westminster 385,000 $ 7,451,819
Food & Beverages - 2.23%
Allied Domecq PLC 660,000 6,102,176
Leisure Time - 1.12%
Rank Group 800,000 3,057,784
Non-Ferrous Metals - 2.04%
Rio Tinto 480,000 5,582,323
Retail Grocery - 2.24%
Tesco 2,100,000 6,105,665
Steel - 1.04%
British Steel 1,877,000 2,845,593
Telephone - 4.15%
British Telecom 750,000 11,351,553
-------------
Total United Kingdom 42,496,913
=============
Total Common Stock & Equivalents
(Cost $193,607,628) 251,827,855
=============
- ----------------------------------------------------------
Short Term Investments - 8.00% Par Value
- ----------------------------------------------------------
Repurchase Agreements - 8.00%
State Street Repo 4.25% January 4, 1999
(Cost - $21,859,000)(Dated December 31, 1998,
due January 4, 1999, collateralized
by $15,495,000 U.S. Treasury Bond 8.875%,
August 15, 2017,
Market Value $22,300,698,
Repurchase Proceeds $21,869,322) $21,859,000 21,859,000
----------
Total Short Term Investments
(Cost $21,859,000) 21,859,000
=============
Total Investments - 100.13%
(Cost $215,466,628) 273,686,855
=============
Other Assets & Liabilities - (.13%) (339,902)
=============
Total Net Assets - 100% $273,346,953
=============
See notes to financial statements and notes to schedules of investments
38
<PAGE>
The Preferred Group of Mutual Funds
Schedules of Investments
Preferred Small Cap Fund
Common Stock-97.72% Shares Value
- --------------------------------------------------------
Aerospace - 3.32%
Amtran Inc * 25,000 $ 678,125
BE Aerospace Inc * 24,400 512,400
Ducommun Inc Del * 31,850 439,928
Kellstrom Industries Inc * 44,100 1,267,875
Primex Technologies Inc 29,500 1,253,750
-----------
4,152,078
-----------
Automotive - 5.06%
Arvin Industries Inc 57,000 2,376,188
Avis Rent A Car Inc 62,200 1,504,463
McGrath Rentcorp 27,300 600,600
Midas Inc 18,000 560,250
Standard Motor Products Inc 35,000 848,750
Tower Automotive Inc * 17,500 436,406
-----------
6,326,657
-----------
Banks - .62%
BSB Bancorp Inc 11,350 373,131
Sky Financial Group Inc 15,330 405,287
-----------
778,418
-----------
Chemicals - 1.01%
Schulman A Inc 19,500 442,406
Spartech Corp 37,100 816,200
-----------
1,258,606
-----------
Computer Software - 1.08%
Hyperion Solutions Corp * 25,000 450,000
Mapics Inc * 6,600 108,900
Project Software &
Development Inc * 12,900 432,150
Structural Dynamics Research Corp * 17,900 355,763
-----------
1,346,813
-----------
Consumer Products - 6.07%
Blair Corp 40,100 889,719
Department 56 Inc * 34,500 1,295,906
Ethan Allan Interiors Inc 20,900 856,900
Fossil Inc * 34,300 986,125
Media Arts Group Inc * 35,300 496,406
Musicland Stores Inc * 79,300 1,184,544
Oshkosh B'Gosh Inc 44,600 900,363
Wesley Jessen Visioncare Inc * 35,000 971,250
-----------
7,581,213
-----------
- -------------------------------------------------------
Common Stock Shares Value
- -------------------------------------------------------
Discount & Fashion Retailing - 6.50%
Ames Department Stores Inc * 79,100 $ 2,135,700
Cato Corp 64,500 634,922
Columbia Sportswear Co * 55,000 928,125
Oxford Industries Inc 36,900 1,042,425
Ross Stores Inc 22,300 878,063
Shopko Stores Inc * 27,600 917,700
United Stationers Inc * 30,000 780,000
Zale Corp * 24,900 803,025
----------
8,119,960
----------
Electrical & Electronics - 5.21%
CHS Electronics Inc * 111,750 1,892,766
General Cable Corp 51,350 1,052,675
Hutchison Technology Inc * 21,700 773,063
NeoMagic Corp * 70,700 1,564,238
Plexus Corp * 22,000 745,250
Triumph Group Inc * 14,900 476,800
----------
6,504,792
----------
Finance-Other - 16.90%
Alfa Corp 44,200 1,071,850
AmeriCredit Corp * 74,900 1,034,556
Andover Bancorp Inc 8,500 294,313
Arthur J Gallagher & Co 24,000 1,059,000
Capital Reinsurance Corp 50,000 1,003,125
Commerce Group Inc 8,700 308,306
Doral Financial Corp 55,300 1,223,513
Downey Financial Corp 27,300 694,444
Eaton Vance Corp 34,900 728,538
FBL Financial Group Inc 26,500 642,625
Fidelity National Financial Inc 60,610 1,848,605
First American Financial Corp 57,700 1,853,613
Flagstar Bancorp Inc 25,900 676,638
Hilb Rogal & Hamilton Co 40,400 802,950
Investment Technology Group Inc* 27,900 1,731,544
Jefferies Group Inc 45,300 2,248,013
Landamerica Financial Group Inc 18,700 1,043,694
Resource Bancshare Mortgage
Group Inc 34,300 568,094
Stewart Information Services Corp 39,300 2,279,400
----------
21,112,821
----------
Food - 1.11%
Michael Foods Inc 18,400 552,000
Pilgrims Pride Inc 42,000 837,375
----------
1,389,375
----------
See notes to financial statements and notes to schedules of investments
39
<PAGE>
Schedules of Investments
December 31, 1998 (unaudited)
Preferred Small Cap (continued)
Common Stock Shares Value
- -------------------------------------------------------
Health Care - 4.18%
American Medical
Security Group, Inc 47,700 $ 682,706
Barr Labs Inc * 20,800 998,400
Bio Rad Laboratories Inc 44,000 924,000
Curative Health Services Inc * 9,500 318,250
Datascope Corp * 22,400 515,200
Hooper Holmes Inc 61,500 1,783,500
----------
5,222,056
----------
Housing & Real Estate - 10.85%
Centex Construction Products Inc 43,600 1,771,250
Centex Corp 42,400 1,910,650
Champion Enterprises Inc * 31,000 848,625
D.R. Horton Inc 93,300 2,145,900
Kaufman & Broad Home Corp 31,800 914,250
Lennar Corp 60,323 1,523,156
M.D.C. Holdings Inc 15,300 327,038
NVR Inc * 35,300 1,683,369
Schottenstein Homes Inc 23,300 512,600
Standard Pacific Corp 60,500 854,563
Toll Brothers Inc * 47,000 1,060,438
----------
13,551,839
----------
Insurance - 2.67%
Enhance Financial
Services Group Inc 26,900 807,000
Presidential Life Corp 56,400 1,120,950
RLI Corp 42,350 1,408,138
---------
3,336,088
---------
Leisure Time Industries - 1.85%
Monaco Coach Corp * 37,500 993,750
Thor Industries Inc 19,200 489,600
Winnebago Industries Inc 55,100 833,388
---------
2,316,738
---------
Manufacturing - 12.17%
Briggs & Stratton Corp 10,000 498,750
C&D Technologies Inc 19,700 541,750
Commercial Intertech Corp 41,600 538,200
Furniture Brands
International Inc * 76,000 2,071,000
Gardner Denver Machinery Inc * 7,600 112,100
Gulf Island Fabrication Inc * 46,000 356,500
JLG Industries Inc 58,000 906,250
Lone Star Industries Inc 38,600 1,420,963
Manitowoc Inc 15,900 705,563
Modine Manufacturing Co 23,400 848,250
Mohawk Industries Inc * 39,100 1,644,644
Myers Industries Inc 62,900 1,804,444
Nacco Industries Inc 16,300 1,499,600
- -------------------------------------------------------
Common Stock Shares Value
- -------------------------------------------------------
Manufacturing (continued)
Plantronics Inc * 15,200 $ 1,307,200
Tredegar Industries Inc 42,300 951,750
----------
15,206,964
----------
Metals & Mining - 3.31%
Barnes Group Inc 40,400 1,176,650
Chase Industry Inc * 37,050 386,709
Cleveland Cliffs Inc 12,000 483,750
Reliance Steel & Aluminum Co 32,300 892,288
Southern Peru Copper Corp 72,500 684,219
Terex Corp 18,000 514,125
----------
4,137,741
----------
Office Equipment & Computers - 1.97%
Avant Corp * 48,000 768,000
Knoll Inc * 26,300 779,138
Microchip Technology Inc * 24,500 906,500
---------
2,453,638
---------
Publishing & Broadcasting - 2.52%
Hollinger International Inc 158,000 2,202,125
Merrill Corp 49,000 946,313
---------
3,148,438
---------
Service Industries - 4.88%
Advo Inc * 65,400 1,724,925
Cal Dive International Inc * 35,900 744,925
Computer Horizons Corp * 40,000 1,065,000
Pomeroy Computer Resources Inc * 27,000 607,500
Schawk Inc 36,300 503,663
URS Corp * 62,300 1,456,263
---------
6,102,276
---------
Telecommunications - .95%
Superior Telecom Inc 25,150 1,188,338
---------
Transportation - 3.61%
Alaska Air Group Inc * 33,300 1,473,525
Comair Holdings Inc 22,875 772,030
Continental Airlines Inc * 15,400 515,900
Landstar System Inc * 10,000 407,500
USFreightways Corp 22,300 649,480
Varlen Corp 30,000 691,870
---------
4,510,305
---------
Utilities & Power - 1.88%
Empire District Electric Co 46,900 1,160,775
United Illuminating Co 23,000 1,184,500
---------
2,345,275
---------
See notes to financial statements and notes to schedules of investments
40
<PAGE>
The Preferred Group of Mutual Funds
Schedules of Investments
- ------------------------------------------------------
Common Stock Shares Value
- ------------------------------------------------------
Total Common Stock
(Cost $100,500,364) $122,090,429
============
- ------------------------------------------------------
Short Term Investments - 1.89% Shares Value
- ------------------------------------------------------
Short Term Investment Fund - 1.89%
State Street Global Advisors
Money Market Fund 2,361,937 2,361,937
---------
Total Short Term Investments
(Cost $2,361,937) 2,361,937
=============
Total Investments - 99.61%
(Cost $102,862,301) 124,452,366
=============
Other Assets and Liabilities - .39% 488,391
=============
Total Net Assets - 100% $124,940,757
=============
Preferred Asset Allocation Fund
Common Stock-43.90% Shares Value
- -----------------------------------------------------
Aerospace - .47%
Boeing Co 9,462 $ 308,698
General Dynamics Corp 1,400 82,075
Lockheed Martin Corp 1,919 162,635
Northrop Grumman Corp 400 29,250
Raytheon Co 3,000 159,750
United Technologies Corp 2,380 258,825
---------
1,001,233
---------
Automotive - .66%
Cooper Tire & Rubber Co 500 10,219
Cummins Engine Inc 200 7,100
Dana Corp 1,518 62,048
Eaton Corp 870 61,498
Ford Motor Co 11,100 651,431
General Motors Corp 6,450 461,578
Goodyear Tire and Rubber 1,620 81,709
Navistar International Corp Inc * 410 11,685
Paccar Inc 940 38,658
---------
1,385,926
---------
- -----------------------------------------------------
Common Stock Shares Value
- -----------------------------------------------------
Banks - 2.97%
BB&T Corp 1,700 $ 68,531
Banc One Corp 10,588 540,650
BankAmerica Corp 16,342 982,563
BankBoston Corp 2,800 109,025
Bank New York Inc 7,300 293,825
Bankers Trust New York Corp 940 80,311
Chase Manhattan Corp 8,142 554,165
Comerica Inc 1,550 105,691
Fifth Third Bancorp 2,300 164,019
Firstar Corp Wisconsin 1,100 102,501
First Union Corp 8,948 544,150
Fleet Financial Group Inc 5,088 227,370
JP Morgan & Co Inc 1,720 180,708
Keycorp 4,500 144,000
MBNA Corp 4,602 114,762
Mellon Bank Corp 2,600 178,750
Mercantile Bancorporation Inc 900 41,513
National City Corp 2,700 195,750
PNC Bank Corp 2,730 147,761
Regions Financial Corp 1,300 52,406
Republic New York Corp 1,300 59,231
State Street Corporation 1,600 111,300
Summit Bancorp 1,100 48,056
Suntrust Banks Inc 2,200 168,300
U.S. Bancorp 5,984 212,432
Union Planters Corp 1,500 67,964
Wachovia Corp 1,930 168,754
Wells Fargo & Co 15,790 630,613
---------
6,295,101
---------
Chemicals - .75%
Air Products & Chemicals Inc 2,260 90,400
BF Goodrich Co 400 14,350
Dow Chemical Co 2,180 198,244
Du Pont E I de Nemours & Co 10,440 553,973
Eastman Chemical Co 875 39,156
Engelhard Corp 1,767 34,457
Freeport McMoRan
Copper & Gold Class B 2,100 21,919
Great Lakes Chemical Corp 670 26,800
Hercules Inc 1,020 27,923
International Flavors
& Fragrances 1,140 50,374
Monsanto Co 5,800 275,500
Morton International Inc 1,510 36,995
Nalco Chemical Co 940 29,140
Praxair Inc 1,730 60,983
Rohm & Haas Co 2,060 62,058
Union Carbide Corp 1,320 56,100
WR Grace & Co * 790 12,393
---------
1,590,765
---------
See notes to financial statements and notes to schedules of investments
41
<PAGE>
Schedules of Investments
December 31, 1998 (unaudited)
Preferred Asset Allocation Fund (continued)
- -----------------------------------------------------
Common Stock Shares Value
- -----------------------------------------------------
Computer Software - 2.19%
Adobe Systems Inc 650 $ 30,388
Autodesk Inc 300 12,806
Automatic Data Processing Inc 2,930 234,949
BMC Software Inc * 1,900 84,669
Computer Associates
International Inc 5,268 224,548
Computer Sciences Corp * 1,400 90,213
Compuware Corp * 500 39,115
First Data Corp 4,100 129,919
Microsoft Corp * 23,300 3,231,419
Novell Inc * 3,800 68,875
Oracle Corp * 9,335 402,572
Parametric Technology Corp * 2,700 43,875
Peoplesoft Inc * 2,150 40,716
Shared Medical System 200 9,975
---------
4,644,039
---------
Conglomerates - 1.84%
Allied Signal Inc 5,460 241,946
General Electric Co 30,640 3,127,195
Harcourt General Inc 400 21,275
Household International Inc 3,013 119,390
Pall Corp 733 18,554
Rockwell International Corp 2,000 97,125
TRW Inc 1,300 73,044
Tenneco Inc 1,690 57,566
Textron Inc 1,680 127,575
---------
3,883,670
---------
Consumer Products - 3.31%
Alberto Culver Co 300 8,006
Anheuser Busch Cos Inc 4,680 307,125
Armstrong World Industries Inc 200 12,063
Avon Products Inc 2,700 119,475
Brown Forman Corp Class B 400 30,275
Circuit City Stores Inc 600 29,963
Clorox Co 1,060 123,821
Coca Cola Co 23,180 1,550,163
Colgate Palmolive Co 2,720 252,620
Coors Adolph Co Class B 200 11,288
Ecolab Inc 800 28,950
Fortune Brands Inc 1,560 49,335
Fruit of the Loom Inc Class A * 600 8,288
Gillette Co 9,840 475,395
Liz Claiborne Inc 780 24,619
Masco Corp 3,440 98,900
- -----------------------------------------------------
Common Stock Shares Value
- -----------------------------------------------------
Consumer Products (continued)
Maytag Corp 600 $ 37,350
Nike Inc 2,680 108,708
Pepsico Inc 14,080 576,400
Philip Morris Cos Inc 22,660 1,212,310
Proctor & Gamble Co 12,400 1,132,275
Reebok International Ltd * 620 9,223
Russell Corp 200 4,063
Seagram Ltd 3,770 143,260
Tupperware Corp 400 6,575
UST Inc 1,860 64,868
Unilever NV 5,780 479,379
V F Corp 1,260 59,063
Whirlpool Corp 930 51,499
---------
7,015,259
---------
Containers & Packing - .06%
Ball Corp 200 9,150
Bemis Inc 300 11,381
Crown Cork & Seal Inc 1,270 39,132
Sealed Air Corp * 615 31,403
Temple Inland Inc 600 35,588
---------
126,654
---------
Discount & Fashion Retailing - 2.18%
Autozone Inc * 1,400 46,113
Consolidated Stores Corp * 1,200 24,225
Costco Cos Inc * 2,265 163,505
Dayton Hudson Corp 4,680 253,890
Dillards Inc 1,310 37,171
Dollar General Corp 1,650 38,981
Federated Department Stores Inc *2,000 87,125
Fred Meyer Inc * 1,300 78,325
Gap Inc 6,090 342,563
Home Depot Inc 14,456 884,526
JC Penney Inc 2,400 112,500
K Mart Corp * 4,930 75,491
Kohls Corp * 1,500 92,156
Limited Inc 2,242 65,298
Lowes Cos Inc 2,100 107,494
May Department Stores Co 2,410 145,504
Nordstrom Inc 1,720 59,663
Pep Boys-Manny Moe & Jack 400 6,275
Sears Roebuck & Co 3,900 165,750
TJX Cos Inc 1,900 55,100
Toys R Us Inc * 2,870 48,431
Venator Group Inc * 800 5,145
Wal Mart Stores Inc 21,110 1,719,146
---------
4,614,377
---------
See notes to financial statements and notes to schedules of investments
42
<PAGE>
The Preferred Group of Mutual Funds
Schedules of Investments
- -----------------------------------------------------
Common Stock Shares Value
- -----------------------------------------------------
Electrical & Electronics - 1.80%
AES Corp * 1,70 $ 80,538
Advanced Micro Devices Inc * 900 26,044
Ameren Corp 1,250 53,359
Amp Inc 2,200 114,538
Consolidated Edison Inc 2,210 116,854
Cooper Industries Inc 1,382 65,904
Emerson Electric Co 4,280 258,940
Harris Corp 500 18,313
Honeywell Inc 1,390 104,684
Intel Corp 15,720 1,863,803
Johnson Controls Inc 500 29,500
KLA Tencor Corp * 800 34,700
LSI Logic Corp * 1,400 22,575
Micron Technology Inc * 2,200 111,238
Millipore Corp 300 8,531
Motorola Inc 5,600 341,950
National Semiconductor Corp * 1,000 13,500
National Service Industry Inc 300 11,400
New Centy Energies Inc 1,100 53,625
Perkin Elmer Corp 300 29,269
Raychem Corp 500 16,156
Solectron Corp * 700 65,051
Tektronix Inc 350 10,522
Texas Instruments Inc 3,840 328,560
Thermo Electron Corp * 1,600 27,100
Thomas & Betts Corp 300 12,994
---------
3,819,648
---------
Finance-Other - 2.57%
American Express Co 4,450 455,013
American General Corp 2,438 190,164
Associates First Capital Corp 6,168 261,369
Bear Stearns Cos Inc 900 33,638
Capital One Financial Corp 600 69,000
Cincinnati Financial Corp 1,000 36,625
Citigroup Inc 22,134 1,095,633
Countrywide Credit Industry Inc 1,100 55,206
Dun & Bradstreet Corp 1,630 51,447
Equifax Inc 1,500 51,281
Federal Home Loan Mortgage Corp 6,580 423,999
Federal National
Mortgage Association 9,900 732,600
Golden West Financial Corp 760 69,683
H & R Block Inc 1,260 56,700
Huntington Bancshares Inc 1,290 38,781
Jefferson Pilot Corp 1,240 93,000
Lehman Brothers Holding Corp 1,100 48,469
Merrill Lynch & Co Inc 3,520 234,960
Morgan Stanley Dean Witter & Co 5,263 373,673
- -----------------------------------------------------
Common Stock Shares Value
- -----------------------------------------------------
Finance-Other (continued)
Northern Trust Corp 700 $ 61,119
Paychex Inc 1,700 87,444
Progressive Corp Ohio 800 135,500
Provident Companies Inc 1,200 49,800
Providian Financial Corp 1,770 132,750
SLM Holding Corp 1,400 67,195
Schwab (Charles) Corp 2,400 134,850
SunAmerica Inc 2,250 182,531
Synovus Financial Corp 1,600 39,000
Washington Mutual Inc 4,450 169,934
---------
5,431,364
---------
Food - 1.60%
Albertsons Inc 2,610 166,224
American Stores Co 3,140 115,984
Archer Daniels Midland Co 5,626 96,697
Bestfoods 2,700 143,775
Campbell Soup Co 4,300 236,500
Coca Cola Enterprises Inc 3,300 117,975
ConAgra Inc 4,540 143,010
General Mills Inc 1,530 118,958
Great Atlantic & Pacific Tea Inc 200 5,925
HJ Heinz Co 3,315 187,712
Hershey Foods Corp 1,420 88,306
Kellogg Co 3,920 133,770
Kroger Co * 1,600 96,800
McDonalds Corp 6,500 498,063
Pioneer Hi-Bred
International Inc 2,412 65,124
Quaker Oats Co 1,360 80,920
RJR Nabisco Holdings Corp 3,000 89,063
Ralston Purina Co 3,130 101,334
Safeway Inc * 4,600 280,313
Sara Lee Corp 8,720 245,795
Supervalu Inc 700 19,600
Sysco Corp 3,840 105,360
Tricon Global Restaurants Inc * 1,418 71,077
WM Wrigley Jr Co 1,170 104,788
Winn Dixie Stores Inc 1,540 69,108
---------
3,382,181
---------
Fuel - 2.50%
Anadarko Petroleum Corp 1,500 46,313
Amerada Hess Corp 1,110 55,223
Apache Corp 900 22,781
Ashland Inc 500 24,188
Atlantic Richfield Co 2,880 187,920
Baker Hughes Inc 2,640 46,695
Burlington Resources Inc 1,655 59,270
Chevron Corp 6,160 510,895
See notes to financial statements and notes to schedules of investments
43
<PAGE>
Schedules of Investments
December 31, 1998 (unaudited)
Preferred Asset Allocation Fund (continued)
- -----------------------------------------------------
Common Stock Shares Value
- -----------------------------------------------------
Fuel (continued)
Coastal Corp 2,180 $ 76,164
Exxon Corp 22,840 1,670,175
Halliburton Co 4,670 138,349
Helmerich & Payne Inc 300 5,813
Kerr McGee Corp 300 11,475
Mobil Corp 7,320 637,755
Occidental Petroleum Corp 3,310 55,856
Oneok Inc 200 7,225
Oryx Energy Co * 1,590 21,366
Phillips Petroleum Co 2,660 113,383
Rowan Companies Inc * 500 5,000
Royal Dutch Petroleum Co 19,600 938,350
Schlumberger Ltd 4,960 228,780
Texaco Inc 5,220 276,008
USX Marathon Group 2,900 87,363
Unocal Corp 2,600 75,888
---------
5,302,235
---------
Health Care - 5.64%
Abbott Labs 14,180 694,820
Allergan Inc 770 49,858
Alza Corp * 1,100 57,475
American Home Products Corp 12,040 678,003
Amgen Inc * 2,480 259,315
Bausch & Lomb Inc 780 46,800
Baxter International Inc 2,580 165,926
Becton Dickinson & Co 2,620 111,841
Biomet Inc 1,500 60,375
Boston Scientific Corp * 3,800 101,888
Bristol Myers Squibb Co 9,080 1,215,018
CR Bard Inc 300 14,850
CVS Corp 3,380 185,900
Cardinal Health Inc 1,200 91,050
Columbia/HCA Healthcare Corp 6,149 152,188
Eli Lilly & Co 9,648 857,466
Guidant Corp 1,600 176,400
HCR Manorcare Inc * 700 20,563
Healthsouth Corp * 3,400 52,488
Humana Inc * 1,600 28,500
IMS Health Inc 1,630 122,963
Johnson & Johnson 12,520 1,050,115
Longs Drug Stores Corp 200 7,500
Mallinckrodt Inc 400 12,325
Medtronic Inc 4,640 344,520
Merck & Co Inc 11,130 1,643,762
Pfizer Inc 12,100 1,517,794
Pharmacia & UpJohn Inc 4,853 274,801
- -----------------------------------------------------
Common Stock Shares Value
- -----------------------------------------------------
Health Care (continued)
Rite Aid Corp 1,600 $ 79,300
Schering Plough Corp 13,960 771,290
Sigma Aldrich 1,200 35,250
St Jude Medical Inc * 1,000 27,687
Tenet Healthcare Corp * 2,760 72,450
United Healthcare Corp * 1,900 81,819
Walgreen Co 5,120 299,840
Warner Lambert Co 7,760 583,455
----------
11,945,595
----------
Housing & Real Estate - .10%
Centex Corp 400 18,025
Kaufman & Broad Home Corp 200 5,750
Owens Corning 300 10,631
PPG Industries Inc 1,780 103,685
Pulte Corp 300 8,344
Sherwin Williams Co 2,080 61,100
---------
207,535
---------
Insurance - 1.33%
Aetna Inc 1,466 115,264
Allstate Corp 8,158 315,103
American International Group Inc 9,665 933,881
Aon Corp 1,050 58,144
Berkshire Hathaway Inc 53 123,375
Chubb Corp 1,560 101,205
Cigna Corp 2,020 156,171
Conseco Inc 2,798 85,514
Hartford Financial
Services Group 2,320 127,310
Lincoln National Corp Inc 980 80,176
Loews Corp 1,100 108,075
MBIA INC 600 39,338
MGIC Investment Corp 1,100 43,794
Marsh & McLennan Cos Inc 2,590 151,353
Safeco Corp 1,460 62,689
St. Paul Cos Inc 2,162 75,130
Torchmark Corp 1,700 60,031
Transamerica Corp 770 88,935
Unum Corp 1,400 81,725
---------
2,807,213
---------
Leisure Time Industries - .68%
American Greetings Corp 400 16,425
Brunswick Corp 1,180 29,205
Carnival Corp 5,500 264,000
Darden Restaurants Inc 1,630 29,340
Eastman Kodak Co 3,130 225,360
Fleetwood Enterprises Inc 200 6,950
Harrahs Entertainment Inc * 650 10,197
See notes to financial statements and notes to schedules of investments
44
<PAGE>
The Preferred Group of Mutual Funds
Schedules of Investments
- -----------------------------------------------------
Common Stock Shares Value
- -----------------------------------------------------
Leisure Time Industries (continued)
Hasbro Inc 1,410 $ 50,936
Hilton Hotels Corp 2,520 48,195
King World Productions Inc * 400 11,775
Marriott International Inc 2,660 77,140
Mattel Inc 2,969 67,730
Mirage Resorts Inc * 1,100 16,431
Polaroid Corp 300 5,606
Walt Disney Co 19,180 575,400
Wendy's International Inc 800 17,450
---------
1,452,140
---------
Manufacturing - .93%
Aeroquip Vickers Inc 200 5,988
Applied Materials Inc * 3,800 162,213
Avery Dennison Corp 700 31,544
Black & Decker Corp 600 33,638
Briggs & Stratton Corp 100 4,988
Case Corp 900 19,631
Caterpillar Inc 3,720 171,120
Corning Inc 2,350 105,750
Crane Co 400 12,075
Danaher Corp 1,200 65,175
Deere & Co 2,560 84,800
Dover Corp 1,400 51,275
FMC Corp * 200 11,200
Harnischfeger Industries Inc 300 3,056
ITT Industries Inc 1,160 46,110
Illinois Tool Works Inc 2,520 146,160
Ingersoll Rand Co 1,860 87,304
Jostens Inc 200 5,238
Milacron Inc 200 3,850
Minnesota Mining &
Manufacturing Co 3,960 281,655
Newell Co 1,760 72,600
Owens Illinois Inc * 1,200 36,750
Parker Hannifin Corp 625 20,469
Rubbermaid Inc 1,580 49,671
Snap On Inc 400 13,925
Springs Industries Inc 100 4,144
Stanley Works 500 13,875
Timken Co 400 7,550
Tyco International Ltd 5,556 419,131
---------
1,970,885
---------
Metals & Mining - .25%
Alcan Aluminum Ltd 2,210 59,808
Allegheny Teldyne Inc 1,177 24,055
Aluminum Company of America 1,800 134,213
Asarco Inc 200 3,013
- -----------------------------------------------------
Common Stock Shares Value
- -----------------------------------------------------
Metals & Mining (continued)
Barrick Gold Corp 3,700 $ 72,150
Battle Mountain Gold Co 2,400 9,900
Bethlehem Steel Corp * 800 6,700
Cyprus Amax Minerals Co 1,160 11,600
Homestake Mining Co 2,490 22,877
Inco Ltd 1,560 16,478
Newmont Mining Corp 1,018 18,388
Nucor Corp 500 21,625
Phelps Dodge Corp 630 32,051
Placer Dome Inc 2,350 27,025
Reynolds Metals Co 700 36,881
USX US Steel Group 1,100 25,300
Worthington Industries Inc 550 6,875
---------
528,939
---------
Office Equipment & Computers - 3.78%
3Com Corp * 3,300 147,881
American Online Inc * 3,700 591,726
Apple Computer * 1,350 55,266
Ascend Communications Inc * 1,900 124,925
Cabletron Systems Inc * 1,400 11,725
Ceridian Corp * 400 27,925
Cisco Systems Inc * 14,645 1,359,239
Compaq Computer Corp 15,955 669,113
Data General Corp * 300 4,931
De Luxe Corp 1,150 42,047
Dell Computer Corp * 13,300 973,394
EMC Corp * 4,600 391,000
Gateway 2000 Inc * 1,400 71,663
HBO & Co 4,000 114,750
Hewlett Packard Co 9,720 663,998
Ikon Office Solutions Inc 800 6,850
International Business Machines 9,000 1,662,750
Moore Corp Ltd 500 5,500
Pitney Bowes Inc 3,100 204,794
Seagate Technology * 2,400 72,600
Silicon Graphics Inc * 2,000 25,750
Staples Inc * 2,700 117,956
Sun Microsystems Inc * 2,300 196,938
Tandy Corp 600 24,713
Unisys Corp * 1,500 51,656
Xerox Corp 3,220 379,960
---------
7,999,050
---------
Paper & Forest Products - .40%
Boise Cascade Corp 300 9,300
Champion International Corp 1,000 40,500
Fort James Corp 1,300 52,000
Georgia Pacific Group 910 53,292
See notes to financial statements and notes to schedules of investments
45
<PAGE>
Schedules of Investments
December 31, 1998 (unaudited)
Preferred Asset Allocation Fund (continued)
- -----------------------------------------------------
Common Stock Shares Value
- -----------------------------------------------------
Paper & Forest Products (continued)
Georgia Pacific Timber Group 310 $ 7,382
International Paper Co 2,880 129,060
Kimberly Clark Corp 5,246 285,907
Louisiana Pacific Corp 1,360 24,905
Mead Corp 600 17,588
Potlatch Corp 200 7,375
Union Camp Corp 730 49,275
Westvaco Corp 1,200 32,175
Weyerhaeuser Co 1,850 94,003
Williamette Industries Inc 1,300 43,550
---------
846,312
---------
Publishing & Broadcasting - .93%
Comcast Corp 2,850 167,259
Dow Jones & Co Inc 1,170 56,306
Gannett Inc 2,920 188,340
Knight Ridder Inc 1,060 57,260
McGraw Hill Inc 1,120 107,988
Meredith Corp 300 11,363
New York Times Co 1,200 41,625
Tele Communications Inc
Series A * 5,472 302,670
Time Warner Inc 10,340 641,726
Times Mirror Co Series A 900 50,400
Tribune Co 1,320 87,120
Viacom Inc Class B * 3,550 262,700
---------
1,974,757
---------
Service Industries - .67%
Browning Ferris Industries Inc 2,000 56,875
Cendant Corp * 8,008 152,653
EG&G Inc 300 8,344
Electronic Data Systems Corp 4,200 211,050
Fluor Corp 850 36,178
Foster Wheeler Corp 200 2,638
Franklin Resources Inc 2,500 80,000
Genuine Parts Co 2,025 67,711
Interpublic Group Cos Inc 800 63,800
McDermott International Inc 400 9,875
Media One Group Inc * 5,470 257,090
Omnicom Group Inc 1,400 81,200
RR Donnelley & Sons Co 1,370 60,023
Service Corp International 1,600 60,900
WW Grainger Inc 600 24,975
Waste Management Inc 5,259 245,193
---------
1,418,505
---------
- -----------------------------------------------------
Common Stock Shares Value
- -----------------------------------------------------
Telecommunications - 4.70%
Airtouch Communications Inc * 5,360 $ 386,590
Alltel Corp 2,200 131,588
Ameritech Corp 10,280 651,495
American Telephone &
Telegraph Corp 16,640 1,252,160
Andrew Corp * 505 8,333
Bell Atlantic Corp 14,452 765,956
BellSouth Corp 18,520 923,685
CBS Corp * 6,620 216,805
Clear Channel Communications * 2,300 125,350
Frontier Corp 1,000 34,000
GTE Corp 9,010 585,650
General Instrument Corp * 1,300 44,119
Lucent Technologies Inc 12,268 1,349,480
MCI Worldcom Inc * 17,289 1,240,486
Nextel Communications Inc * 1,700 40,163
Northern Telecom Ltd 6,440 322,805
SBC Communications Inc 18,254 978,871
Scientific Atlanta Inc 500 11,406
Sprint Corp 3,305 76,428
Sprint Corp PCS Series 1 * 4,210 354,166
Tellabs Inc * 2,000 137,125
US West Inc 4,894 316,270
---------
9,952,931
---------
Transportation - .45%
AMR Corp * 1,820 108,063
Burlington Northern Santa Fe 4,202 141,818
CSX Corp 2,120 87,980
Delta Airlines Inc 1,520 79,040
FDX Corp * 1,496 133,144
Laidlaw Inc 3,500 35,219
Norfolk Southern Corp 3,650 115,659
Ryder System Inc 400 10,400
Southwest Airlines Co 3,425 76,848
Union Pacific Corp 2,230 100,489
Union Pacific Resources
Group Inc 2,619 23,735
US Airways Group Inc * 600 31,200
---------
943,595
---------
Utilities & Power - 1.14%
American Electric Power Inc 1,860 87,536
Baltimore Gas & Electric Co 1,660 51,253
Carolina Power & Lighting Co 1,590 74,829
Central & SouthWest Corp 2,000 54,875
Cinergy Corp 1,006 34,581
Columbia Energy Group 500 28,875
Consolidated Natural Gas Co 1,130 61,020
DTE Energy Co 1,580 67,743
Dominion Resources Inc 1,860 86,955
Duke Energy Co 2,851 182,642
See notes to financial statements and notes to schedules of investments
46
<PAGE>
The Preferred Group of Mutual Funds
Schedules of Investments
- -----------------------------------------------------
Common Stock Shares Value
- -----------------------------------------------------
Utilities & Power (continued)
Eastern Enterprises 100 $ 4,375
Edison International 3,530 98,399
Enron Corp 3,000 171,188
Entergy Corp 2,180 67,853
FPL Group Inc 1,690 104,146
First Energy Corp 2,250 73,266
GPU Inc 800 35,350
Houston Industries Inc 2,472 79,413
Niagara Mohawk Power Co * 2,190 35,314
Nicor Inc 300 12,675
Northern Systems Power Co 1,760 48,840
PG&E Corp 3,770 118,755
PP&L Resources Inc 900 25,088
Pacific Corp 2,940 61,924
Peco Energy Co 2,350 97,819
Peoples Energy Corp 200 7,975
Public Services Enterprise Group 2,230 89,200
Sempra Energy 1,501 38,088
Sonat Inc 700 18,944
Southern Co 6,290 182,803
Sunoco Inc 1,121 40,421
Texas Utilities Co 2,437 113,777
Unicom Corp 2,160 83,295
Williams Cos Inc 2,610 81,399
---------
2,420,616
---------
Total Common Stock
(Cost $47,413,811) 92,960,525
==========
- -----------------------------------------------------
Fixed Income - 30.13% Par Value
- -----------------------------------------------------
U.S. Treasury - 30.13%
United States Treasury Bonds
6.00% February 15, 2026 $1,547,000 1,687,437
6.125% November 15, 2027 2,600,000 2,910,362
6.25% August 15, 2023 1,020,000 1,140,013
6.375% August 15, 2027 2,250,000 2,586,083
6.50% November 15, 2026 3,026,000 3,518,663
6.875% August 15, 2025 1,400,000 1,696,444
7.125% February 15, 2023 760,000 936,578
7.25% May 15, 2016 2,495,000 3,022,468
7.25% August 15, 2022 340,000 423,195
7.50% November 15, 2016 2,040,000 2,534,068
7.50% November 15, 2024 1,080,000 1,399,615
7.625% November 15, 2022 555,000 719,419
7.625% February 15, 2025 2,900,000 3,812,601
8.00% November 15, 2021 # 4,200,000 5,615,526
8.125% August 15, 2019 530,000 707,799
8.125% May 15, 2021 2,059,000 2,777,715
- -----------------------------------------------------
Fixed Income Par Value
- -----------------------------------------------------
U.S. Treasury (continued)
United States Treasury Bonds
8.125% August 15, 2021 $ 680,000 $ 918,850
8.75% May 15, 2017 1,340,000 1,864,061
8.75% May 15, 2020 1,790,000 2,542,086
8.75% August 15, 2020 # 3,825,000 5,443,434
8.875% August 15, 2017 1,365,000 1,922,725
8.875% February 15, 2019 1,400,000 1,993,908
9.00% November 15, 2018 350,000 502,905
9.125% May 15, 2009 280,000 335,518
9.125% May 15, 2018 125,000 180,820
9.25% February 15, 2016 200,000 286,938
9.875% November 15, 2015 250,000 376,015
10.375% November 15, 2012 2,300,000 3,173,287
10.625% August 15, 2015 1,410,000 2,239,249
11.25% February 15, 2015 1,720,000 2,845,258
11.75% February 15, 2010 295,000 400,831
11.75% November 15, 2014 405,000 629,492
12.00% August 15, 2013 1,495,000 2,282,446
12.50% August 15, 2014 230,000 369,475
----------
63,795,284
----------
Total Fixed Income
(Cost $59,104,425) 63,795,284
==========
- -----------------------------------------------------
Short Term Investments - 25.92% Par/Shares Value
- -----------------------------------------------------
Commercial Paper - 15.05%
Alcatel Alsthom Inc
5.17% February 22, 1999 @ 2,500,000 2,481,331
Associates Corp of North America
5.10% January 4, 1999 @ 3,989,278 3,987,582
Citigroup Inc
5.35% January 7, 1999 @ 2,000,000 1,998,217
Coca Cola Co
5.14% January 19, 1999 @ 2,000,000 1,994,860
Ford Motor Credit Co
5.00% February 26, 1999 @ 3,000,000 2,976,667
General Electric Co
5.14% February 19, 1999 @ 2,500,000 2,482,510
General Motors Acceptance Corp
5.25% January 13, 1999 @ 2,500,000 2,495,625
Halifax PLC
5.01% March 18, 1999 @ 2,000,000 1,980,400
Lucent Technologies Inc
5.15% January 19, 1999 @ 2,000,000 1,994,850
Met Life Funding Inc
5.20% January 21, 1999 @ 2,650,000 2,642,344
National Australia Funding
5.65% January 6, 1999 @ 1,848,000 1,846,550
See notes to financial statements and notes to schedules of investments
47
<PAGE>
Schedules of Investments
December 31, 1998 (unaudited)
Preferred Asset Allocation Fund (continued)
- ----------------------------------------------------
Short Term Investments Par/Shares Value
- ----------------------------------------------------
Commercial Paper (continued)
Pepsico Inc
5.40% January 8, 1999 @ $1,000,000 $ 998,950
Toyota Motor Credit Co
5.08% January 22, 1999 @ 1,000,000 997,037
Xerox Corp
5.25% January 12, 1999 @ 3,000,000 2,995,188
----------
31,872,111
----------
Repurchase Agreements - 9.22%
State Street Repo 4.25% January 4, 1999
(Cost - $19,518,000)(Dated December 31, 1998,
due January 4, 1999, collateralized by
$13,835,000 U.S. Treasury Bond 8.875%,
August 15, 2017,
Market Value $19,911,595,
Repurchase Proceeds
$19,527,217) $19,518,000 19,518,000
-----------
Short Term Investment Fund - 1.16%
State Street Global Advisors
Money Market Fund 2,451,277 2,451,277
---------
U.S. Treasury - .49%
United States Treasury Bills
4.345% March 4, 1999 @ $ 450,000 446,768
4.48% March 25, 1999 @ 600,000 593,872
---------
1,040,640
---------
Total Short Term Investments
(Cost $54,880,338) 54,882,028
===========
Total Investments - 99.95%
(Cost $161,398,574) 211,637,837
===========
Other Assets and Liabilities - .05% 105,328
===========
Total Net Assets - 100% $211,743,165
============
Preferred Fixed Income Fund
- -----------------------------------------------------
Fixed Income-93.17% Par Value
- -----------------------------------------------------
Asset Backed - .83%
Chevy Chase Auto Receivables
6.00% December 15, 2001 $ 58,431 $ 58,522
Eaglemark Credit
6.75% November 15, 2002 # 1,048,982 1,056,850
Reliable Auto Receivable
Master Trust 5.80%
June 15, 2002 243,234 243,006
---------
1,358,378
---------
Collateralized Mortgage Obligations - 23.95%
1345 Funding LLC Class C **
7.993% May 25, 2006 3,000,000 3,043,125
Chase Commercial Mortgage
Securities Corp
6.45% December 19, 2004 901,546 919,013
Criimi Mae Financial Corp
7.00% January 1, 2033 716,856 711,927
Countrywide Home Loans
6.75% May 25, 2028 # 1,714,835 1,727,474
Countrywide Home Loans
Passthrough Certificates
6.50% February 25, 2028 2,800,000 2,779,000
Deutsche Mortgage & Asset
Receivable Corp
6.22% June 15, 2031 1,440,251 1,457,354
Federal Home Loan Mortgage Pc Gtd
6.00% April 15, 2006 1,000,000 1,001,560
6.50% November 15, 2022 5,000,000 5,014,050
7.00% August 15, 2023 1,000,000 1,046,560
Federal National Mortgage Assn Gtd
5.50% December 25, 2008 1,200,000 1,192,116
6.50% May 18, 2011 2,500,000 2,527,325
First USA Securities **
6.80% February 18, 2011 4,500,000 4,563,000
JP Morgan Commercial Mortgage
Financial Corp **
8.731% November 25, 2027 1,000,000 896,094
MLIC Commercial Mortgage **
6.60% July 25, 2027 311,778 311,556
Merrill Lynch Mortgage Investments Inc
6.96% November 21, 2028 750,000 784,102
7.15% April 25, 2028 2,513,311 2,585,795
Morgan Stanley Capital I Inc
6.19% January 15, 2007 617,239 629,324
6.25% July 15, 2007 812,052 830,104
Mortgage Capital Funding Inc
6.417% June 18, 2007 # 1,919,542 1,962,506
See notes to financial statements and notes to schedules of investments
48
<PAGE>
The Preferred Group of Mutual Funds
Schedules of Investments
- -----------------------------------------------------
Fixed Income Par Value
- -----------------------------------------------------
Collateralized Mortgage Obligations (continued)
Residential Funding Mortgage
Securities I Inc
6.50% March 25, 2013 # $1,335,547$ 1,335,547
Tyron Mortgage Funding Inc
7.55% December 20, 2009 3,750,000 3,777,263
----------
39,094,795
----------
Electric - 2.40%
Boston Edison Co
7.80% May 15, 2010 # 1,375,000 1,558,384
Houston Lighting & Power Co MTN
6.50% April 21, 2003 # 1,500,000 1,547,250
Pacific Corp Security Discounted MTN
6.75% July 15, 2004 770,000 804,527
---------
3,910,161
---------
Federal Agency Pooled - 3.25%
Federal Home Loan Mortgage Corp
6.50% July 15, 2016 2,000,000 2,009,360
6.65% March 15, 2018 1,302,241 1,305,822
Federal Home Loan Pc
7.00% December 1, 2024 321,466 327,795
8.00% August 1, 2026 1,594,805 1,651,356
---------
5,294,333
---------
Finance & Banking - 5.63%
AMSouth Bank North America
6.45% February 1, 2018 # 1,500,000 1,562,610
Associates Corp North America
6.95% November 1, 2018 # 1,000,000 1,061,495
FCB/NC Capital Trust I
8.05% March 1, 2028 700,000 731,544
Integra Bank Pittsburgh MTN
6.55% June 15, 2000 1,650,000 1,677,407
Keycorp Institutional Capital B
8.25% December 15, 2026 1,000,000 1,133,220
Security Pacific Corp MTN
10.30% May 15, 2001 # 1,250,000 1,386,113
Toyota Motor Credit Corp
5.625% November 13, 2003 1,000,000 1,004,825
Weeks Realty
6.875% March 15, 2006 667,000 634,220
---------
9,191,434
---------
Foreign Corporate - .82%
Bangkok Bank Pub Ltd **
7.25% September 15, 2005 25,000 16,958
Energy Group Overseas BV
7.50% October 15, 2027 # 1,250,000 1,319,650
---------
1,336,608
---------
- -----------------------------------------------------
Fixed Income Par Value
- -----------------------------------------------------
Foreign Government - 1.40%
Quebec Providence of Canada
7.50% July 15, 2023 $2,000,000 $2,287,000
----------
Government Sponsored - 10.02%
Federal National Mortgage Association
6.00% November 1, 2028 4,033,977 3,981,011
6.00% December 1, 2028 1,797,123 1,773,527
6.00% December 1, 2099 6,500,000 6,414,655
6.50% January 1, 2013 49,309 50,002
6.50% June 1, 2013 586,293 594,537
6.50% July 1, 2013 149,103 151,200
6.50% August 1, 2013 1,287,039 1,305,136
6.50% With maturities of
January 1, 2028
through
October 1, 2028 1,322,313 1,315,761
6.925% March 1, 2001 767,062 774,254
----------
16,360,083
----------
Industrials - 11.81%
Allied Waste North America **
7.625% January 1, 2006 250,000 251,875
Boston Scientific Corp
6.625% March 15, 2005 # 1,500,000 1,455,375
Canadian Occidental Petroleum Ltd
7.40% May 1, 2028 # 2,600,000 2,426,320
Ford Motor Co
9.00% September 15, 2001 1,695,000 1,847,601
Joseph E. Seagram & Sons Inc
7.60% December 15, 2028 2,000,000 2,013,560
Laidlaw Inc
6.50% May 1, 2005 # 2,350,000 2,252,029
6.72% October 1, 2027 1,000,000 918,000
Lakehead Pipeline Co Ltd
7.125% October 1, 2028 350,000 360,210
Lasmo U.S.A. Inc
7.30% November 15, 2027 # 1,500,000 1,330,125
Lomak Petroleum Inc
8.75% January 1, 2007 300,000 285,000
Mariner Health Group Inc
9.50% April 1, 2006 400,000 394,000
Oil Purchase Co **
7.10% April 30, 2002 # 1,210,022 1,160,471
Philip Morris Cos Inc
6.15% March 15, 2000 600,000 604,980
Plains Resource Inc
10.25% March 15, 2006 400,000 404,000
Tricon Global Restaurants Inc
7.45% May 15, 2005 300,000 309,024
Ultramar Diamond Shamrock Corp
6.75% October 15, 2037 # 2,000,000 2,038,100
See notes to financial statements and notes to schedules of investments
49
<PAGE>
Schedules of Investments
December 31, 1998 (unaudited)
Preferred Fixed Income Fund (continued)
- -----------------------------------------------------
Fixed Income Par Value
- -----------------------------------------------------
Industrials (continued)
Union Tex Petroleum Holdings Inc
7.00% April 15, 2008 # $1,000,000 $ 1,081,329
Westpoint Stevens Inc
7.875% June 15, 2005 150,000 152,438
----------
19,284,437
----------
Mortgage Related-Other Marketable - 2.74%
Midland Realty Acceptance Corp
7.02% January 25, 2029 # 1,491,015 1,535,700
Morgan Stanley Capital II Inc
6.34% July 15, 2030 339,466 347,698
Ocwen Residential MBS Corp **
4.00% October 25, 2030 2,590,412 2,593,245
---------
4,476,643
---------
Natural Gas - .30%
RAS Laffan Liquified Natural Gas **
8.294% September 15, 2014 595,000 490,435
---------
Telephone - 4.17%
Aerial Communications Inc **
0.00% February 1, 2008 ***# 3,265,000 1,502,938
Cox Communications Inc
6.15% August 1, 2003 2,000,000 2,038,874
McLeodUSA Inc
9.25% July 15, 2007 235,000 243,225
Qwest Communications International Inc
(9.47% October 15, 2002)
October 15, 2007 *** 300,000 233,250
Telecommunications Inc
7.875% August 1, 2013 # 1,500,000 1,757,355
US West Capital Funding Inc
6.25% July 15, 2005 # 1,000,000 1,034,270
---------
6,809,912
---------
U.S. Government Agency
Mortgage-Backed Securities - 8.99%
Government National Mortgage Association
7.00% April 15, 2028 89,364 91,430
7.00% May 15, 2028 1,938,440 1,983,277
7.00% June 15, 2028 45,533 46,586
7.00% September 15, 2029 740,707 757,832
7.00% December 15, 2099 1,870,000 1,913,234
7.50% August 20, 2026 1,967,282 2,020,753
7.50% June 15, 2027 36,123 37,241
7.50% July 15, 2029 4,774,091 4,926,242
8.00% January 15, 2027 2,782,647 2,892,200
-----------
14,668,795
-----------
- -----------------------------------------------------
Fixed Income Par Value
- -----------------------------------------------------
U.S. Treasury - 16.86%
United States Treasury Bonds
6.75% August 15, 2026 # $1,420,000 $ 1,701,117
12.00% August 15, 2013 # 4,225,000 6,450,392
United States Treasury Notes
4.25% November 15, 2003 # 6,135,000 6,056,411
5.25% August 15, 2003 # 6,190,000 6,347,659
6.125% August 15, 2007 # 275,000 300,352
6.25% February 28, 2002 # 4,010,000 4,191,092
6.625% June 30, 2001 1,625,000 1,699,896
6.875% May 15, 2006 686,000 775,605
-----------
27,522,524
-----------
Total Fixed Income
(Cost $150,668,003) 152,085,538
===========
- -----------------------------------------------------
Short Term Investments - 11.05% Par Value
- -----------------------------------------------------
Collateralized Mortgage Obligations - 1.69%
Sears Credit Account Master Trust II
6.50% November 15, 1999 @ 2,750,000 2,760,313
---------
Finance & Banking - 9.16%
Citibank Capital Market Assets
5.40% January 22, 1999 @ 5,465,000 5,447,785
General Motors Acceptance Corp
8.00% October 1, 1999 @ 1,500,000 1,530,645
Windmill Funding Corp
5.43% January 21, 1999 @ 8,000,000 7,975,867
----------
14,954,297
----------
Federal Agency Pooled - .20%
Federal Home Loan Mortgage
Discounted Notes
4.50% January 4, 1999 @ 327,000 326,877
---------
Total Short Term Investments
(Cost $18,009,532) 18,041,487
==========
Total Investments - 104.22%
(Cost $168,677,535) 170,127,025
===========
Other Assets and Liabilities - (4.22%) (6,885,224)
===========
Total Net Assets - 100% $163,241,801
============
See notes to financial statements and notes to schedules of investments
50
<PAGE>
The Preferred Group of Mutual Funds
Schedules of Investments
Preferred Short-Term Government
Securities Fund
Fixed Income - 90.50% Par Value
- -----------------------------------------------------
Collateralized Mortgage Obligations - 31.96%
Federal Home Loan Mortgage Corp
6.00% February 15, 2007 $3,000,000 $ 3,000,000
Federal Home Loan Mortgage Pc Gtd
5.75% January 15, 2006 1,985,002 1,984,366
6.00% April 15, 2005 2,540,608 2,539,795
6.00% August 15, 2016 611,704 612,737
6.00% December 15, 2017 3,170,730 3,169,715
Federal National Mortgage
Association Gtd
5.75% February 25, 2017 1,805,419 1,803,559
Federal National Mortgage
Association REMIC
6.00% November 25, 2016 3,776,157 3,771,437
6.00% November 25, 2018 2,133,390 2,129,379
6.65% October 25, 2018 1,550,746 1,548,311
----------
20,559,299
----------
Federal Agency Pooled - 12.51%
Federal Home Loan Pc
6.00% December 1, 2000 3,715,319 3,725,016
6.00% January 1, 2001 3,419,145 3,428,069
6.00% April 1, 2001 891,009 893,334
---------
8,046,419
---------
Government Sponsored - 10.95%
Federal National Mortgage Association
5.50% November 1, 2002 945,138 949,797
6.50% December 1, 2000 1,932,271 1,936,116
6.50% April 1, 2003 1,810,637 1,826,951
Overseas Private Investment Corp
6.13% September 15, 2001 2,291,667 2,326,042
---------
7,038,906
---------
U.S. Treasury - 35.08%
United States Treasury Notes
4.25% November 15, 2003 10,000,000 9,871,900
4.625% November 30, 2000 5,000,000 5,003,101
5.25% August 15, 2003 7,500,000 7,691,026
----------
22,566,027
----------
Total Fixed Income
(Cost $58,347,378) 58,210,651
==========
- -----------------------------------------------------
Short Term Investments - 8.72% Par/Shares Value
- -----------------------------------------------------
Federal Agency Pooled - 2.64%
Federal Home Loan Pc
6.00% July 1, 1999 @ $1,508,635 $1,504,532
6.75% October 1, 1999 @ 191,784 193,188
---------
1,697,720
---------
Government Sponsored - 3.88%
Student Loan Marketing Short Term Notes
5.463% March 18, 1999 @ $2,500,000 2,496,275
---------
Short Term Investment Fund - .61%
State Street Global Advisors
Money Market Funds 395,053 395,053
---------
U.S. Treasury - 1.59%
United States Treasury Notes
8.00% August 15, 1999 @ $1,000,000 1,020,000
---------
Total Short Term Investments
(Cost $5,610,667) 5,609,048
===========
Total Investments - 99.22%
(Cost $63,958,045) 63,819,699
===========
Other Assets and Liabilities - .78% 504,313
===========
Total Net Assets - 100% $64,324,012
===========
See notes to financial statements and notes to schedules of investments
51
<PAGE>
Schedules of Investments
December 31, 1998 (unaudited)
Preferred Money Market Fund
- ----------------------------------------------------
Short Term Investments-98.08% Par Value
- ----------------------------------------------------
Certificates of Deposit - 10.11%
Bank of New York
5.64% March 26, 1999 @ $2,000,000 $1,999,735
Bayerische Landes Bank of New York
5.72% May 6, 1999 @ 3,000,000 2,999,704
Deutsche Bank AG New York
5.73% April 15, 1999 @ 2,000,000 1,999,727
Dresdner Bank AG New York
4.95% November 9, 1999 @ 3,000,000 2,999,010
Toronto Dominion
5.64% July 14, 1999 @ 2,000,000 1,999,491
5.65% July 26, 1999 @ 1,000,000 999,676
----------
12,997,343
----------
Commercial Paper - 23.52%
Associates Corp
5.03% February 16, 1999 @ 5,000,000 4,967,864
CXC Inc
5.08% March 15, 1999 @ 4,500,000 4,453,645
Monsanto Co
5.00% April 6, 1999 @ 4,000,000 3,947,222
Proctor & Gamble Co
5.02% March 16, 1999 @ 5,000,000 4,948,406
Providence de Quebec
5.04% March 15, 1999 @ 2,000,000 1,979,560
Southern California Edison
5.02% March 15, 1999 @ 5,000,000 4,949,103
Windmill Funding Corp
5.45% February 4, 1999 @ 5,000,000 4,974,264
----------
30,220,064
----------
Floating Rate Notes - 36.73%
Abbey National Treasury Services
5.333% January 20, 1999 ##@ 4,000,000 3,998,264
American Express Centurion Bank
5.693% January 7, 1999 ## 1,000,000 1,000,000
Banc One Corp MTN
5.228% March 15, 1999 ##@ 3,000,000 2,999,543
Bank of Nova Scotia
5.726% January 7, 1999 ##@ 5,000,000 4,998,310
Bankers Trust Co
5.093% January 6, 1999 ##@ 2,000,000 1,999,512
CIT Group Inc
5.081% January 6, 1999 ##@ 3,200,000 3,200,248
First Chicago Corp
5.249% February 4, 1999 ##@ 2,000,000 1,999,957
First Union National Bank
5.212% January 25, 1999 ## 4,000,000 4,000,000
- ----------------------------------------------------
Short Term Investments Par Value
- ----------------------------------------------------
Floating Rate Notes (continued)
General Electric Capital Corp
4.924% January 6, 1999 ## $4,000,000 $4,000,000
General Motors Acceptance Corp
5.235% January 6, 1999 ##@ 4,000,000 3,997,628
Key Bank North America MTN
5.613% January 15, 1999 ## 2,000,000 2,000,000
5.281% January 6, 1999 ##@ 4,000,000 3,999,343
Pepsico Inc
5.403% February 19, 1999 ##@4,000,000 3,997,156
Societe Generale
5.51% January 26, 1999 ##@ 5,000,000 4,998,631
----------
47,188,592
----------
Government Agency - 27.72%
Federal Home Loan Mortgage
Discounted Notes
4.50% January 4, 1999 @ 35,630,000 35,616,637
----------
Total Short Term Investments
(Cost $126,022,636) 126,022,636
============
Total Investments - 98.08%
(Cost $126,022,636) 126,022,636
============
Other Assets and Liabilities - 1.92% 2,464,556
============
Total Net Assets - 100% $128,487,192
============
See notes to financial statements and notes to schedules of investments
52
<PAGE>
The Preferred Group of Mutual Funds
Schedules of Investments
Notes to Schedules of Investments
* Non-income producing security
** Pursuant to Rule 144A under the Securities Act of 1933, these securities
may be resold in transactions exempt from registration, normally to
qualified institutional buyers. At December 31, 1998, these securities
amounted to $14,829,697 or 9.08% of the net assets of the Preferred Fixed
Income Fund.
*** Currently zero coupon. Shown parenthetically is the next interest rate to
be paid and the date the Fund will begin accruing this rate.
# All or a portion of this security is being used to collateralize futures
contracts outstanding at December 31, 1998.
## Floating rate note. The interest rate shown reflects the rate currently in
effect. The maturity date shown reflects the next reset date.
@ Yields are at time of purchase (unaudited).
Abbreviations:
ADR - American Depository Receipt
MTN - Medium Term Notes
See notes to financial statements and notes to schedules of investments
53
<PAGE>
Notes to Financial Statements
December 31, 1998 (unaudited)
1. Accounting Policies
The Preferred Group of Mutual Funds ("The Preferred Group" or "the Trust")
is registered under the Investment Company Act of 1940, as amended, as an
open-end, diversified series management investment company offering eight
portfolios ("Funds"):
Preferred Growth Fund ("Growth") - seeks long-term capital appreciation by
investing its assets primarily in equity securities that are believed to
offer the potential for capital appreciation, including stocks of companies
experiencing above average earnings growth.
Preferred Value Fund ("Value") - seeks capital appreciation and current
income. The Fund invests primarily in equity securities that are believed to
be undervalued and that offer above-average potential for capital
appreciation.
Preferred International Fund ("International") - seeks long-term capital
appreciation by investing its assets primarily in equity securities traded
principally on markets outside the United States.
Preferred Small Cap Fund ("Small Cap") - seeks long-term capital
appreciation through investments in companies with small equity
capitalizations.
Preferred Asset Allocation Fund ("Asset Allocation") - seeks both capital
appreciation and current income by allocating its assets among stocks, bonds
and high quality money market instruments.
Preferred Fixed Income Fund ("Fixed Income") - seeks a high level of current
income consistent with investment in a diversified portfolio of high quality
debt securities.
Preferred Short-Term Government Securities Fund ("Short-Term Government") -
seeks high current income consistent with preservation of capital, primarily
through investment in U.S. Government Securities. Preferred Money Market
Fund ("Money Market") - seeks the maximum current income believed to be
consistent with preservation of capital and maintenance of liquidity by
investing in a portfolio of short-term, fixed income instruments.
The Preferred Group was established in 1991 as a business trust under
Massachusetts law and has an unlimited authorized number of shares of
beneficial interest which may, without shareholder approval, be divided into
an unlimited number of series of such shares.
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
the reported amounts of income and expenses during the reporting period and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates. The following
significant accounting policies are consistently followed by the Funds in
the preparation of their financial statements.
Security Valuations
Portfolio securities, options, futures and options on futures for which
market quotations are readily available are valued at market value, which is
determined by using the last reported sale price, or, if no sales are
reported, the last reported bid price. Portfolio debt securities with
remaining maturities greater than sixty days are valued by pricing agents
approved by the Trustees, which prices reflect broker/ dealer supplied
market valuations and electronic data processing techniques. If the pricing
agents are unable to provide such quotations, the most recent bid quotation
supplied by a bonafide market maker shall be used. Over-the-counter options
are valued at fair value, as determined in good faith by the Trustees or by
persons acting at their direction based on prices supplied by a broker,
usually the option counter-party. Forward contracts are valued at the mean
between the bid and the offered forward
54
<PAGE>
The Preferred Group of Mutual Funds
Notes to Financial Statements
rates as last quoted by a pricing service. Obligations with a remaining
maturity of 60 days or less and holdings in Money Market are valued at
amortized cost which approximates market value. Equity securities that have
reached the limit for aggregate foreign ownership may trade at a premium to
the local share price. The premium is valued based on prices supplied by a
broker. Portfolio positions which cannot be valued as set forth above are
valued at fair value under procedures approved by the Trustees.
Security Transactions
Security transactions are accounted for on the trade date. Cost is
determined and gains and losses are based upon the specific identification
method for both financial statement and federal tax purposes.
Federal Taxes
Consistent with each Fund's policy to qualify as a regulated investment
company and to distribute all of its taxable income and net realized capital
gains to its shareholders, no federal tax has been accrued.
At June 30, 1998, capital loss carryforwards available (to the extent
provided in federal income tax regulations) to offset future realized gains
were as follows:
Year of Capital Loss
Fund Expiration Carryforward
--------------------------------------------------------
Short-Term Government 2003 $408,901
Short-Term Government 2004 $302,863
Short-Term Government 2005 $ 96,867
To the extent the loss carryforwards are used to offset any future realized
gains, it is unlikely that such gains would be distributed.
Interest Income, Debt Discount and Premium
Interest income is recorded on the accrual basis. Original issue discount
and market discount are accreted to interest income over the life of a
security with a corresponding adjustment in the cost basis; premium is
amortized on debt securities with a corresponding adjustment to the cost
basis. Income earned on short-term investment funds is included in interest
income in the Statement of Operations.
Distributions to Shareholders
Growth, Value, International and Small Cap declare and pay dividends at
least annually. Dividends are declared and paid quarterly for Asset
Allocation. Dividends are declared and recorded daily and paid monthly for
Fixed Income, Short-Term Government and Money Market.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments of foreign currency transactions, losses deferred due
to wash sales and post-October 31 losses. Permanent book and tax differences
relating to shareholder distributions will result in reclassifications in
the Funds' capital accounts.
Expenses
Expenses specific to an individual Fund are charged to that Fund. Common
expenses are allocated to the Funds based on their relative net asset
values.
Foreign Currency Translation
The accounting records of the Funds are maintained in U.S. dollars.
All assets and liabilities initially expressed in foreign currencies are
converted into U.S. dollars at the daily exchange rates.
Net realized gains and losses on foreign denominated other assets,
liabilities and currency transactions disclosed in the Statement of
Operations represent net gains and losses from the disposition of foreign
currencies, currency gains and losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amount of net investment income accrued and the U.S. dollar amount actually
received. Further, the effects of changes in foreign currency exchange rates
on securities are not segregated in the Statement of Operations from the
effects of changes in market prices of those securities, but rather, are
included with the net realized and unrealized gain or loss on investments.
55
<PAGE>
Notes to Financial Statements
December 31, 1998 (unaudited)
Forward Currency Contracts
All Funds (except Short-Term Government and Money Market) may enter into
forward currency contracts to purchase or sell foreign currencies at
predetermined exchange rates at future dates. The market value of the
contract will fluctuate with changes in currency exchange rates. All
contracts are marked-to-market daily, resulting in unrealized gains or
losses which become realized at the time the forward contracts are settled.
Forward currency contracts do not eliminate fluctuations in the prices of
the Funds' portfolio securities. The maximum potential loss from such
contracts is the aggregate face value in U.S. dollars at the time the
contract was opened. See note 4 for all open forward currency contracts
held as of December 31, 1998.
Futures Contracts
All Funds (except Money Market) may enter into futures contracts. A Fund may
use futures contracts to manage its exposure to the stock and fixed income
markets. Buying futures tends to increase the Fund's exposure to the
underlying instrument. Selling futures tends to decrease the Fund's exposure
to the underlying instrument or hedge other Fund instruments. Upon entering
into such a contract, the Fund is required to pledge to the broker an amount
of cash or investment securities equal to the minimum "initial margin"
requirements of the exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
"variation margin," and are recorded by the Fund as unrealized gains or
losses in the Statement of Assets and Liabilities. When the contract is
closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value at
the time it was closed. Futures contracts involve, to varying degrees, risk
of loss in excess of the variation margin. Losses may arise from the changes
in the value of the underlying instrument, the illiquidity of the secondary
market for the contracts, or the failure of counterparties to perform under
the contract terms. See Note 4 for all open futures contracts held as of
December 31, 1998.
Delayed Delivery Transactions
All Funds (except Money Market) may purchase or sell securities on a forward
commitment basis. Payment and delivery may take place a month or more after
the date of the transaction. The price of the underlying securities and the
date when the securities will be delivered and paid for are fixed at the
time the transaction is negotiated. The Fund identifies securities as
segregated in its custodial records with a value at least equal to the
amount of the purchase commitment.
Repurchase Agreements
The Funds' custodian takes possession through the federal book-entry system
of securities collateralizing repurchase agreements. Collateral is
marked-to-market daily to ensure that the market value of the underlying
assets remains sufficient to protect the Funds. The Funds may experience
costs and delays in liquidating the collateral if the issuer defaults or
declares bankruptcy.
Industry Concentrations
While none of the Funds are permitted to invest more than 25% of their
assets in a particular industry (other than the Money Market Fund, which may
concentrate in the domestic banking industry), each Fund may, from time to
time, "focus" its investments (generally considered to include investing
more than 10% of its assets) in certain industries. This may subject a Fund
to greater risk than Funds that are not so focused.
56
<PAGE>
The Preferred Group of Mutual Funds Notes to Financial Statements
Other
Corporate actions (including cash dividends) are recorded on the ex-date
(except for certain foreign securities for which corporate actions are
recorded as soon after the ex-date as the Funds become aware of such), net
of nonrebatable tax withholdings. Where a high level of uncertainty as to
collection exists, income on securities is recorded net of all tax
withholdings with any rebates recorded when received.
All Funds (except Short-Term Government) may invest in foreign securities.
There are certain additional risks involved when investing in foreign
securities that are not inherent with investments in domestic securities.
These risks may include foreign currency exchange rate fluctuations, adverse
political and economic developments and the imposition of unfavorable
foreign governmental laws or restrictions, including the possible prevention
of currency exchange. The Funds may be subject to foreign taxes on income
and gains on investments which are accrued based upon the Fund's
understanding of the tax rules and regulations.
57
<PAGE>
Notes to Financial Statements
December 31, 1998 (unaudited)
2. Fees and Compensation Paid to Affiliates
Management Fee
Caterpillar Investment Management Ltd. ("the Manager") provides investment
advisory and portfolio management services for the Funds. Each Fund pays a
monthly fee based on the average net assets of the Fund at the
following rates:
Annual Percentage of
Fund Average Net Assets
------------------------------------------------------------
Growth.................................. 0.75%
Value................................... 0.75%
International........................... 0.95%
Small Cap............................... 0.75%
Asset Allocation........................ 0.70%
Fixed Income............................ 0.50%
Short-Term Government................... 0.35%
Money Market............................ 0.30%
To assist in carrying out its responsibilities, the Manager has retained
various subadvisors to render advisory services to the Funds:
Fund Subadvisor(s)
---- -------------
Growth...................... Jennison Associates Capital Corp. ("Jennison")
Value....................... Oppenheimer Capital ("Oppenheimer")
International............... Mercator Asset Management, L.P. ("Mercator")
Small Cap................... None
Asset Allocation............ Mellon Capital Management Corporation
("Mellon") and PanAgora Asset Management, Inc.
("PanAgora")
Fixed Income and Money Market.... J. P. Morgan Investment Management,
Inc. ("Morgan")
Short-Term Government........... None
The subadvisors operate under the supervision of the Manager and The
Preferred Group's Trustees. The Manager pays the fees of each of the
subadvisors; the Funds do not pay subadvisory fees in addition to the
management fee paid to the Manager.
For the six month period ended December 31, 1998, brokerage commissions were
paid to the following affiliates of the Trust's subadvisors by the following
Funds:
Growth
-------
J. P. Morgan Securities, Inc. $21,147
Oppenheimer & Co., Inc. 3,053
-------
$24,200
=======
Trustees' Fees
For the six month period ended December 31, 1998, the Trustees who were not
"interested persons" of The Preferred Group, as defined in the Investment
Company Act of 1940, as amended, received an annual fee of $10,000 plus
$1,500 for each Trustees' meeting attended.
58
<PAGE>
The Preferred Group of Mutual Funds
Notes to Financial Statements
3. Beneficial Interest
As of December 31, 1998, affiliated shareholders beneficially holding more
than 5% of total shares outstanding are as follows:
<TABLE>
<CAPTION>
% of total shares outstanding
------------------------------------------------------------
Group Preferred Stable
Insurance Insurance Principal
401(k) Plan* Trust A & B** Reserves*** Collective Trust
------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth 65.96% - 6.05% -
Value 69.80% - 7.46% -
International 32.39% 39.15% 6.58% -
Small Cap 32.85% 47.67% 10.88% -
Asset Allocation 44.65% 26.68% - -
Fixed Income 24.08% 26.61% - 34.97%
Short-Term Government 28.91% 29.95% 35.75% -
Money Market 67.21% - - 5.01%
</TABLE>
* Caterpillar Investment Trust 401(k) Plan.
** Caterpillar Inc. Supplemental Unemployment and Benefits Group Insurance
Trust A and Caterpillar Group Insurance Trust B (Trust A and B).
*** Caterpillar Insurance Company Limited Insurance Reserves. The
35.75% holdings in the Short-Term Government Securities Fund are
held by American Bankers' Insurance Company of Florida for the
benefit of Caterpillar Insurance Company Limited.
59
<PAGE>
Notes to Financial Statements
December 31, 1998 (unaudited)
4. Portfolio Information
Security Purchases and Sales
During the six month period ended December 31, 1998, purchases and sales of
long-term investments (investments other than short-term obligations and
U.S. Government Securities) and U.S. Government Securities (short- and
long-term), respectively, were as follows:
<TABLE>
<CAPTION>
Long-Term U.S. Government
-------------------------------- ------------------------------
Purchases Sales Purchases Sales
-------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Growth $197,849,894 $196,094,497 - -
Value 22,046,495 21,774,058 - -
International 11,309,968 8,040,110 - -
Small Cap 65,790,569 62,336,863 - -
Asset Allocation 16,419,578 1,104,502 $37,625,349 $15,116,543
Fixed Income 79,631,899 68,349,694 51,967,502 41,215,705
Short-Term Government 9,999,960 13,668,393 32,469,769 10,207,094
</TABLE>
During the six month period ended December 31, 1998, Money Market had
purchases and sales (including maturities and excluding repurchase
agreements) of short-term obligations and U.S. Government Securities of:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Other U.S. Government
-------------------------------- ------------------------------
Purchases Sales Purchases Sales
-------------------------------- ------------------------------
Money Market $2,063,507,394 $2,038,290,198 - -
Futures Contracts
Asset Allocation and Fixed Income had the following futures contracts open
at December 31, 1998:
</TABLE>
<TABLE>
<CAPTION>
Number of Expiration Underlying Net Unrealized
Contracts Contracts Date Face Value Gain (Loss)
------------------ ------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Asset Allocation:
Long Positions:
S&P 500 106 Mar 99 $33,005,750 $1,594,200
S&P 500 5 Mar 99 1,556,875 110,592
U.S. Treasury Bonds 67 Mar 99 8,561,344 58,440
-----------
$1,763,232
===========
Fixed Income:
Long Positions:
U.S. Treasury Bonds 71 Mar 99 9,072,469 $ (64,840)
U.S. Treasury Bonds 84 Mar 99 9,520,875 (57,129)
------------
(121,969)
Short Positions:
U.S. Treasury Bonds 34 Mar 99 (4,051,313) (20,392)
------------
($ 142,361)
============
</TABLE>
60
<PAGE>
The Preferred Group of Mutual Funds
Notes to Financial Statements
<TABLE>
<CAPTION>
Forward Currency Contracts
Fixed Income Fund had the following forward currency contracts open at
December 31, 1998:
Settlement Units of In Exchange for Value at Unrealized
Date Deliver Currency (in US Dollars) 12/31/98 Appreciation
-------- ------ --------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Purchases:
February 12, 1999 DEM 6,099,609 $3,705,508 $3,667,645 ($ 37,863)
February 12, 1999 FRF 24,342,787 4,411,843 4,363,121 (48,722)
-----------
($86,585)
-----------
Sales:
February 12, 1999 DEM 6,099,609 $3,736,818 $3,667,645 $ 69,173
February 12, 1999 FRF 24,342,787 4,476,258 4,363,121 113,137
-----------
$ 182,310
-----------
$ 95,725
===========
</TABLE>
Unrealized Appreciation (Depreciation)
Unrealized appreciation (depreciation) for each Fund at December 31, 1998,
based on cost of both long-term and short-term securities for federal tax
purposes were as follows:
<TABLE>
<CAPTION>
Net unrealized Cost for
Gross unrealized Gross unrealized appreciation/ federal tax
Fund appreciation (depreciation) (depreciation) purposes
---------------- ------------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Growth $183,819,318 ($ 4,050,275) $179,769,043 $377,179,619
Value 211,408,607 (10,128,893) 201,279,714 191,852,856
International 76,831,045 (18,610,818) 58,220,227 215,466,628
Small Cap 25,746,581 (4,156,516) 21,590,065 102,862,301
Asset Allocation 51,188,654 (949,391) 50,239,263 161,398,574
Fixed Income 2,869,806 (1,420,316) 1,449,490 168,677,535
Short-Term Government 104,278 (242,624) (138,346) 63,958,045
Money Market - - - 126,022,636
</TABLE>
Income Tax Information
The Funds which declared and paid a long-term capital gain distribution in
calendar year 1998 (Growth, Value, International, Small Cap, Asset
Allocation and Fixed Income) hereby designate the following amounts as
long-term capital gain distributions:
Fund Long-term capital gains
------------------ -----------------------
Growth $104,999,355
Value 15,333,582
International 8,300,068
Small Cap 5,076,307
Asset Allocation 6,833,057
Fixed Income 947,991
61
<PAGE>
The Preferred Group of Mutual Funds
December 31, 1998 (unaudited)
LOGO
The Preferred Group of Mutual Funds
1-800-662-GROW
This report and the financial statements contained herein are submitted for the
general information of the shareholders of The Preferred Group of Mutual Funds.
The report is not intended for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
Officers and Trustees
Gary M. Anna Trustee
William F. Bahl Trustee
James F. Masterson Trustee
F. Lynn McPheeters Trustee
Dixie L. Mills Trustee
Ronald R. Rossmann President
Carol K. Burns Vice President and Assistant Clerk
Fred L. Kaufman Vice President and Treasurer
Richard P. Konrath Clerk
Investment Advisor
Caterpillar Investment Management Ltd.
411 Hamilton Boulevard, Suite 1200
Peoria, IL 61602-1104
Distributor
Caterpillar Securities Inc.
411 Hamilton Boulevard, Suite 1200
Peoria, IL 61602-1104
Custodian
State Street Bank & Trust Co.
P.O. Box 1713
Boston, MA 02101
Transfer Agent and Investor Services
Boston Financial Data Services, Inc.
The BFDS Building
Two Heritage Drive
Quincy, MA 02171
Legal Counsel
Ropes & Gray
One International Place
Boston, MA 02110-2624
62
<PAGE>
The Preferred Group of Mutual Funds
Shareholder Privileges
Affordable Minimum
Investment
You may open a Preferred account with an investment of $1,000 or more.
Subsequent investments of $50 or more may be made at any time.
- --------------------------------------------------------------------------------
Free Checkwriting
You can write an unlimited number of free checks (minimum $250 per check)
against the assets in your account (Money Market and Short-Term Government
Securities Funds only). You must maintain the minimum required account
balance of $1,000.
- --------------------------------------------------------------------------------
Systematic Savings Plan
You may authorize your bank to debit your checking account automatically and
send regular monthly investments of $50 or more to your fund account. If you
select this option, you may open an account with your first monthly
investment of $50.
- --------------------------------------------------------------------------------
Exchange Privilege
Should you wish to change your investment selection, you may move all or a
portion of your assets to another fund. One toll-free call is all it takes.
- --------------------------------------------------------------------------------
IRA Plans
If you consider a comfortable retirement to be one of your financial goals,
you might be especially interested in opening a Preferred Traditional or
Roth IRA account. You may transfer or roll over your current IRA. You may
also convert your current IRA at another institution to a Roth IRA. Call
1-800-662-GROW for a free IRA kit.
- --------------------------------------------------------------------------------
Comprehensive Investor Services
You can reach The Preferred Group at 1-800-662-GROW during normal business
hours of 8 a.m. to 6 p.m. Eastern Time to discuss your questions with our
Investor Services Representatives. After business hours you can access
pre-recorded information via The Preferred Tele-Services line. You will also
receive easy-to-read account statements and a comprehensive year-end summary
statement for your tax records. High quality service is our top priority at
The Preferred Group.
- --------------------------------------------------------------------------------
100% No-Load*
We are a 100% no-load fund group. There are no sales commissions, exchange
fees, exit fees, or 12b-1 fees when you invest in a Preferred Group fund.
All of your money goes to work for you immediately.
- --------------------------------------------------------------------------------
* The Preferred Group is a no-load mutual fund family and does not charge any
12b-1 fees. As with any no-load mutual fund, however, certain other fees and
expenses do apply to continued investments in the Funds. These fees and
expenses are described in the Fund's current prospectus, which should be read
carefully before making an investment.
63
<PAGE>
LOGO: Preferred Group
The Preferred Group of Mutual Funds
P.O. Box 8320
Boston, MA 02266-8320
Distributed by
Caterpillar Securities Inc.
Semiannual Report
December 31, 1998
(unaudited)
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