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Semiannual
Report
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June 30, 1995
Mailing Address:
SAFECO Mutual Funds
P.O. Box 34443
Seattle, WA 98174-1443
For Account Information
or Telephone Transactions:
Nationwide: 1-800-278-1985
Seattle: 545-5423 FIXED-INCOME
TTY.TDD: 1-800-438-8718 PORTFOLIO
[PHOTO]
SAFECO
INSTITUTIONAL
SERIES TRUST
[SYMBOL] SAFECO
MUTUAL FUNDS
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PERFORMANCE INFORMATION
For the Period Ended June 30, 1995 (Unaudited)
The performance of the Portfolio assumes the reinvestment of all interest and
capital gains. Operating expenses for the Portfolio have been applied, but not
to the Index. If portfolio operating expenses had been applied to the Index, its
value would have been lower. Investment returns are historical and not
predictive of future performance. The Lehman Brothers Gov't/Corp. Index is a
representative total return benchmark for the portfolio.
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AVERAGE ANNUAL SINCE
TOTAL RETURN 1 YEAR INCEPTION
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SAFECO Institutional Series
Trust -- Fixed-Income Portfolio 9.97% 4.58%*
Lehman Brothers Gov't/Corp. Index 12.76% 6.41%
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*The SAFECO Institutional Series Trust -- Fixed-Income Portfolio's inception
date was February 28, 1994.
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SAFECO INSTITUTIONAL SERIES TRUST --
FIXED-INCOME PORTFOLIO
ILLUSTRATION OF A $10,000 INVESTMENT
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[Chart appears here showing SAFECO
the value of a $10,000 investment INSTITUTIONAL
in the SAFECO Institutional Series SERIES TRUST --
Trust Fixed-Income Portfolio as of FIXED-INCOME
June 30, 1995 as compared to the PORTFOLIO:
Lehman Brothers Gov't/Corp Index.] $10,615
--------------------
LEHMAN
BROTHERS GOV'T/
CORP INDEX:
$12,103
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====================
*The Fund's inception was February 28, 1994.
Therefore, index graph comparison also begins
February 28, 1994.
TABLE OF CONTENTS
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Report from the Fund Manager 1
Highlights Information 2
Portfolio of Investments 3
Statement of Assets and Liabilities 4
Statement of Operations 5
Statement of Changes in Net Assets 5
Notes to Financial Statements 6
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REPORT FROM THE FUND MANAGER
SAFECO INSTITUTIONAL SERIES TRUST
August 3, 1995
INVESTMENT PERFORMANCE
In marked contrast to last year, owning bonds has been a very satisfying and
rewarding experience thus far in 1995.
[PICTURE - Michael C. Knebel]
For the six-month period ending June 30, the SAFECO Institutional Series
Trust - Fixed Income Portfolio returned 9.44%; its twelve-month return was
9.97%.
These returns are comparable to the Lehman Brothers Government/Corporate
Intermediate Index, which delivered 9.6% for the six months; but less than the
Lehman Brothers Government/Corporate Index which is comprised of longer maturity
bonds. For the six months ended June 30, the bond market, as measured by
Lehman's longer index returned 11.8%.
Twelve-month returns were 12.76% for the Government/Corporate Index and
10.37% for the Intermediate Index.
THE PORTFOLIO IN REVIEW
We began the year expecting inflation (and rates) to rise, cautiously
keeping the average maturity of the portfolio shorter than the market indices.
As the case for slower economic growth continued to build, we increased
portfolio maturities, most recently on July 6, following the Federal Reserve
Board's lowering of the Federal Funds Rate.
Still, the Trust continues to favor intermediate maturities, even though
longer bonds had higher returns this year. Over a longer horizon, long bond
investors experience much higher volatility of their principal in exchange for a
modest yield premium, not a worthwhile trade-off in our estimation.
The Trust's duration (that is, the sensitivity of the portfolio to changes
in interest rates) was 5.03 years, on June 30, similar to that of the Lehman
Government/Corporate Index, which is 5.05 years.
Trading activity in the Trust included selling our positions in Fannie Mae
and Ontario Hydro bonds. Both positions had reached what we considered full
valuations. Corporate bonds now comprise about 35% of the portfolio, Treasuries
are about 62%, and cash and accruals account for the balance.
MARKET REVIEW AND OUTLOOK
Despite a seventh rate hike by the Federal Reserve in early February,
investors seemed to sense that the end to the Fed's tight money policy was near.
Buyers returned to the market in early January and continued their spree
throughout the spring. As a result, ten-year Treasury Note yields have fallen
nearly 1.75% so far this year. In its happiness, the market has been able to
weather sometimes discouraging news on the inflation front, including rising raw
material prices and a falling dollar.
Amidst a slowdown in both employment growth and consumer spending, inflation
pressures seem to have subsided for now. As if to validate the market's
satisfaction with the inflation outlook, the Federal Reserve Board lowered its
Fed Funds rate target from 6% to 5 3/4% on July 6.
Doing so, the Fed signaled to bond investors that it expects slower, more
sustainable economic growth, with little risk of inflation above 3 to 3 1/2%.
Such an environment should be very constructive for the financial markets in the
coming months. Rates should stabilize and perhaps fall a bit more as we await
the rebound in economic activity expected later this year.
And so we go forward, conservatively, but with optimism and slightly longer
maturities.
/s/ Michael C. Knebel
Michael C. Knebel
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HIGHLIGHTS
SAFECO INSTITUTIONAL
SERIES TRUST --
FIXED-INCOME PORTFOLIO
As of June 30, 1995 (Unaudited)
CURRENT YIELD (30-DAY) 4.40%
WEIGHTED AVERAGE MATURITY 6.07 YEARS
SAFECO INSTITUTIONAL SERIES TRUST --
FIXED-INCOME PORTFOLIO
====================================
BONDS BY TYPE
AS A PERCENTAGE OF NET ASSETS
[Pie Chart appears here displaying the following:]
U. S. Treasury Notes: 49.2%
Utilities: 17.9%
U. S. Treasury Strips: 12.5%
Cash, Short-Term Investments and Other: 3%
Canadian Provinces, U. S. Funds: 2.3%
Banking and Finance: 15.1%
<TABLE>
<CAPTION>
S&P CREDIT RATING DISTRIBUTION
AS A PERCENTAGE OF NET ASSETS
=============================================================
<S> <C>
U.S. Treasury Notes (Not Rated) 49.2%
U.S. Treasury Strips (Not Rated) 12.5%
AA 12.6%
A 22.7%
Cash, Short-Term Investments and Other 3.0%
-----
100.0%
=====
</TABLE>
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PORTFOLIO OF INVESTMENTS
As of June 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000'S) MARKET VALUE (000'S)
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<S> <C> <C>
CORPORATE BONDS - 35.3%
BANKING & FINANCE - 15.1%
$200 American General Finance Corp.
6.875%, due 7/01/99 $ 203
200 Associates Corp. of North America
8.80%, due 8/01/98 213
100 International Lease Finance Corp.
6.625%, due 4/01/99 100
100 Norwest Financial, Inc.
6.25%, due 3/15/99 99
100 Transamerica Finance Corp.
6.80%, due 3/15/99 101
CANADIAN PROVINCES - 2.3%
100 Manitoba (Province)
9.50%, due 9/15/98 109
UTILITIES - 17.9%
100 Central Power & Light Co.
7.50%, due 5/01/99 103
100 Consolidated Natural Gas Co.
5.875%, due 10/01/98 99
185 GTE California, Inc.
6.25%, due 1/15/98 185
250 Nova Gas Transmission
7.25%, due 7/06/99 257
100 Pennsylvania Power & Light Co.
5.50%, due 4/01/98 98
100 Virginia Electric & Power Co.
7.25%, due 3/01/97 101
------
TOTAL CORPORATE BONDS 1,668
======
U.S. GOVERNMENT SECURITIES - 61.7%
U.S. TREASURY NOTES - 49.2%
$2,035 6.25%, due 2/15/03 $2,039
50 5.875%, due 2/15/04 49
100 5.375%, due 5/31/98 99
85 5.125%, due 11/15/95 85
50 5.125%, due 3/31/96 50
U.S. TREASURY STRIPS - 12.5%
1,100 0.00%, due 5/15/05 588
------
TOTAL U.S. GOVERNMENT SECURITIES 2,910
------
SHORT-TERM INVESTMENTS - 1.2%
INVESTMENT COMPANIES:
57 Short-Term Investments Co.
(Prime Portfolio) 57
------
TOTAL INVESTMENTS - 98.2% 4,635
Other Assets, less Liabilities 85
------
NET ASSETS $4,720
======
</TABLE>
See Notes to Financial Statements
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STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 1995 (Unaudited)
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<TABLE>
<S> <C>
ASSETS
Investments, at Value
Corporate Bonds (Identified Cost $1,637,147) $1,668,173
U.S. Government Securities (Identified Cost $2,789,010) 2,910,102
Short-Term Investments 56,816
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Total Investments 4,635,091
Interest Receivable 94,204
Deferred Organization Expense (Note 1) 21,982
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Total Assets 4,751,277
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LIABILITIES
Payables
Organization Expense 21,982
Investment Advisory Fees 1,917
Dividends 785
Other 6,116
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Total Liabilities 30,800
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NET ASSETS $4,720,477
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SHARES OUTSTANDING (Note 2) 543,644
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NET ASSET VALUE PER SHARE (Net Assets Divided by Shares Outstanding) $ 8.68
==========
</TABLE>
See Notes to Financial Statements
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STATEMENT OF OPERATIONS
For the Six Month Period Ended June 30, 1995 (Unaudited)
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<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest $ 156,630
EXPENSES
Investment Advisory Fees (Note 5) $ 11,411
Trustees' Fees 8,200
Legal and Auditing Fees 5,600
Amortization of Organization Expenses 2,990
Custodian Fees 368
Corporate Fees 190
Shareholder Servicing Fees (Note 5) 128
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Total Expenses 28,887
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NET INVESTMENT INCOME 127,743
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net Realized Gain on Investment Transactions 18,400
Net Change in Unrealized Appreciation (Note 3) 275,989
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NET GAIN ON INVESTMENTS 294,389
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NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $ 422,132
==========
</TABLE>
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STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTH PERIOD ENDED YEAR ENDED
JUNE 30 DECEMBER 31
1995 1994
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<S> <C> <C>
OPERATIONS
Net Investment Income $ 127,743 $ 146,555
Net Realized Gain on Investment Transactions 18,400 (12,033)
Net Change in Unrealized Appreciation 275,989 (125,849)
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NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 422,132 8,673
DIVIDENDS TO SHAREHOLDERS FROM
Net Investment Income (127,743) (146,555)
TRUST SHARE TRANSACTIONS (Note 2) (201,064) 4,674,265
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TOTAL CHANGE IN NET ASSETS 93,325 4,536,383
NET ASSETS AT BEGINNING OF PERIOD 4,627,152 90,769
---------- ----------
NET ASSETS AT END OF PERIOD $4,720,477 $4,627,152
========== ==========
</TABLE>
See Notes to Financial Statements
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NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The SAFECO Institutional Series Trust ("Trust") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Trust is authorized to issue up to 15
different classes of stock, each representing a different investment portfolio.
At June 30, 1995, the Trust consists of one portfolio -- the Fixed Income
Portfolio ("Portfolio").
On August 5, 1993, the Trust's shareholder approved a plan of
reorganization to convert the Trust from a Massachusetts Business Trust into a
Delaware Business Trust. The effective date of the reorganization was the
initial public offering date of the Portfolio, February 28, 1994. At that time,
the Portfolio's Trust shares changed from no par value to a par value of
$.001. The costs of conversion were borne by the investment adviser to the
Portfolio, SAFECO Asset Management Company.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
SECURITY VALUATION. Investments in securities are stated on the basis of
valuations provided by a pricing service which uses information with respect to
transactions in securities, quotations from securities dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Short-term investments purchased at par are
valued at cost. All other short-term investments are valued at amortized cost
which approximates market value.
SECURITY TRANSACTIONS. Security transactions are recorded on the trade
date. The cost of the portfolio is the same for financial statement and federal
income tax purposes. Realized gains and losses from security transactions are
determined using the identified cost basis.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS. Securities purchased on a
when-issued or delayed basis may be settled a month or more after the trade
date. The securities purchased are carried in the portfolio at market and are
subject to market fluctuation during this period. These securities begin earning
interest on the settlement date. As commitments to purchase when-issued
securities become fixed, the Portfolio segregates liquid assets in an amount
equal to the total obligation.
INCOME RECOGNITION. Interest is accrued on portfolio investments daily.
Bond premiums and market discounts are amortized to either call or maturity
dates.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Net investment income is
declared as a dividend to shareholders of record as of the close of each
business day and payment is made as of the last business day of each month. Net
gains realized from security transactions, if any, are normally distributed to
shareholders at the end of December.
FEDERAL INCOME AND EXCISE TAXES. The Trust intends to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies by distributing substantially all taxable income to shareholders in a
manner which results in no tax to the Trust. Therefore, no federal income or
excise tax provision is required.
DEFERRED ORGANIZATION EXPENSES. Costs related to the organization of the
Portfolio have been deferred and are being amortized to operations over a period
of sixty months, beginning on the initial public offering date. These costs were
advanced by the investment adviser and are being reimbursed by the Portfolio
over a period of not more than sixty months. If any of the original seed money
shares are redeemed by SAFECO Asset Management Company prior to the end of the
amortization period, the redemption proceeds will be reduced by pro rata share
of the unamortized organization expenses as of the date of redemption.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. TRUST SHARES
At June 30, 1995, there were unlimited trust shares of $.001 par value
authorized, and capital paid in aggregated $4,561,989. Transactions in trust
shares were as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTH PERIOD ENDED YEAR ENDED
JUNE 30, 1995 DECEMBER 31, 1994
--------------------------------------------------------------------------------
SHARES DOLLARS SHARES DOLLARS
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<S> <C> <C> <C> <C>
Sales -- -- 544,069 $4,561,929
Reinvestments 14,706 $ 123,936 17,208 142,336
------- --------- ------- ----------
14,706 123,936 561,277 4,704,265
Redemptions (38,751) (325,000) (3,588) (30,000)
------- --------- ------- ----------
Net Change (24,045) $(201,064) 557,689 $4,674,265
======= ========= ======= ==========
</TABLE>
3. INVESTMENT TRANSACTIONS
PURCHASES AND SALES. The Portfolio had purchases and sales of securities
during the six month period ended June 30, 1995, of $2,098,447 and $2,266,140;
respectively (including purchases and sales of U.S. Government Securities of
$1,898,727 and $1,965,091, respectively).
UNREALIZED APPRECIATION (DEPRECIATION) AT JUNE 30, 1995:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for
investment securities in which there is an
excess of value over identified cost $153,379
Aggregate gross unrealized depreciation for
investment securities in which there is an
excess of identified cost over value (1,261)
--------
Net unrealized appreciation $152,118
========
</TABLE>
4. ACCUMULATED UNDISTRIBUTED CAPITAL GAINS
At June 30, 1995, the Portfolio had an undistributed capital gain of
$6,730.
5. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
SAFECO Asset Management Company receives investment advisory fees from the
Portfolio. The fee is based on average daily net assets at the annual rate of
50/100 of one percent on the first $100 million, declining in two levels to
35/100 of one percent on net assets over $250 million. SAFECO Services
Corporation receives shareholder servicing fees. At June 30, 1995, SAFECO Asset
Management Company owned 15,675 shares of the Trust. In connection with the
formation of the Trust, the investment adviser, SAFECO Asset Management Company,
advanced moneys for organizational expenses (Note 1). The Trust may borrow money
for temporary purposes from SAFECO Corporation or its affiliates at interest
rates equivalent to commercial bank interest rates.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
<TABLE>
<CAPTION>
JUNE 25, 1992
FOR THE FOR THE (COMMENCEMENT OF
SIX MONTHS ENDED YEAR ENDED DECEMBER 31 OPERATIONS) TO
JUNE 30, 1995 1994 1993+ DECEMBER 31, 1992 +
============================================================================================================================
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 8.15 $ 9.08 $ 9.57 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income (Loss) 0.23 0.89 (0.62) (0.50)
Net Realized and Unrealized Gain (Loss)
on Investments 0.53 (1.55) 0.15 0.07
------ ------- ------ ------
Total from Investment Operations 0.76 (0.66) (0.47) (0.43)
------ ------- ------ ------
LESS DISTRIBUTIONS
Dividends from Net Investment Income (0.23) (0.27) -- --
Dividends from Capital Gains -- -- (0.02) --
------ ------- ------ ------
Total Distributions (0.23) (0.27) (0.02) --
------ ------- ------ ------
NET ASSET VALUE AT END OF PERIOD $ 8.68 $ 8.15 $ 9.08 $ 9.57
====== ======= ====== ======
TOTAL RETURN 9.44%** -3.01%# N/A N/A
NET ASSETS AT END OF PERIOD (000'S) $4,720 $ 4,627 $ 91 $ 96
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.24%* 1.37% 11.75% 13.35%*
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS 5.46%* 4.47% -6.75% -9.80%*
PORTFOLIO TURNOVER RATE 92.58%* 129.56% None None
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</TABLE>
+ Financial Highlights relate only to the performance of the initial seed
investment of SAFECO Asset Management Company. Trust shares were not yet
available to the public.
# Total return from February 28, 1994 (initial public offering), to December
31, 1994, not annualized.
* Annualized.
** Not Annualized.
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SAFECO FAMILY OF FUNDS==========================================================
STABILITY OF PRINCIPAL
SAFECO Money Market Fund
SAFECO Tax-Free Money Market Fund
TAXABLE BOND INCOME
SAFECO Intermediate-Term U.S. Treasury Fund
SAFECO GNMA Fund
SAFECO High-Yield Bond Fund
TAX-FREE BOND INCOME
SAFECO Intermediate-Term Municipal Bond Fund
SAFECO Insured Municipal Bond Fund
SAFECO Municipal Bond Fund
SAFECO California Tax-Free Income Fund
SAFECO Washington State Municipal Bond Fund
HIGH CURRENT INCOME WITH LONG-TERM GROWTH
SAFECO Income Fund
LONG-TERM GROWTH
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
FOR MORE COMPLETE INFORMATION ON ANY SAFECO MUTUAL FUND, INCLUDING MANAGEMENT
FEES AND EXPENSES, CALL OR WRITE FOR A FREE PROSPECTUS. PLEASE READ IT CAREFULLY
BEFORE YOU INVEST OR SEND MONEY.
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SAFECO INSTITUTIONAL SERIES TRUST
BOARD OF TRUSTEES
Boh A. Dickey, Chairman
Barbara J. Dingfield
Richard W. Hubbard
Richard E. Lundgren
L.D. McClean
Larry L. Pinnt
John W. Schneider
OFFICERS
David F. Hill, President
Ronald L. Spaulding,
Vice President and Treasurer
Neal A. Fuller,
Vice President and Controller
INVESTMENT ADVISER
SAFECO Asset
Management Company
DISTRIBUTOR
SAFECO Securities, Inc.
TRANSFER AGENT
SAFECO Services Corporation
CUSTODIAN
U.S. Bank of Washington, N.A.
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