<PAGE> 1
SAFECO INSTITUTIONAL SERIES TRUST
BOARD OF TRUSTEES:
Roth A. Dickey, Chairman
Barbara J. Dingfield
Richard W. Hubbard
Richard E. Lundgren
L.D. McClean
Terry L. Pinnt
John W. Schneider
OFFICERS:
David E. Hill, President
Ronald L. Spaulding,
Vice President and Treasurer
Neal A. Fuller,
Vice President and Controller
INVESTMENT ADVISER:
SAFECO Asset
Management Company
DISTRIBUTORS:
SAFECO Securities, Inc.
TRANSFER AGENT:
SAFECO Services Corporation
CUSTODIAN:
U.S. Bank of Washington, N.A.
MAILING ADDRESS:
SAFECO Mutual Funds
P.O. Box 34443
Seattle, WA 98124-1443
FOR ACCOUNT INFORMATION
OR TELEPHONE TRANSACTIONS:
Nationwide: 1-800-278-1985
Seattle: 545-5823
TTY/TDD: 1-800-438-8718
December 31, 1995
[Photo of Mt. Rainier, Washington]
ANNUAL
REPORT
SAFECO INSTITUTIONAL SERIES TRUST - FIXED INCOME PORTFOLIO
[SAFECO LOGO]
GMF 772 2/96
[RECYCLE LOGO] Printed on Recycled Paper.
This report must be preceded or
accompanied by a current prospectus.
(R) Registered Trademark of SAFECO Corporation.
<PAGE> 2
PERFORMANCE INFORMATION
For the Period Ended December 31, 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.
<TABLE>
<CAPTION>
================================================================================
AVERAGE ANNUAL SINCE
TOTAL RETURN 1 YEAR INCEPTION*
- --------------------------------------------------------------------------------
<S> <C> <C>
SAFECO Institutional Series
Trust -- Fixed Income Portfolio 17.35% 7.32%
Lehman Brothers Gov't/Corp. Index 19.24% 8.39%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
================================================================================
<S> <C>
Report from the Fund Manager 1
Highlights Information 2
Portfolio of Investments 3
Statement of Assets and Liabilities 4
Statement of Operations 4
Statement of Changes in Net Assets 5
Notes to Financial Statements 6
Report of Independent Auditors 9
</TABLE>
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.
================================================================================
SAFECO INSTITUTIONAL SERIES TRUST --
FIXED-INCOME PORTFOLIO
ILLUSTRATION OF A $10,000 INVESTMENT
- --------------------------------------------------------------------------------
[A graph appears here which illustrates the growth of a $10,000 investment over
the life of the fund in comparison to the Lehman Brothers Gov't/Corp. Index.]
<TABLE>
<CAPTION>
DATE FUND LEHMAN
- ---- ---- ------
<S> <C> <C>
02/28/94 10,000 10,000
03/31/94 9,666 9,755
04/30/94 9,657 9,674
05/31/94 9,666 9,657
06/30/94 9,653 9,634
07/31/94 9,757 9,827
08/31/94 9,780 9,831
09/30/94 9,703 9,683
10/31/94 9,709 9,672
11/30/94 9,680 9,655
12/31/94 9,699 9,718
01/31/95 9,828 9,905
02/28/95 9,991 10,135
03/31/95 10,038 10,203
04/30/95 10,167 10,344
05/31/95 10,533 10,778
06/30/95 10,615 10,864
07/31/95 10,541 10,822
08/31/95 10,674 10,960
09/30/95 10,791 11,072
10/31/95 10,962 11,235
11/30/95 11,178 11,420
12/31/95 11,382 11,588
</TABLE>
* The Fund became available to the public on February 28, 1994. Therefore,
index graph comparison also begins on February 28, 1994.
<PAGE> 3
REPORT FROM THE FUND MANAGER
SAFECO INSTITUTIONAL SERIES TRUST
December 31, 1995
INVESTMENT PERFORMANCE
Who would have guessed, following 1994, arguably the worst year for bonds
in three generations, that 1995 would be so kind to fixed-income investors?
Benevolent it was. The bond market came roaring back, producing handsome returns
for patient investors.
[Photo of Michael C. Knebel]
For 12 months ending December 31, the SAFECO Institutional Series Trust
returned 17.35% after expenses. For the same period, the Lehman Brothers
Government Corporate Index gained 19.24%.
The difference in returns is partially due to our conservatism. We kept a
shorter-than-average duration (sensitivity to interest rates) during the first
half of the year. We began the year with a cautionary stance because the Federal
Reserve was still raising short-term interest rates to avoid an overheated
economy. Anticipating little gains would be found in intermediate-range
maturities and wanting to keep interest rate risk low, we overweighted the fund
with short-term bonds.
As time moved on, the Fed's actions worked as planned: economic growth
slowed in the second half of the year, but more importantly, inflationary
pressures, which had been building from late 1994 through May 1995, subsided
significantly. (Inflation is a bond investor's worst enemy, as it erodes the
purchasing power of bonds' principal and interest-income streams.)
On these signs, the market continued to rally. Performance of the portfolio
lagged the index in the early going due to our more defensive, lower-risk
posture.
As the year unfolded, however, we gradually increased the Trust's risk
profile by extending maturities, thus increasing our interest-rate sensitivity.
Returns (in both absolute and relative terms) improved.
By closely monitoring and then following the market trend (rather than
anticipating where rates might go) we were able to capture much of the market's
gain while carefully controlling the risk level of the portfolio.
Other than these adjustments to the Trust's duration, which was 6.6 years
on December 31, compared to 5.3 for the index, trading activity during the last
six months was unremarkable.
WHAT CAN WE EXPECT FOR 1996?
The temporary shutdown of many government agencies in recent weeks has
delayed the release of many economic indicators, making forecasts more
challenging than normal. That said, I'll venture this: conflicting factors will
affect bond returns in the coming months. First, let's examine the good news for
bonds:
- - Continued low inflation and the likely slow pace of economic growth.
- - Moderate consumer spending and eroding confidence could be further dampened
by corporate "downsizings" and this winter's storms.
- - Government spending is forecast to grow more slowly than the overall
economy.
- - The Federal Reserve lowered short-term rates January 31 and is expected to
ease rates further in the face of slow growth.
Significant risks to bond valuations in '96 include:
- - Uncertainty over fiscal policy, specifically whether a balanced Federal
budget can be achieved.
- - Lower interest rates may reduce mortgage outlays enough to spur consumer
spending, which ultimately could lead to higher interest rates.
On balance, we think the environment for bond investors remains positive.
However, repeating the astonishing returns of 1995 would take a significantly
weaker economy than we foresee in 1996.
/s/ Michael C. Knebel
Michael C. Knebel
- 1 -
<PAGE> 4
SAFECO INSTITUTIONAL SERIES TRUST --
FIXED-INCOME PORTFOLIO
================================================================================
BONDS BY TYPE
AS A PERCENTAGE OF NET ASSETS
- --------------------------------------------------------------------------------
[A pie chart appears here illustrating the percentage of net assets invested in
specific types of bonds, as follows:
<TABLE>
<S> <C>
US Treasury Strips 61.4%
Utilities 19.0%
Banking & Finance 16.2%
Canadian Provinces, U.S. Funds 2.5%
Cash, Short-Term Investments and Other 0.9%]
</TABLE>
HIGHLIGHTS
SAFECO INSTITUTIONAL
SERIES TRUST --
FIXED-INCOME PORTFOLIO
As of December 31, 1995 (Unaudited)
<TABLE>
<S> <C>
CURRENT YIELD (30-DAY) 4.78%
WEIGHTED AVERAGE MATURITY 6.93 YEARS
</TABLE>
<TABLE>
<CAPTION>
S&P CREDIT RATING DISTRIBUTION
AS A PERCENTAGE OF NET ASSETS
================================================================================
<S> <C>
U.S. Treasury Strips (Not Rated) 61.4%
AA 13.4%
A 24.3%
0.9%
-----
Cash, Short-Term Investments and Other 100.0%
=====
</TABLE>
- 2 -
<PAGE> 5
PORTFOLIO OF INVESTMENTS
As of December 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000'S) MARKET VALUE (000'S)
================================================================================
<S> <C>
CORPORATE BONDS - 37.7%
BANKING & FINANCE - 16.2%
$200 American General Finance Corp.
6.875%, due 7/01/99 $ 207
200 Associates Corp. of North America
8.80%, due 8/01/98 215
100 International Lease Finance Corp.
6.625%, due 4/01/99 102
100 Norwest Financial, Inc.
6.25%, due 3/15/99 101
100 Transamerica Finance Corp.
6.80%, due 3/15/99 108
CANADIAN PROVINCES, U.S. FUNDS - 2.5%
100 Manitoba (Province)
9.50%, due 9/15/98 110
UTILITIES - 19.0%
100 Central Power & Light Co.
7.50%, due 5/01/99 105
100 Consolidated Natural Gas Co.
5.875%, due 10/01/98 101
185 GTE California, Inc.
6.25%, due 1/15/98 188
250 Nova Gas Transmission
7.25%, due 7/06/99 261
100 Pennsylvania Power & Light Co.
5.50%, due 4/01/98 99
100 Virginia Electric & Power Co.
7.25%, due 3/01/97 102
------
TOTAL CORPORATE BONDS 1,694
------
U.S. GOVERNMENT SECURITIES - 61.4%
U.S. TREASURY INTEREST STRIPS - 21.5%
$1,645 0.00%, due 5/15/05 $ 969
U.S. TREASURY PRINCIPAL STRIPS - 39.9%
1,100 0.00%, due 5/15/05 647
1,980 0.00%, due 8/15/05 1,146
------
TOTAL U.S. GOVERNMENT SECURITIES 2,762
------
SHORT-TERM INVESTMENTS - 0.4%
INVESTMENT COMPANIES:
17 Short-Term Investments Co.
(Prime Portfolio) 17
------
TOTAL SHORT-TERM INVESTMENTS 17
------
TOTAL INVESTMENTS - 99.5% 4,473
Other Assets, less Liabilities 24
------
NET ASSETS $4,497
======
</TABLE>
See Notes to Financial Statements
- 3 -
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES
As of December 31, 1995
================================================================================
<TABLE>
<S> <C>
ASSETS
Investments, at Value
Corporate Bonds (Identified Cost $1,636,175) $1,694,107
U.S. Government Securities (Identified Cost $2,612,464) 2,761,329
Short-Term Investments 17,337
----------
Total Investments 4,472,773
Interest Receivable 42,860
Deferred Organization Expense 18,992
----------
Total Assets 4,534,625
----------
LIABILITIES
Payables
Organization Expense 18,992
Investment Advisory Fees 1,770
Dividends 5,385
Other 11,602
----------
Total Liabilities 37,749
----------
NET ASSETS $4,496,876
==========
SHARES OUTSTANDING 512,967
==========
NET ASSET VALUE PER SHARE (Net Assets Divided by Shares Outstanding) $ 8.77
==========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
================================================================================
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest $292,598
EXPENSES
Investment Advisory Fees $ 22,720
Trustees' Fees 10,624
Legal and Auditing Fees 11,600
Amortization of Organization Expenses 5,980
Custodian Fees 2,418
Shareholder Servicing Fees 309
Other 347
--------
Total Expenses
NET INVESTMENT INCOME 53,998
--------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 238,600
Net Realized Gain on Investments 167,331
Net Change in Unrealized Appreciation 330,668
--------
NET GAIN ON INVESTMENTS 497,999
--------
NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $736,599
========
</TABLE>
See Notes to Financial Statements
- 4 -
<PAGE> 7
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31
1995 1994
================================================================================
<S> <C> <C>
OPERATIONS
Net Investment Income $ 238,600 $ 146,555
Net Realized Gain (Loss) on Investments 167,331 (12,033)
Net Change in Unrealized Appreciation 330,668 (125,849)
----------- -----------
NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 736,599 8,673
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (238,600) (146,555)
Net Realized Gain on Investments (155,678) --
----------- ------------
Total Distributions (394,278) (146,555)
TRUST SHARE TRANSACTIONS (472,597) 4,674,265
----------- -----------
TOTAL CHANGE IN NET ASSETS (130,276) 4,536,383
NET ASSETS AT BEGINNING OF PERIOD 4,627,152 90,769
----------- -----------
NET ASSETS AT END OF PERIOD $ 4,496,876 $ 4,627,152
=========== ===========
- --------------------------------------------------------------------------------
OTHER INFORMATION
INCREASE (DECREASE) IN SHARES AND AMOUNTS
SHARES:
Sales -- 544,069
Reinvestments 44,227 17,208
Redemptions (98,949) (3,588)
----------- -----------
(54,722) 557,689
=========== ===========
AMOUNTS:
Sales $ -- $ 4,561,929
Reinvestments 382,403 142,886
Redemptions (855,000) (30,000)
----------- -----------
$ (472,597) $ 4,674,265
=========== ===========
At December 31, 1995:
Paid in Capital $ 4,290,456
Par Value per Share $ .001
Shares Authorized UNLIMITED
</TABLE>
See Notes to Financial Statements
- 5 -
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
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. At December 31, 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 a pro rata share
of the unamortized organization expenses as of the date of redemption.
- 6 -
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT TRANSACTIONS
Purchases and Sales. The Portfolio had purchases and sales of securities
during the year ended December 31, 1995 of $4,082,938 and $4,623,887,
respectively (including purchases and sales of U.S. Government Securities of
$3,883,218 and $4,322,837, respectively).
<TABLE>
<S> <C>
UNREALIZED APPRECIATION AT DECEMBER 31, 1995:
Aggregate gross unrealized appreciation for
investment securities in which there is an
excess of value over identified cost $206,797
Aggregate gross unrealized depreciation for
investment securities in which there
is an excess of identified cost over value 0
--------
Net unrealized appreciation $206,797
========
</TABLE>
3. 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. 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.
- 7 -
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
<TABLE>
<CAPTION>
June 25, 1992
(Commencement of
For the Year Ended December 31 Operations) to
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) 0.44 0.27 (0.62) (0.50)
Net Realized and Unrealized Gain (Loss)
on Investments 0.94 (0.93) 0.15 0.07
------ ------- ------- ------
Total from Investment Operations 1.38 (0.66) (0.47) (0.43)
------ ------- ------- ------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net Investment Income (0.44) (0.27) -- --
Net Realized Gain on Investments (0.32) -- (0.02) --
------ ------- ------- ------
Total Distributions (0.76) (0.27) (0.02) --
------ ------- ------- ------
NET ASSET VALUE AT END OF PERIOD $ 8.77 $ 8.15 $ 9.08 $ 9.57
====== ======= ======= ======
TOTAL RETURN 17.35% -3.01%# N/A N/A
NET ASSETS AT END OF PERIOD (000'S) $4,497 $ 4,627 $ 91 $ 96
RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.16% 1.37% 11.75% 13.35%*
RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE NET ASSETS 5.14% 4.47% -6.75% -9.80%*
PORTFOLIO TURNOVER RATE 78.78% 129.56% None None
</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.
- 8 -
<PAGE> 11
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
SAFECO INSTITUTIONAL SERIES TRUST --
FIXED INCOME PORTFOLIO
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of SAFECO Institutional Series Trust --
Fixed Income Portfolio as of December 31, 1995, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the three years in the period then ended and for the period from June
25, 1992 (commencement of operations) to December 31, 1992. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
SAFECO Institutional Series Trust -- Fixed Income Portfolio at December 31,
1995, the results of its operations, the changes in its net assets, and the
financial highlights for the periods referred to above, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Seattle, Washington
January 26, 1996
- 9 -
<PAGE> 12
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
SAFECO Balanced Fund
LONG-TERM GROWTH
SAFECO Growth Fund
SAFECO Equity Fund
SAFECO Northwest Fund
SAFECO International Stock Fund
SAFECO Small Company Stock 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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