<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 0-21112
THE SECTOR STRATEGY FUND/SM/ V L.P.
-------------------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3674792
- -------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
(formerly ML Futures Investment Partners Inc.)
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
-----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
212-236-4161
-------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____
-----
This document contains 13 pages.
There are no exhibits and no exhibit index filed with this document.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE SECTOR STRATEGY FUND/SM/ V L.P.
-------------------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
March 31, December 31,
1996 1995
----------- -----------
ASSETS
- ------
Accrued interest (Note 2) $ 83,552 $ 105,038
Equity in commodity futures trading
accounts:
Cash and option premiums 21,434,247 24,941,940
Net unrealized gain on open 666,621 2,001,534
contracts
------------- -------------
TOTAL $22,184,420 $27,048,512
============= =============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $ 851,769 $ 743,243
Brokerage commissions payable (Note 135,843 174,332
2)
Profit shares payable 4,590 74,883
Administrative expense payable 3,483 -
------------- -------------
Total liabilities 995,685 992,458
------------- -------------
PARTNERS' CAPITAL:
General Partner (2,990 and 2,990 314,096 345,379
units)
Limited Partners (198,734 and 20,874,639 25,710,675
222,604 units)
------------- -------------
Total partners' capital 21,188,735 26,056,054
------------- -------------
TOTAL $22,184,420 $27,048,512
============= =============
NET ASSET VALUE PER UNIT
(Based on 201,724, and 225,594 Units 105.04 115.50
outstanding) =========== ===========
See notes to financial statements.
2
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
-------------------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF OPERATIONS
------------------------
For the three For the three
Months ended Months ended
March 31, 1996 March 31, 1995
--------------- --------------
REVENUES:
Trading (loss) profit:
Realized $ (695,729) $2,511,357
Change in unrealized (1,334,913) 120,873
----------------- --------------
Total trading results (2,030,642) 2,632,230
----------------- --------------
Interest income (Note 2) 265,519 493,742
----------------- --------------
Total revenues (1,765,123) 3,125,972
----------------- --------------
EXPENSES:
Profit shares 4,590 205,570
Brokerage commissions (Note 2) 457,082 672,451
Administrative expense 11,720 -
----------------- --------------
Total expenses 473,392 878,021
----------------- --------------
NET (LOSS) INCOME $(2,238,515) $2,247,951
================= ==============
NET (LOSS) INCOME PER UNIT:
Weighted average number of units
outstanding (Note 4) 216,770 355,501
======= =======
Weighted average net (loss) income per $(10.33) $6.32
unit ======== =====
See notes to financial statements.
3
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
-------------------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------
For the three months ended March 31, 1996 and 1995
--------------------------------------------------
<TABLE>
<CAPTION>
Limited General
Units Partners Partner Total
-------- ------------ --------- ------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1994 381,064 38,004,265 528,877 38,533,142
Net income - 2,212,797 35,154 2,247,951
Redemptions (68,422) (7,065,420) - (7,065,420)
----------- ------------- ---------- -----------
PARTNERS' CAPITAL,
MARCH 31, 1995 312,642 $33,151,642 $564,031 $33,715,673
=========== ============= ========== ===========
PARTNERS' CAPITAL,
DECEMBER 31, 1995 225,594 $25,710,675 $345,379 $26,056,054
Net loss - (2,207,232) (31,283) (2,238,515)
Redemptions (23,870) (2,628,804) - (2,628,804)
----------- ------------- ---------- -----------
PARTNERS' CAPITAL,
MARCH 31, 1996 201,724 $20,874,639 $314,096 $21,188,735
=========== ============= ========== ===========
See notes to financial statements.
</TABLE>
4
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
-------------------------------------
(a Delaware limited partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The SECTOR Strategy Fund V L.P. (the "Partnership" or the "Fund") was
organized under the Delaware Revised Uniform Limited Partnership Act on July
16, 1992 and commenced trading activities on January 4, 1993. The
Partnership engages in the speculative trading of futures, options and
forward contracts on a wide range of commodities. The initial capitalization
included an investment from The SECTOR Strategy Fund International V Ltd.
(the "Company"). On April 1, 1994 the Company redeemed its investment in the
Partnership to become a stand-alone trading company. Merrill Lynch
Investment Partners Inc. (formerly ML Futures Investment Partners Inc.)
("MLIP" or the "General Partner"), a wholly-owned subsidiary of Merrill Lynch
Group, Inc., which in turn is a wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("Merrill Lynch",) is the general partner of the Partnership, and
Merrill Lynch Futures Inc. ("MLF"), also a Merrill Lynch affiliate, is its
commodity broker. The General Partner has agreed to maintain a general
partner's interest of at least 1% of the total capital in the Partnership.
The General Partner and each Limited Partner share in the profits and losses
of the Partnership in proportion to their respective interest in it.
The financial information included herein has been prepared by management
without audit by independent certified public accountants who do not express
an opinion thereon. The statement of financial condition as of December 31,
1995 has been derived from but does not include all the disclosures contained
in the audited financial statements for the year ended December 31, 1995.
The information furnished includes all adjustments which are, in the opinion
of management, necessary for a fair statement of results for the interim
period. The results of operations as presented, however, should not be
considered indicative of the results to be expected for the entire year.
MLIP selects independent advisors (the "Advisors" or the "Trading Advisors")
to manage the Partnership's assets, and allocates and reallocates the
Partnership's trading assets among existing, replacement and additional
Advisors.
MLIP also determines what percentage of the Partnership's total capital to
allocate to trading from time to time, attempting to balance the desirability
of reducing the opportunity costs of the Partnership's "principal protection"
structure by allocating 100% (or more) of the Partnership's assets to trading
against the necessity of preventing Merrill Lynch & Co., Inc. from ever being
required to make any payments to the Partnership under the Merrill Lynch &
Co., Inc. guarantee. (See Note 5.)
Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
-------------------
Commodity futures, options and forward contract transactions are recorded on
the trade date and open contracts are reflected in the financial statements
at their fair value on the last business day of the reporting period. The
difference between the original contract amount and fair value is reflected
in income as an unrealized gain or loss. Fair value is based on quoted
market prices. All commodity futures, options and forward contracts are
reflected at fair value in the financial statements.
Operating Expenses
------------------
MLIP pays for all routine expenses (including legal, accounting, printing,
postage and similar administrative expenses) of the Partnership.
5
<PAGE>
The General Partner pays for all routine operating costs (including all
legal, accounting, printing, postage and similar administrative expenses) of
the Partnership.
No selling commissions were paid by Limited Partners.
Income Taxes
------------
No provision for income taxes has been made in the accompanying financial
statements as each partner is individually responsible for reporting income
or loss based on their respective share of the Partnership's income and
expenses as reported for income tax purposes.
Distributions
-------------
The Unitholders are entitled to receive, equally per Unit, any distribution
which may be made by the Partnership. No such distributions have been made
as of March 31, 1996.
Redemptions
-----------
A Limited Partner may require the Partnership to redeem some or all of their
Units at Net Asset Value as of the close of business on the last business day
of any month upon ten calendar days' notice. Units redeemed during each
successive six-month period ending on or prior to the end of the sixth,
twelfth, eighteenth and twenty-fourth full month after the Partnership
commenced trading were assessed early redemption charges of 4%, 3%, 2% and
1%, respectively, of their Net Asset Value as of the date of redemption.
Dissolution of the Partnership
------------------------------
The Partnership will terminate on December 31, 2022 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as
set forth in the Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
Substantially all of the Partnership's assets are deposited with MLF. As a
means of approximating the interest rate which would be earned by the
Partnership had 100% of its Net Assets on deposit with MLF been invested in
91-day Treasury bills, MLF pays the Partnership interest on its' account
equity on deposit with MLF at a rate of 0.5 of 1% per annum below the
prevailing 91-day Treasury bill rate. In the case of its trading in certain
foreign futures contracts, the Partnership deposits margin in foreign
currency denominated instruments or cash and earns interest generally at a
rate of 0.5 of 1% per annum below the prevailing short-term government
interest rate in the country in question. All of the accrued interest
receivable and substantially all of the interest income in these financial
statements result from these transactions. Any additional economic benefit
derived from possession of the Partnership's assets accrues to MLF or its
affiliates.
The Partnership pays brokerage commissions to MLF, at a flat monthly rate of
0.833 of 1% (a 10% annual rate) of the Partnership's month-end Net Assets
allocated to trading. Assets allocated to trading are not reduced, for
purposes of calculating brokerage commissions, by any accrued but unpaid
brokerage commissions, Profit shares or other fees or charges. Effective
January 1, 1996, the brokerage commission the Partnership pays to the
Commodity Broker was reduced to .8125% (a 9.75% annual rate), and the
Partnership began to pay an administrative fee to the General Partner of
.020833% (a .25% annual rate). The General Partner estimates that the round-
turn equivalent commission rate charged to the Partnership during the
quarters ended March 31, 1996 and 1995 was approximately $47 and $21
respectively (not including, in calculating round-turn equivalents, forward
contracts on a futures-equivalent basis).
MLF pays the Advisors annual Consulting Fees ranging from 2% to 4% of the
Partnership's average month-end assets allocated to them for management,
after reduction for a portion of the brokerage commissions.
The Partnership trades forward contracts through a Foreign Exchange Desk (the
"F/X Desk") established by MLIP that contacts at least two counterparties,
along with Merrill Lynch International Bank ("MLIB") for all of the
Partnership's currency trades. All counterparties other than MLIB are
unaffiliated with any Merrill Lynch entity. The F/X Desk charges a service
fee equal (at current exchange rates) to approximately $5.00 to $12.50 on
each purchase or sale of a futures-contract equivalent face amount of a
foreign currency. No service fees are charged on trades awarded to MLIB
(which receives a "bid-ask" spread on such trades). MLIB is awarded trades
only if its price (which includes no service fee) is equal to or better than
the best price (including the service fee) offered by any of the other
counterparties contacted.
6
<PAGE>
The F/X Desk trades on the basis of credit lines provided by a Merrill Lynch
entity. The Partnership is not required to margin or otherwise guarantee its
F/X Desk trading.
Certain of the Partnership's currency trades are executed in the form of
"exchange of futures for physical" ("EFP") transactions involving MLIB and
MLF. In these transactions, a spot or forward (collectively referred to as
"cash") currency position is acquired and exchanged for an equivalent futures
position on the Chicago Mercantile Exchange's International Monetary Market.
In its EFP trading, the Partnership acquires cash currency positions through
the F/X Desk in the same manner and on the same terms as in the case of the
Partnership's other F/X Desk trading. When the Partnership exchanges these
positions for futures, there is a "differential" between the prices of these
two positions. This "differential" reflects, in part, the different
settlement dates of the cash and the futures contracts as well as prevailing
interest rates, but also includes a pricing spread in favor of MLIB or
another Merrill Lynch entity.
The Partnership's F/X Desk service fee and EFP differential costs have, to
date, totaled no more than 0.25 of 1% per annum of the Partnership's average
month-end Net Assets.
3. AGREEMENTS
The Partnership and the Advisors have each entered into Advisory Agreements.
These Advisory Agreements generally terminate one year after they are entered
into, subject to certain renewal rights exercisable by the Partnership. The
Advisors determine the commodity futures and forward contract trades to be
made on behalf of their respective Partnership accounts, subject to certain
Partnership trading policies and to certain rights reserved for the General
Partner.
Profit shares, ranging from 15% to 25% of any New Trading Profit, as defined,
recognized by each Advisor considered individually irrespective of the
overall performance of the Partnership, as of the end of each calendar
quarter are paid by the Partnership to each Advisor. Profit shares are also
paid out in respect of Units redeemed as of the end of interim months during
a calendar quarter, to the extent of the applicable percentage of any New
Trading Profit attributable to such Units.
4. WEIGHTED AVERAGE UNITS
The weighted average number of Units outstanding was computed for purposes of
disclosing net income (loss) per weighted average Unit. The weighted average
number of Units outstanding at March 31, 1996, and 1995 equals the Units
outstanding as of such date, adjusted proportionately for Units redeemed
based on the respective length of time each was outstanding during the
preceding period.
5. MERRILL LYNCH & CO., INC. GUARANTEE
Merrill Lynch & Co., Inc. has guaranteed to the Partnership that it will have
sufficient Net Assets as of the Principal Assurance Date, as defined, that
the Net Asset Value per Unit as of such Principal Assurance Date will equal,
after adjustment for all liabilities to third parties, not less than $100 per
unit.
6. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades futures, options and forward contracts in interest
rates, stock indices, commodities, currencies, energy and metals. The
Partnership's revenues by reporting category for the quarter ended March 31,
1996 and the year ended December 31, 1995 were as follows:
1996
------------
Interest rate and Stock Indices $ (683,534)
Commodities (468,567)
Currencies 93,031
Energy (753,941)
Metals (217,631)
-------------
$(2,030,642)
=============
Market Risk
-----------
Derivative instruments involve varying degrees of off-balance sheet market
risk, and changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the financial instruments or
commodities underlying such derivative instruments frequently result in
changes in the Partnership's unrealized gain or loss on such derivative
instruments as reflected in the Statements of Financial Condition. The
Partnership's exposure to market risk is influenced by
7
<PAGE>
a number of factors, including the relationships among the derivative
instruments held by the Partnership as well as the volatility and liquidity
of the markets in which the derivative instruments are traded.
The General Partner has procedures in place intended to control market risk,
although there can be no assurance that they will, in fact, succeed in doing
so. These procedures focus primarily on monitoring the trading of the
Advisors selected from time to time for the Partnership, adjusting the
percentage of the Partnership's total assets allocated to trading,
calculating the Net Asset Value of the Advisors' respective Partnership
accounts as of the close of business on each day and reviewing outstanding
positions for over-concentration C both on an Advisor-by-Advisor and on an
overall Partnership basis. While the General Partner does not itself
intervene in the markets to hedge or diversify the Partnership's market
exposure (although the General Partner does adjust the percentage of the
Partnership's total assets allocated to trading), the General Partner may
urge Advisors to reallocate positions, or itself reallocate Partnership
assets among Advisors (although typically only as of the end of a month) in
an attempt to avoid over-concentrations. However, such interventions are
unusual. Except in cases in which it appears that an Advisor has begun to
deviate from past practice or trading policies or to be trading erratically,
the General Partner's basic risk control procedures consist simply of the
ongoing process of Advisor monitoring and selection, with the market risk
controls being applied by the Advisors themselves.
Fair Value
----------
The derivative instruments used in the Partnership's trading activities are
marked to market daily with the resulting unrealized gains or losses recorded
in the Statements of Financial Condition and the related profit or loss
reflected in trading revenues in the Statements of Operations. The
contract/notional values of open contracts as of March 31, 1996 and December
31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------- ---------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest rate
and Stock
indices $24,285,658 $120,671,846 $179,096,703 $56,850,064
Commodities 6,459,692 1,360,802 14,318,195 4,314,805
Currencies 6,963,192 11,092,224 6,547,272 20,755,132
Energy 3,641,445 687,022 10,409,141 1,849,351
Metals 1,838,220 2,327,495 3,153,302 4,949,099
--------------- ------------------ ------------------ ----------------
$43,188,207 $136,139,389 $213,524,613 $88,718,451
=============== =================== ================== ================
</TABLE>
Substantially all of the Partnership's derivative instruments outstanding as
of March 31, 1996 expire within one year.
The contract/notional value of exchange-traded and non-exchange-traded open
derivative instrument positions as of March 31, 1996 and December 31, 1995
were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------- ---------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Opions & Forwards)
------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Exchange
traded $36,330,768 $124,747,733 $205,483,343 $75,005,128
Non-Exchanged
traded 6,857,439 11,391,656 8,041,270 13,713,323
------------------- ------------------ ------------------ ----------------
$43,188,207 $136,139,389 $213,524,613 $88,718,451
=================== =================== ================== ================
</TABLE>
The average fair value of the Partnership's derivative instrument positions
which were open as of the end of each calendar month during the quarter ended
March 31, 1996 and the year ended December 31, 1995 were as follows:
8
<PAGE>
<TABLE>
<CAPTION>
1996 1995
----------------------------------------- -----------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest rate
and Stock
indices $69,931,365 $122,394,348 $137,303,534 $18,139,506
Commodities 8,873,732 2,807,085 8,709,133 3,311,991
Currencies 13,657,002 21,554,452 29,404,375 28,992,505
Energy 2,916,245 2,223,671 3,972,514 2,644,938
Metals 4,491,288 2,146,405 3,487,022 6,130,981
---------------- -------------------------------- --------------------
$99,869,632 $151,125,961 $182,876,578 $59,219,921
================ ================================ ====================
</TABLE>
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and sell the same derivative instrument on
the same date in the future. These commitments are economically offsetting
but are not, as a technical matter, offset in the forward market until the
settlement date.
Credit Risk
-----------
The risks associated with exchange-traded contracts are typically perceived
to be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases
limited in amount, in some cases not) of the members of the exchange is
pledged to support the financial integrity of the exchange. In over-the-
counter transactions, on the other hand, traders must rely solely on the
credit of their respective individual counterparties. Margins, which may be
subject to loss in the event of a default, are generally required in exchange
trading, and counterparties may also require margin in the over-the-counter
markets.
The fair value amounts in the above tables represent the extent of the
Partnership's market exposure in the particular class of derivative
instrument listed, but not the credit risk associated with counterparty
nonperformance. The credit risk associated with these instruments from
counterparty nonperformance is the net unrealized gain, if any, included in
the Statements of Financial Condition. The Partnership also has credit risk
because the sole counterparty or broker with respect to most of the
Partnership's assets is MLF.
As of March 31, 1996 and December 31, 1995, $21,546,934 and $20,795,559 of
the Partnership's assets, respectively, were held in segregated accounts at
MLF in accordance with Commodity Futures Trading Commission regulations.
The gross unrealized gain and the net unrealized gain (loss) on the
Partnership's open derivative instrument positions as of March 31, 1996 and
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Gain Gain (Loss) Gain Gain (Loss)
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Exchange
traded $829,510 $675,030 $2,644,507 $2,009,512
Non-Exchanged
traded 79,403 (8,809) 10,261 (7,978)
---------- ----------- ---------- -----------
$908,913 $666,221 $2,654,768 $2,001,534
========== =========== ========== ===========
</TABLE>
The Partnership controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of
Operation
Operational Overview; Advisor Selections
Due to the nature of the Fund's business, its results of operations
depend on MLIP's ability to select Advisors and determine the appropriate
percentage of each series' assets to allocate to them for trading, as well as
the Advisors' ability to recognize and capitalize on trends and other profit
opportunities in different sectors of the world commodity markets. MLIP's
9
<PAGE>
Advisor selection procedure and leveraging analysis, as well as the Advisors'
trading methods, are confidential, so that substantially the only information
that can be furnished regarding the Fund's results of operations is contained
in the performance record of its trading. Unlike operating businesses,
general economic or seasonal conditions do not directly affect the profit
potential of the Fund, and its past performance is not necessarily indicative
of future results. Because of the speculative nature of its trading,
operational or economic trends have little relevance to the Fund's results.
MLIP believes, however, that there are certain market conditions, for
example, markets with strong price trends, in which the Fund has a better
likelihood of being profitable than in others.
As of April 1, 1996, the Partnership's assets were allocated as
follows:
Trading Advisor Sector Allocation
--------------- ------ ----------
John W. Henry & Co., Inc. Diversified 23.04%
Sjo, Inc. Financials 20.52%
Blenheim Investments, Inc. Diversified 12.42%
Rabar Market Research, Inc. Diversified 11.96%
R&S Management Recommended Traders Agriculture 6.29%
Cash 25.77%
-------
100.00%
MLIP expects to continue to change both allocations and Advisor
selections from time to time without advance notice to existing investors.
Results of Operations - General
-------------------------------
MLIP believes that multi-Advisor futures funds should be regarded as
medium- to long-term investments but, unlike an operating business, it is
difficult to identify "trends" in the Fund's operations and virtually
impossible to make any predictions regarding future results based on results
to date.
Markets in which sustained price trends occur with some frequency tend
to be more favorable to managed futures investments than "whipsaw," "choppy"
markets, but (i) this is not always the case, (ii) it is impossible to
predict when trending markets will occur and (iii) different Advisors are
affected differently by trends in general as well as by particular types of
trends.
The Fund controls credit risk in its trading in the derivatives markets
by trading only through Merrill Lynch entities which MLIP believes to be
creditworthy. The Fund attempts to control the market risk inherent in its
derivatives trading by utilizing a multi-advisor, multi-strategy structure.
This structure purposefully attempts to diversify the Fund's Advisor group
among different strategy types and market sectors in an effort to reduce risk
(although the Fund's portfolio currently emphasizes technical and trend-
following approaches).
Performance Summary
-------------------
During the first quarter of 1995, the Fund's average month-end Net
Assets equalled $35,275,019, and the Fund recognized gross trading gains of
$2,632,231 or 7.46% of such average month-end Net Assets. Brokerage
commissions of $672,451 or 1.91%, Profit Shares of $205,570 or .58% of
average month-end Net Assets were paid. Interest income of $493,742 or 1.40%
of average month-end Net Assets resulted in a net gain of $2,247,951 or 6.37%
of average month-end Net Assets, which resulted in a 6.65% increase in the
Net Asset Value per Unit since December 31, 1994.
During the first quarter of 1996, the Fund's average month-end Net
Assets equalled $23,623,077, and the Fund recognized gross trading losses of
$2,030,642 or 8.6% of such average month-end Net Assets. Brokerage
commissions of $457,082 or 1.93%, Administrative expense of $11,720 or .05%
and Profit Shares of $4,590 or .02% of average month-end Net Assets were
paid. Interest income of $265,519 or 1.12% of average month-end Net Assets
resulted in net loss of $2,238,515 or 9.48% of average month-end Net Assets
which resulted in a 9.06% decrease in the Net Asset Value per Unit since
December 31, 1995.
During the first quarter of 1996 and 1995, the Fund experienced 3
profitable months and 3 unprofitable months.
10
<PAGE>
MONTH-END NET ASSET VALUE PER UNIT
------------------------------------
Jan. Feb. Mar.
------------------------------------
1995 $ 99.58 $103.91 $107.84
------------------------------------
1996 $115.53 $106.85 $105.04
------------------------------------
Importance of Market Factors
----------------------------
Comparisons between the Fund's performance in a given period in one
fiscal year to the same period in a prior year are unlikely to be meaningful,
given the uncertainty of price movements in the markets traded by the Fund.
In general, MLIP expects that the Fund is most likely to trade successfully
in markets which exhibit strong and sustained price trends. The current
Advisor group emphasizes technical and trend-following methods.
Consequently, one would expect that in trendless, "choppy" markets the Fund
would likely be unprofitable, while in markets in which major price movements
occur, the Fund would have its best profit potential (although there could be
no assurance that the Fund would, in fact, trade profitably). However,
trend-followers not infrequently will miss major price movements, and market
corrections can result in rapid and material losses (sometimes as much as 5%
in a single day). Although MLIP monitors market conditions and Advisor
performance on an ongoing basis in overseeing the Fund's trading, MLIP does
not attempt to "market forecast" or to "match" trading styles with predicted
market conditions. Rather, MLIP concentrates on quantitative and qualitative
analysis of prospective Advisors, as well as on statistical studies of the
historical performance parameters of different Advisor combinations in
selecting Advisors and allocating and reallocating Fund assets among them.
Because managed futures advisors' strategies are proprietary and
confidential and market movements unpredictable, selecting advisors to
implement speculative trading strategies involves considerable uncertainty.
Furthermore, the concentration of the Fund's current Advisor portfolio, both
in terms of the number of managers retained and the common emphasis of their
strategies on technical and trend-following methods, increases the risk that
unexpectedly bad performance, turbulent market conditions or a combination of
the two will result in significant losses.
MLIP's Advisor Selections
-------------------------
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally intends to make a medium- to long-term
commitment to all Advisors selected. However, there can be no assurance as
to the frequency or number of the Advisor changes which may take place in the
future, or as to how long any of the current Advisors will continue to manage
assets for the Fund.
Liquidity
---------
Most of the Partnership's assets are held as cash which, in turn, is
used to margin its futures positions and earns interest income and is
withdrawn, as necessary, to pay redemptions and fees.
The futures contracts in which the Partnership trades may become illiquid
under certain market conditions. Commodity exchanges limit fluctuations in
futures prices during a single day by regulations referred to as "daily
limits." During a single day no trades may be executed at prices beyond the
daily limit. Once the price of a futures contract for a particular commodity
has increased or decreased by an amount equal to the daily limit, positions
in the commodity can generally neither be taken nor liquidated unless traders
are willing to effect trades at or within the limit. Futures contracts have
occasionally moved to the daily limit for several consecutive days with
little or no trading. Such market conditions could prevent the Partnership
from promptly liquidating its futures (including its options) positions.
There are no limitations on the daily price moves in trading foreign currency
forward contracts through banks, although illiquidity may develop in the
forward markets due to large spreads between "bid" and "ask" prices quoted.
(Forward contracts are the bank version of currency futures contracts and are
not traded on exchanges.)
Capital Resources
-----------------
The Partnership does not have, nor does it expect to have, any capital
assets and has no material commitments for capital expenditures. The
Partnership uses its assets to supply the necessary margin or premiums for,
and to pay any losses incurred in connection with, its trading activity and
to pay redemptions and fees.
Inflation is not a significant factor in the Fund's profitability,
although inflationary cycles can give rise to the type of major price
movements which can have a materially favorable or adverse impact on the
Fund's performance.
Changes in the level of prevailing interest rates (a factor generally
associated with inflation) could have a material effect on the percentage of
the total capital attributable to various series of Units which is committed
to trading, as interest rates affect the calculation of the
11
<PAGE>
discounted minimum Net Asset Value per Unit which Merrill Lynch & Co., Inc.
has guaranteed to investors.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits required to be filed as part of this document.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first quarter of
fiscal 1996.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SECTOR STRATEGY FUND/SM/ V L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: May 13, 1996 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: May 13, 1996 By /s/JAMES M. BERNARD
-------------------
James M. Bernard
Chief Financial Officer,
Treasurer and Senior Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS OF OPERATIONS,
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 0 0
<RECEIVABLES> 22,184,420 36,440,929
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 22,184,420 36,440,929
<SHORT-TERM> 0 0
<PAYABLES> 995,685 2,725,255
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<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 21,188,735 33,715,674
<TOTAL-LIABILITY-AND-EQUITY> 22,184,420 0
<TRADING-REVENUE> (2,030,642) 2,632,230
<INTEREST-DIVIDENDS> 265,519 493,742
<COMMISSIONS> 473,392 878,021
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (2,238,515) 2,247,951
<INCOME-PRE-EXTRAORDINARY> (2,238,515) 2,247,951
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,238,515) 2,247,951
<EPS-PRIMARY> (10.33) 6.32
<EPS-DILUTED> (10.33) 6.32
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