Mentor Institutional Trust
Semi-Annual Report, April 30, 1998
Message from the Chairman and President
- --------------------------------------------------------------------------------
It is our privilege to send you the Semi-Annual Report for the Mentor U.S.
Government Cash Management Portfolio, and the Mentor Fixed-Income Portfolio,
for the six months ended April 30, 1998.
The funds are sponsored by Mentor Investment Group, a firm that provides
diversified investment services to a broad range of investors including
corporations, foundations, endowments, municipalities, public funds, and
individual investors.* Seven different investment styles are available to
investors through Mentor, in both mutual funds and separately-invested
portfolios.
In the reports that follow the management teams present their perspectives on
the markets and their strategies for investing
Mentor Investment Group
Seven Investment Styles*
[GRAPH]
Cash Management
Active Fixed Income
Balanced Management
Tactical Asset Allocation
Large-Capitalization Quality Growth
Global/International Growth Equity
Small/Mid-Capitalization Growth
1
<PAGE>
Mentor Institutional Trust
Semi-Annual Report, April 30, 1998
Message from the Chairman and President (continued)
- --------------------------------------------------------------------------------
your assets. Complete financial statistics for the Portfolio are also included
in the reports.
Please review the information carefully. Should you have questions, please call
your consultant, or call us directly, (800) 382-0016. We welcome your comments.
On behalf of all of us at Mentor Investment Group, we thank you for your
investment in the Mentor Cash and Fixed Income Portfolios.
Sincerely,
/s/ Daniel J. Ludeman /s/ Paul F. Costello
- --------------------- --------------------
Daniel J. Ludeman Paul F. Costello
Chairman and CEO President
[MENTOR INVESTMENT GROUP LOGO]
The Mentor Mission
To provide professional investment management services through a firm that is
second to none in the quality of its investment process, the skill and training
of its professionals, and the commitment, shared by all its associates, to
deliver the highest level of service and ethical behavior to clients.
For more information and prospectuses please call us, (800) 382-0016, or
contact your consultant. The prospectuses contain complete information
regarding fees, sales charges, and expenses. Please read them carefully
before investing or sending money.
2
<PAGE>
Mentor U.S. Government Cash Management Portfolio
Managers' Commentary: The Cash Management Team
April 30, 1998
- --------------------------------------------------------------------------------
Economic Overview
For the six months ended April 30, 1998, the U.S. economy continued the pattern
of unprecedented stability which has become so familiar over the past two
years. Activity was strong enough to keep us moving ahead, but not so strong as
to cause overheating or the risk of inflation. Indeed, economic stability has
been such that we have now completed a full year since the last Fed move.
Production costs have risen as a result of a tight labor market and high
capacity utilization, but improved productivity and wide profit margins have
allowed industry to refrain from price increases, and inflation has not
surfaced.
About halfway through the reporting period just ended, however, an element was
introduced which cast doubt on the sustainability of the economic stability we
have enjoyed for so long. In December and January, a financial crisis erupted
in Asia, throwing the economies in that area into turmoil and threatening to
have a ripple effect on the U.S. economy. It was anticipated that exports would
slump as demand for U.S. products in those countries decreased. Imports were
expected to increase as soaring exchange rates made foreign products cheap.
Both factors tend to dampen U.S. production.
Evidence indicates that the Asian turmoil is indeed having a dampening effect,
but so far, it appears to be minor. Exports have declined and imports have
risen, causing a widening of the trade gap. Certain companies heavily engaged
in the Asian trade have reported a softening in demand, but the overall effect
on the economy seems to be nominal at this point. It may still be too early to
determine the full effect. Fed Chairman Greenspan himself has indicated that we
can expect some effect "in the spring." He has also indicated that the Fed is
more or less "on hold" pending further evidence of either inflation or economic
weakness.
Economists have predicted that the Asian ripple effect could cut our GDP (gross
domestic product) growth by 1% or more. With our economic expansion now more
than five years old and growing tired, it would seem to us that the greater
challenge for the Federal Reserve in 1998 will be to sustain growth rather than
contain inflation. We see little prospect of
3
<PAGE>
Mentor U.S. Government Cash Management Portfolio
Managers' Commentary: The Cash Management Team
(continued)
- --------------------------------------------------------------------------------
a Fed increase in rates except perhaps late in the year. The greater
probability, we think, is for a continuation of the neutrality we have seen, or
even a Fed ease if the Asian ripple effect begins to emerge.
In response to our expectations with regard to interest rates specifically and
to the economy in general, we are managing the Portfolios to a target average
maturity of 55-60 days - longer than the industry average. We intend to
maintain that target at least through the second quarter. At no time, however,
will we compromise our primary objectives of safety and liquidity.*
* While the managers seek to invest the Portfolio in accordance with their
proprietary strategy, there is no guarantee of investment success. An
investment in the Portfolio is neither insured nor guaranteed by the U.S.
government, and there can be no assurance that they will maintain a
stable net asset value of $1.00 per share.
4
<PAGE>
Mentor Fixed-Income Portfolio
Managers' Commentary: The Fixed-Income Management Team
April 30, 1998
- --------------------------------------------------------------------------------
Market Conditions
During the six-month period ended April 30, 1998 fixed-income interest rates
fell modestly across the yield curve. Two-year and 10-year treasuries yielded
5.57% and 5.67% respectively on April 30, 1998 down 0.04% and 0.16% from levels
six months earlier. The Federal Reserve continued to leave the federal funds
rate (the rate member banks charge each other on inter-bank loans and the
primary way in which the Fed influences short-term interest rates) unchanged,
continuing the neutral monetary stance that it has maintained since its last
tightening in March of 1997.
The attractive combination of low inflation and moderate growth, which has
characterized the domestic economy in recent years, remains firmly intact.
Annualized GDP (gross domestic product), the most comprehensive measure of
overall domestic economic growth, increased at a rate of 3.7% for the fourth
quarter of 1997 and preliminary indications are that first quarter 1998 growth
could be as high as 4.8%.
Despite continued steady economic growth, inflation at both the wholesale and
retail levels remains remarkably subdued. At no time during the past year has
the monthly CPI (consumer price index) increase exceeded 0.2%. The PPI
(producer price index) readings have been even weaker. During five of the last
six months PPI numbers have been negative, resulting in a negative year-to-date
annualized producer price growth rate. That negative growth rate points to an
emerging deflationary environment for basic industrial commodities such as oil
and metals. And amazingly, these falling prices are occurring in a period of
the lowest unemployment rates of the past 30 years. In fact, the 4.3% to 4.7%
unemployment rates experienced during the early months of 1998 represent levels
that were viewed well below "full employment" only a few years ago.
Performance
For the six-month period ended April 30, 1998, the Mentor Fixed-Income
Portfolio returned 2.42% versus 3.59% for the Lehman Brothers Aggregate Bond
Index benchmark.* The primary reason for the underperformance of the fund was
an exposure to securities issued by the Korean Development Bank. These
securities fell from a rating of A to a below-investment- grade rating during
the past six-months. The price declines resulting from the deteriorating credit
quality of these assets hurt portfolio performance. The securities were sold
prior to being downgraded
5
<PAGE>
Mentor Fixed-Income Portfolio
Managers' Commentary: The Fixed-Income Management Team
(continued)
- --------------------------------------------------------------------------------
below investment grade, and as a result the portfolio escaped the worst of the
price declines experienced by these bonds in the final days of 1997.
The turmoil in emerging Asian markets and Japan has been positive for U.S.
fixed-income markets, particularly the highest quality sectors such as U.S.
treasuries. The current low interest rate environment has made mortgage
refinancing particularly attractive for homeowners. As a result, in January we
reconfigured our portfolios to take advantage of the increased likelihood of
mortgage prepayments. It was our belief that increased prepayment pressure
would inevitably negatively affect the relative attractiveness of
mortgage-backed bonds. Likewise, we felt that the Asian crisis would negatively
affect the earnings of U.S. multi-national corporations that rely on exports to
those countries. The likely consequence of this lack of predictability of
corporate earnings would be a widening of spreads. This anticipated widening of
spreads versus treasuries did in fact occur in both the mortgage and corporate
markets. By quarter-end, however, widened spreads made high-grade mortgage and
corporate product sufficiently attractive to cause us to reverse course and
selectively raise non-treasury allocations within the Portfolio.
At period-end we maintained a portfolio duration approximately 5% longer than
our Lehman Brothers Aggregate Bond Index. This represents a modest lengthening
from the beginning of the period when the Fixed-Income Portfolio was
approximately 5% shorter than its benchmark. During the period we also sold our
international bond positions in Germany and the UK, replacing them with
domestic holdings.**
Market Outlook
The outlook is little changed from what it appeared to be at the beginning of
the year. Prospects for continued low inflation remain good. The likely
long-term consequence is that long rates, which are more sensitive to inflation
than they are to economic growth, are likely to continue to decline over the
course of the year.
Still unknown is the ultimate effect of Pacific Rim dislocations on the rate of
US domestic growth. So far, the effect appears to be more modest than expected.
Declining exports and surging imports have depressed US growth rates; but
accelerating domestic consumption expenditures driven by the lower rate
environment have offset the damage. It seems clear, however, that the crisis
has prevented inflationary pressures from
6
<PAGE>
Mentor Fixed-Income Portfolio
Managers' Commentary: The Fixed-Income Management Team
(continued)
- --------------------------------------------------------------------------------
emerging in the US economy, as exhibited by year-to-date inflation trends. Low
inflation should continue to provide an attractive backdrop for lower interest
rates.
* The Lehman Brothers Aggregate Bond Index is commonly used to compare
performance of income-oriented portfolios and is made up of the
Government/Corporate Index, the Mortgage-Backed Securities Index, and the
Asset-Backed Securities Index. Investors can not invest in the Index.
** While the portfolio managers will endeavor to manage the portfolio in
accordance with an active fixed-income investment process, there are no
guarantees that they will be successful.
7
<PAGE>
Mentor Fixed-Income Portfolio
Managers' Commentary: The Fixed-Income Management Team
(continued)
- --------------------------------------------------------------------------------
Performance Comparisons
[GRAPH]
Fixed-Income Lehman Brothers
Portfolio Aggregate Bond Index*
------------ ---------------------
12/94 $10,000 $10,000
1/95 10,196 10,198
2/95 10,421 10,441
3/95 10,511 10,504
4/95 10,625 10,651
5/95 11,092 11,064
6/95 11,215 11,144
7/95 11,131 11,120
8/95 11,290 11,254
9/95 11,407 11,364
10/95 11,593 11,511
11/95 11,785 11,684
12/95 11,974 11,848
1/96 12,046 11,926
2/96 11,802 11,718
3/96 11,676 11,636
4/96 11,575 11,571
5/96 11,539 11,548
6/96 11,688 11,703
7/96 11,716 11,734
8/96 11,688 11,714
9/96 11,885 11,918
10/96 12,158 12,183
11/96 12,384 12,391
12/96 12,262 12,276
1/97 12,271 12,313
2/97 12,309 12,344
3/97 12,165 12,207
4/97 12,350 12,390
5/97 12,447 12,507
6/97 12,592 12,656
7/97 12,947 12,997
8/97 12,819 12,886
9/97 12,997 13,076
10/97 13,178 13,266
4/30/98 13,497 13,837
Average Annual Returns as of 4/30/98
1-Year Since Inception**
9.29% 9.22%
** Reflects operations of Fixed-Income Portfolio from the date of commencement
of operations on 12/6/94 through 4/30/98.
The graph compares the investment performance of the Portfolio, from inception,
to an appropriate broad-based securities index. The graph reflects the
performance of a $10,000 investment from the date of inception through April
30, 1998. Returns do not reflect taxes payable on distributions.
In comparing the performance of a Portfolio to an index, please recognize that
market indexes do not take into account brokerage commissions that would be
incurred if the individual securities of the index were purchased. They also do
not include taxes payable on dividends and interest payments, or operating
expenses necessary to maintain a portfolio investing in the index.
The performance data quoted in this report are historical and do not predict
future investment results. Investment return and principal value will fluctuate
so that shares, when redeemed, may be worth more or less than their original
cost.
Performance is cited as of April 30, 1998 and includes changes in share price
and reinvestment of dividends and capital gains. Because shares of the
Portfolios of the Trust can only be purchased in individually-managed accounts,
the performance return information does not reflect the investment advisory
fees charged at each account level.
* The Lehman Brothers Aggregate Bond Index is commonly used to compare
performance of income-oriented portfolios and is made up of the
Government/Corporate Index, the Mortgage-Backed Securities Index, and the
Asset-Backed Securities Index. Please note that effective January 1, 1998, the
Lehman Brothers Aggregate Bond Index became the benchmark for the Fixed-Income
Portfolio. Given its mortgage pass-through and asset-backed components, which
are not contained in the Lehamn Brothers Government/Coporate Index, it is more
reflective of the Investment mandate of the Fixed-Income Portfolio and
therefore the appropriate benchmark.
8
<PAGE>
Mentor U.S. Government Cash Management Portfolio
Portfolio of Investments
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Value
----------------------- --------------- --------------
<S> <C> <C> <C>
U.S. Government Agencies 58.96%
Federal Home Loan Bank,
5.40% - 5.70%, 5/29/98 - 4/09/99 $ 32,840,000 $32,781,937
5.54%, 10/20/98 (a) 12,000,000 11,998,354
Federal Home Loan Mortgage Corporation,
5.43% - 5.57%, 5/29/98 - 6/05/98 24,000,000 23,884,337
5.46%, 1/26/99 (a) 12,000,000 11,993,848
Federal National Mortgage Association,
5.46% - 5.47%, 1/21/99 - 3/16/99 (a) 25,000,000 24,990,981
5.33% - 5.63%, 8/14/98 - 4/22/99 17,000,000 16,984,788
- -------------------------------------------------- ------------ -----------
Total U.S. Government Agencies 122,634,245
- -------------------------------------------------- -----------
Repurchase Agreements 41.24%
Dean Witter
Dated 4/30/98, 5.55%, due 5/01/98,
collateralized by various U.S. Treasury
Securities with total original face value of
$10,092,000 , 6.13%-6.63%, 1/07/99-
2/15/27, market value $10,200,823 10,000,000 10,000,000
Goldman, Sachs & Company
Dated 4/30/98, 5.55%, due 5/01/98,
collateralized by $42,545,760 (total original
face value) Federal Home Loan Mortgage
Corporation, 6.00% - 9.50%, 9/01/02 -
1/01/28, market value $36,485,322 35,769,923 35,769,923
JP Morgan Securities, Inc.
Dated 4/30/98, 5.55%, due 5/01/98,
collateralized by $14,034,904 (total original
face value) Government National Mortgage
Association, 8.50%, 7/15/25 - 9/15/27,
market value $10,134,149 10,000,000 10,000,000
JP Morgan Securities, Inc. (b)
Dated 4/30/98, 5.55%, due 5/22/98,
collateralized by $166,485,755 (total
original face value) Government National
Mortgage Association, 9.00%, 1/15/21 -
6/15/22, market value $20,263,313 20,000,000 20,000,000
</TABLE>
9
<PAGE>
Mentor U.S. Government Cash Management Portfolio
Portfolio of Investments
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Value
----------------------- -------------- -----------------
<S> <C> <C> <C>
Repurchase Agreements (continued)
Lehman Brothers, Inc.
Dated 4/30/98, 5.54%, due 5/01/98,
collateralized by various U.S. Government
Agency Securities with total par value of
$15,326,407 , 6.50%-10.50%, 6/01/08-
5/01/20, market value $10,201,894 $10,000,000 $ 10,000,000
- --------------------------------------------- ----------- ---------------
Total Repurchase Agreements 85,769,923
- --------------------------------------------- ---------------
Total Investments ($208,404,168) 100.20% 208,404,168
- --------------------------------------------- ------ ---------------
Other Assets less Liabilities ( 0.20%) (414,536)
- --------------------------------------------- ------ ---------------
Net Assets 100.00% $ 207,989,632
- --------------------------------------------- ------ ---------------
</TABLE>
(a) Floating Rate Securities - The rates shown are the effective rates at April
30, 1998. Securities shown without a date are payable within five business
days and are backed by credit support agreements from banks or insurance
institutions.
(b) The repurchase agreement is deemed illiquid because it cannot be resold
within seven business days from April 30, 1998.
See notes to financial statements.
10
<PAGE>
Mentor Fixed-Income Portfolio
Portfolio of Investments
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
----------------------- ------------ -------------
<S> <C> <C> <C>
Asset-Backed Securities 14.63%
Advanta Home Equity Loan, 6.15%, 10/25/09 $ 921,223 $ 913,801
Advanta Mortgage Loan Trust Series 1993-3,
4.75%, 2/25/10, CMO 809,873 795,156
AFC Home Equity Loan Trust, 6.60%, 2/25/27,
CMO 999,970 1,000,036
AFG Receivables Trust, 6.35% - 7.05%,
9/15/00 - 2/15/03 3,612,094 3,618,531
CS First Boston Series 1996-2 A6, 7.18%,
2/25/18 980,000 995,474
Prudential Home Mortgage Securities Series
1996-3, Class M, 6.75%, 3/25/11, CMO 1,138,619 1,141,122
Union Acceptance Corporation Auto Trust
Series 1997-A, 6.48%, 5/10/04, CMO 1,462,000 1,474,966
- -------------------------------------------------- --------- ---------
Total Asset-Backed Securities (cost $9,837,802) 9,939,086
- -------------------------------------------------- ---------
Corporate Bonds 26.37%
Capital One Bank, 7.20%, 7/19/99 1,000,000 1,012,773
Capital One Bank, 7.15%, 9/15/06,
puttable 9/15/99 2,100,000 2,135,666
Dayton Hudson Company, 6.63%, 3/01/03 1,500,000 1,523,232
General Motors, 6.38%, 5/01/08 1,500,000 1,492,374
Lehman Brothers Holdings, Inc.,
8.50%, 5/01/07 1,000,000 1,125,421
Lehman Brothers Holdings, Inc., 7.50%,
8/01/26, puttable 8/01/03 1,500,000 1,609,887
Lockheed Martin Corporation, 7.20%, 5/01/36,
puttable 5/01/08 1,000,000 1,078,599
Merrill Lynch & Company, Inc.,
6.64%, 9/19/02 155,000 157,760
Norwest Corporation, 6.80%, 5/15/02 270,000 276,411
Philips Electronics NV, 7.20%, 6/01/26,
puttable 6/01/06 2,200,000 2,340,268
Reliastar Financial Corporation, 6.63%, 9/15/03 2,250,000 2,255,310
Salomon, Inc., 7.65%, 6/27/05 1,300,000 1,385,039
Travelers Group, Inc., 8.63%, 2/01/07 180,000 206,137
</TABLE>
11
<PAGE>
Mentor Fixed-Income Portfolio
Portfolio of Investments
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
----------------------- ------------- -------------
<S> <C> <C> <C>
Corporate Bonds (continued)
United Dominion Realty Trust, Inc.,
7.07%, 11/15/06 $1,300,000 $1,315,779
- ------------------------------------------------ ---------- ----------
Total Corporate Bonds (cost $17,394,171) 17,914,656
- ------------------------------------------------ ----------
U.S. Government Securities and Agencies 36.71%
Federal National Mortgage Association
6.00% - 7.00%, 9/01/27 - 4/01/28 5,386,997 5,317,074
Series MTN, 6.64%, 7/02/07 1,375,000 1,431,511
Government National Mortgage Association
7.38%, 4/20/22 - ARM 3,371,198 3,461,816
6.50% - 7.00%, 5/15/09 - 4/15/28 4,515,047 4,527,091
U.S. Treasury Bonds, 7.13% - 7.50%,
2/15/23 - 11/15/24 4,825,000 5,594,335
U.S. Treasury Notes, 5.75% - 6.25%,
2/15/03 - 2/15/26 3,500,000 3,532,552
U.S. Treasury Strip, 11/15/21 4,500,000 1,075,675
- ------------------------------------------------ ---------- ----------
Total U.S. Government Securities and Agencies
(cost $24,221,890) 24,940,054
- ------------------------------------------------ ----------
Residual Interests (a) 3.43%
Capital Mortgage Funding I, Inc.,
1997-20, 1/20/23 20,404 705,577
National Mortgage Funding I, Inc.,
1997-4, 5/20/23 70,363 856,883
National Mortgage Funding I, Inc.,
1997-5, 2/20/23 72,592 765,482
- ------------------------------------------------ ---------- ----------
Total Residual Interests (cost $2,430,387) 2,327,942
- ------------------------------------------------ ----------
Total Long-Term Investments (cost $53,884,250) 55,121,738
- ------------------------------------------------ ----------
</TABLE>
12
<PAGE>
Mentor Fixed-Income Portfolio
Portfolio of Investments
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Principal
Percent of Net Assets Amount Market Value
----------------------- ------------- -------------
<S> <C> <C> <C>
Short-Term Investments 17.77%
- ------------------------------------------------- ------
Repurchase Agreement 4.67%
Goldman Sachs & Company
Dated 4/30/98, 5.54%, due 5/01/98,
collateralized by $3,202,770 Federal Home
Loan Mortgage Corporation, 7.00%, 2/01/28,
market value $3,240,802 $3,173,065 $ 3,173,065
- ------------------------------------------------- ---------- -----------
Variable-Rate Demand Notes 13.10%
Carolina Medi-Plan, Inc., 5.64%, 6/01/22 7,000,000 7,000,000
Hilander Finance, LLC, 5.75%, 12/01/25 1,900,000 1,900,000
- ------------------------------------------------- ---------- -----------
8,900,000
-----------
Total Short-Term Investments (cost $12,073,065) 12,073,065
- ------------------------------------------------- -----------
Total Investments (cost $65,957,315) 98.91% 67,194,803
- ------------------------------------------------- ------ -----------
Other Assets less Liabilities 1.09% 741,217
- ------------------------------------------------- ------ -----------
Net Assets 100.00% $67,936,020
- ------------------------------------------------- ------ -----------
</TABLE>
ARM - Adjustable Rate Mortgage
CMO - Collateralized Mortgage Obligation
MTN - Medium Term Note.
Investment Transactions
Cost of purchases and proceeds from sales of securities, other than short-term
securities, aggregated $42,971,327 and $33,256,968, respectively.
Income Tax Information
At April 30, 1998, the aggregated cost of investment securities for federal
income tax purposes was $65,957,315. Net unrealized appreciation aggregated
$1,237,488, of which $1,454,422, related to appreciated investment securities
and $216,934, related to depreciated investment securities.
(a) These are securities that may be resold to "qualified institutional buyers"
under Rule 144A or securities offered Pursuant to Section 4(2) of the
Securities Act of 1933, as amended. These securities have been determined to
be liquid under guidelines established by the Board of Trustees.
See notes to financial statements.
13
<PAGE>
Mentor Institutional Trust
Statements of Assets and Liabilities
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
U.S. Government
Cash Management Fixed-Income
Portfolio Portfolio
----------------- ---------------
<S> <C> <C>
Assets
Investments, at market value (Note 2) (a)
Investment securities $ 122,634,245 $ 64,021,738
Repurchase agreements 85,769,923 3,173,065
- ------------------------------------------------------------- ------------- ------------
Total investments 208,404,168 67,194,803
- ------------------------------------------------------------- ------------- ------------
Collateral for securities loaned (Note 2) 5,201,695
Receivables
Dividends and interest 517,854 730,474
Fund shares sold - 1,407
Deferred expenses (Note 2) 11,300 9,347
Other 30,000 9,449
- ------------------------------------------------------------- ------------- ------------
Total assets 208,963,322 73,147,175
- ------------------------------------------------------------- ------------- ------------
Liabilities
Payables
Securities loaned (Note 2) - 5,201,695
Dividends 967,206 -
Accrued expenses and other liabilities 6,484 9,460
- ------------------------------------------------------------- ------------- ------------
Total liabilities 973,690 5,211,155
- ------------------------------------------------------------- ------------- ------------
Net Assets $ 207,989,632 $67,936,020
- ------------------------------------------------------------- ------------- ------------
Net Assets represented by: (Note 2)
Additional paid-in capital - 66,817,334
Accumulated undistributed net investment income - 158,270
Accumulated net realized loss on investment transactions - (277,072)
Net unrealized appreciation of investments - 1,237,488
- ------------------------------------------------------------- ------------- ------------
Net Assets - 67,936,020
- ------------------------------------------------------------- ------------- ------------
Shares Outstanding 207,989,632 5,257,870
- ------------------------------------------------------------- ------------- ------------
Net Asset Value per Share $ 1.00 $ 12.92
- ------------------------------------------------------------- ------------- ------------
</TABLE>
(a) Investments at cost are $208,404,168 and $65,957,315, respectively.
See notes to financial statements.
14
<PAGE>
Mentor Institutional Trust
Statements of Operations
Six Months Ended April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
U.S. Government
Cash Management Fixed-Income
Portfolio Portfolio
----------------- ---------------
<S> <C> <C>
Investment income
Interest $ 6,242,671 $ 2,037,659
- ------------------------------------------------------ ----------- -----------
Expenses
Registration expenses 53,895 6,718
Custodian and accounting fees (Note 3) 28,609 10,584
Shareholder reports and postage expenses 8,972 2,240
Transfer agent fee (Note 3) 8,847 8,557
Legal fees 6,514 1,458
Audit fees 3,230 722
Organizational expenses 3,222 3,222
Directors' fees and expenses 2,999 675
Miscellaneous 8,153 637
- ------------------------------------------------------ ----------- -----------
Total expenses 124,441 34,813
- ------------------------------------------------------ ----------- -----------
Deduct
Reimbursement of expenses by investment
adviser (Note 4) 57,788 3,126
- ------------------------------------------------------ ----------- -----------
Net expenses 66,653 31,687
- ------------------------------------------------------ ----------- -----------
Net investment income 6,176,018 2,005,972
- ------------------------------------------------------ ----------- -----------
Realized and unrealized loss on investments and
interest-rate swaps
Net realized loss on investments and
interest-rate swaps (Note 2) - (196,590)
Change in unrealized appreciation of investments - (261,521)
- --------------------------------------------------- -- ----------- -----------
Net realized and unrealized loss on investments - (458,111)
- ------------------------------------------------------ ----------- -----------
Net increase in net assets resulting from operations $ 6,176,018 $ 1,547,861
- ------------------------------------------------------ ----------- -----------
</TABLE>
(a) Net of interest expense of $261,568 related to interest-rate swaps.
See notes to financial statements.
15
<PAGE>
Mentor Institutional Trust
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
U.S. Government
Cash Management Portfolio Fixed-Income Portfolio
------------------------------------ ---------------------------------
Six Months Six Months
Ended 4/30/98 Year Ended Ended 4/30/98 Year Ended
(Unaudited) 10/31/97 (Unaudited) 10/31/97
----------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Increase (Decrease) in
Net Assets
Operations
Net investment income $ 6,176,018 $ 13,983,224 $ 2,005,972 $ 3,442,891
Net realized gain (loss) on
investments and interest-rate
swaps - 418 (196,590) 299,467
Change in unrealized
appreciation of investments
and interest-rate-swaps - - (261,521) 715,440
- ------------------------------------ ------------ ------------ ----------- -----------
Net increase in net assets
resulting from operations 6,176,018 13,983,642 1,547,861 4,457,798
- ------------------------------------ ------------ ------------ ----------- -----------
Distributions to Shareholders
From net investment income (6,176,018) (13,983,224) (2,171,415) (3,342,801)
From net realized gain on
investments - (418) (285,172) -
- ------------------------------------ ------------ ------------ ----------- -----------
Net decrease from distributions (6,176,018) (13,983,642) (2,456,587) (3,342,801)
- ------------------------------------ ------------ ------------ ----------- -----------
Capital Share Transactions (Note 5)
Proceeds from sale of shares 121,816,622 435,146,664 7,170,536 16,476,287
Reinvested distributions 6,390,024 12,969,017 2,259,665 3,312,978
Shares redeemed (180,167,238) (276,138,685) (2,323,439) (9,128,026)
- ------------------------------------ ------------ ------------ ----------- -----------
Change in net assets resulting
from capital share transactions (51,960,592) 171,976,996 7,106,762 10,661,239
- ------------------------------------ ------------ ------------ ----------- -----------
Increase (decrease) in net assets (51,960,592) 171,977,414 6,198,036 11,776,236
Net Assets
Beginning of period 259,950,224 87,973,228 61,737,984 49,961,748
- ------------------------------------ ------------ ------------ ----------- -----------
End of period (including
undistributed net investment
income of $158,270, and
$323,713, respectively for
Fixed-Income Portfolio) $207,989,632 $259,950,224 $67,936,020 $61,737,984
- ------------------------------------ ------------ ------------ ----------- -----------
</TABLE>
See notes to financial statements.
16
<PAGE>
Mentor Institutional Trust
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
U.S. Government
Cash Management Portfolio
-----------------------------------------------------------------
Six Months Year Year Period
Ended 4/30/98 Ended Ended Ended
(Unaudited) 10/31/97 10/31/96 10/31/95(b)
--------------- ------------- ------------ ----------------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------- ------- -------- ------- -------
Income from investment operations
Net investment income 0.03 0.05 0.05 0.05
Net realized and unrealized gain
(loss) on investments - - * - * -
- -------------------------------------- -------- ----------- ---------- --------
Total from investment operations 0.03 0.05 0.05 0.05
- -------------------------------------- -------- ----------- --------- --------
Less distributions
From net investment income (0.03) (0.05) (0.05) ( 0.05)
From net realized capital gain - - * - * -
- -------------------------------------- -------- ------------ ---------- --------
Total distributions (0.03) (0.05) (0.05) ( 0.05)
- -------------------------------------- -------- ------------ ---------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------- -------- ------------ ---------- --------
Total Return ** 2.79% 5.56% 5.60% 5.06%
- -------------------------------------- -------- ------------ ---------- --------
Ratios / Supplemental Data
Net assets, end of period (in
thousands) $ 207,990 $ 259,950 $ 87,973 $ 69,997
Ratio of expenses to average net
assets 0.06%(a) 0.06% 0.04% 0.04%(a)
Ratio of expenses to average net
assets excluding waiver 0.11%(a) 0.09% 0.12% 0.18%(a)
Ratio of net investment income to
average net assets 5.53%(a) 5.45% 5.54% 5.56%(a)
- -------------------------------------- --------- ------------ ---------- --------
</TABLE>
(a) Annualized
(b) For the period from December 5, 1994 (commencement of operations) to
October 31, 1995.
* Reflects net realized gain (loss) which was under $0.005 per share.
** Total return does not reflect sales commissions and is not annualized.
See notes to financial statements.
17
<PAGE>
Mentor Institutional Trust
Financial Highlights
<TABLE>
<CAPTION>
Fixed-Income Portfolio
-------------------------------------------------------------------
Six Months Year Year Period
Ended 4/30/98 Ended Ended Ended
(Unaudited) 10/31/97 10/31/96 10/31/95(c)
------------------ ----------- ----------- ------------------
<S> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of period $ 13.11 $ 12.89 $ 13.71 $ 12.50
- -------------------------------------------- --------- ------- ------- ----------
Income from investment operations
Net investment income 0.40 0.83 0.77 0.81
Net realized and unrealized gain (loss) on
investments (0.09) 0.21 (0.16) 1.14
- -------------------------------------------- --------- ------- ------- ----------
Total from investment operations 0.31 1.04 0.61 1.95
- -------------------------------------------- --------- ------- ------- ----------
Less distributions
From net investment income (0.44) (0.82) (0.77) (0.74)
From net realized capital gain (0.06) - (0.66) -
- -------------------------------------------- --------- ------- ------- ----------
Total distributions (0.50) (0.82) (1.43) (0.74)
- -------------------------------------------- --------- ------- ------- ----------
Net asset value, end of period $ 12.92 $ 13.11 $ 12.89 $ 13.71
- -------------------------------------------- --------- ------- ------- ----------
Total Return* 2.42% 8.39 4.87% 15.90%
- -------------------------------------------- --------- ------- ------- ----------
Ratios / Supplemental Data
Net assets, end of period (in thousands) $ 67,936 $61,738 $49,962 $ 34,053
Ratio of expenses to average net assets 0.10%(a) 0.10% 0.05% 0.05%(a)
Ratio of expenses to average net assets
excluding waiver 0.11%(a) 0.15% 0.17% 0.22%(a)
Ratio of net investment income to average
net assets 6.19%(a) 6.52% 6.22% 6.75%(a)
Portfolio turnover rate 63% 194% 226% 302%
- -------------------------------------------- --------- ------- ------- ----------
</TABLE>
(a) Annualized.
(c) For the period from December 6, 1994 (commencement of operations) to
October 31, 1995.
* Total return does not reflect sales commissions and is not annualized.
See notes to financial statements.
18
<PAGE>
Mentor Institutional Trust
Notes to Financial Statements
April 30, 1998 (Unaudited)
Note 1: Organization
Mentor Institutional Trust ("Trust") was organized on February 8, 1994, and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Trust consists of four separate diversified
portfolios (hereinafter each individually referred to as a "Portfolio" or
collectively as the "Portfolios") at April 30, 1998:
Mentor U.S. Government
Cash Management Portfolio ("Cash Management Portfolio")
Mentor Fixed-Income Portfolio ("Fixed-Income Portfolio")
Mentor Perpetual International Portfolio ("International Portfolio")
SNAP Fund
The assets of each Portfolio of the Trust are segregated and a shareholder's
interest is limited to the Portfolio in which shares are held.
These financial statements include the Cash Management Portfolio and the
Fixed-Income Portfolio.
Note 2: Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Portfolios in the preparation of their financial statements.
The policies are in conformity with generally accepted accounting principles
which require management to make estimates and assumptions that affect amounts
reported therein. Although actual results could differ from these estimates,
any such differences are expected to be immaterial to the net assets of the
Portfolios.
(a) Valuation of Securities
Securities held by the Cash Management Portfolio are stated at amortized cost,
which approximates market value as permitted by Rule 2a-7 of the Investment
Company Act of 1940. In the event that a deviation of 1/2 of 1% or more exists
between the Portfolio's $1.00 per share net asset value, calculated at
amortized cost, and the net asset value calculated by reference to market-based
values, or if there is any other deviation that the Board of Trustees believes
would result in a material dilution to shareholders or purchasers, the Board of
Trustees will promptly consider what action should be initiated. Net asset
value per share is
19
<PAGE>
Mentor Institutional Trust
Notes to Financial Statements
(continued)
determined each business day for the Cash Management Portfolio and is
calculated by dividing net asset value by the number of shares outstanding at
the end of each business day.
U.S. Government obligations held by the Fixed-Income Portfolio are valued at
the mean between the over-the-counter bid and asked prices as furnished by an
independent pricing service. Listed corporate bonds, other fixed income
securities, mortgage backed securities, mortgage related and other related
securities are valued at the prices provided by an independent pricing service.
Security valuations not available from an independent pricing service are
provided by dealers approved by the Board of Trustees. In determining value,
the dealers use information with respect to transactions in such securities,
market transactions in comparable securities, various relationships between
securities, and yield to maturity. Any securities for which current market
quotations are not readily available are valued at their fair value as
determined in good faith under procedures established by the Board of Trustees.
(b) Repurchase Agreements
It is the policy of the Trust to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book entry system, or to have
segregated within the custodian bank's possession all securities held as
collateral in support of repurchase agreement investments. Additionally,
procedures have been established by the Trust to monitor, on a daily basis, the
market value of each repurchase agreement's underlying securities to ensure the
existence of a proper level of collateral.
The Trust will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by
the Trust's adviser to be creditworthy pursuant to guidelines established by
the Trustees. Risks may arise from the potential inability of counterparties to
honor the terms of the repurchase agreement. Accordingly, the Trust could
receive less than the repurchase price on the sale of collateral securities.
20
<PAGE>
Mentor Institutional Trust
Notes to Financial Statements
(continued)
(c) Portfolio Securities Loaned
The Fixed-Income Portfolio is authorized by the Board of Trustees to
participate in securities lending transactions.
The Portfolio may receive fees for participating in lending securities
transactions. During the period that a security is out on loan, the Portfolio
continues to receive interest or dividends on the securities loaned. The
Portfolio receives collateral in an amount at least equal to, at all times, the
fair value of the securities loaned plus interest. When cash is received as
collateral, the Portfolio records an asset and obligation for the market value
of that collateral. Cash received as collateral may be reinvested, in which
case that security is recorded as an asset of the Portfolio. Variations in the
market value of the securities loaned occurring during the term of the loan are
reflected in the value of the Portfolio.
At April 30, 1998, the Fixed-Income Portfolio had loaned securities to brokers
which were collateralized by cash. Income from securities lending activities
amounted to $6,423 for the six months ended April 30, 1998. The risks to the
Portfolio from securities lending are that the borrower may not provide
additional collateral when required or return the securities when due. At April
30, 1998, the market value of the securities on loan and the related cash
collateral were $6,942,978, and $5,201,695, respectively.
(d) Security Transactions and Interest Income
Security transactions for the Portfolios are accounted for on a trade date
basis. Interest income is recorded on the accrual basis and includes
amortization of premium and discount on investments. Dividends are recorded on
ex-dividend date. Realized and unrealized gains and losses on investment
security transactions are calculated on an identified cost basis.
(f) Expenses
Expenses arising in connection with a Portfolio are allocated to that
Portfolio. Other Trust expenses are allocated among the Portfolios in
proportion to their relative net assets.
21
<PAGE>
Mentor Institutional Trust
Notes to Financial Statements
(continued)
(g) Federal Taxes
No provision for federal income taxes has been made since it is each
Portfolio's intent to comply with the provisions applicable to regulated
investment companies under the Internal Revenue Code and to distribute to its
shareholders within the allowable time limit substantially all taxable income
and realized capital gains.
(h) When-Issued and Delayed Delivery Transactions
Fixed-Income Portfolio may engage in when-issued or delayed delivery
transactions. To the extent the Portfolio engage in such transactions, they
will do so for the purpose of acquiring portfolio securities consistent with
its investment objectives and policies and not for the purpose of investment
leverage. The Portfolio will record a when-issued security and the related
liability on the trade date. Until the securities are received and paid for,
the Portfolio will maintain security positions such that sufficient liquid
assets will be available to make payment for the securities purchased.
Securities purchased on a when-issued or delayed delivery basis are marked to
market daily and begin earning interest on the settlement date.
(i) Deferred Expenses
Costs incurred by the Portfolios in connection with their initial share
registration and organization costs were deferred by the Portfolios and are
being amortized on a straight-line basis over a five-year period.
(j) Distributions
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 the deferral of
wash sales.
(k) Interest-Rate Swap
An interest-rate swap is a contract between two parties on a specified
principal amount (referred to as the notional principal) for a specified
period. In the most common instance, a swap involves the exchange of streams of
22
<PAGE>
Mentor Institutional Trust
Notes to Financial Statements
(continued)
variable and fixed-rate interest payments. During the term of the swap, changes
in the value of the swap are recognized as unrealized gains or losses by
marking-to-market to reflect the market value of the swap. When the swap is
terminated, the Portfolio will record a realized gain or loss. During the six
months ended April 30, 1998, the Portfolio recorded realized losses of $50,741
on closed interest-rate swap contracts. As of April 30, 1998, there were no
outstanding interest rate swap agreements.
Note 3: Dividends
Dividends will be declared daily and paid monthly by the Cash Management
Portfolio. Dividends are declared and paid quarterly by the Fixed-Income
Portfolio. Capital gains realized by each Portfolio, if any, will be
distributed annually.
Note 4: Investment Management and Administration Agreements
Mentor Investment Advisors, LLC ("Mentor Advisors"), the Portfolios' investment
adviser, receives no compensation for its services. Mentor Advisors is a
wholly-owned subsidiary of Mentor Investment Group, LLC ("Mentor"), which is a
partially owned subsidiary of Wheat First Union. EVEREN Capital Corporation
owns 20% of the outstanding interest in Mentor.
In order to limit the annual operating expenses of the Portfolios, Mentor
Advisors may bear certain expenses incurred in connection with the operation of
the Portfolios. For the six months ended April 30, 1998, Mentor Advisors bore
expenses of $57,788, and $3,126 respectively, for the Cash Management Portfolio
and Fixed-Income Portfolio.
Mentor provides administrative personnel and services to each Portfolio,
pursuant to an Administration Agreement. Mentor receives no compensation for
such services.
23
<PAGE>
Mentor Institutional Trust
Notes to Financial Statements
(continued)
Note 5: Capital Share Transactions
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in capital
shares were as follows:
<TABLE>
<CAPTION>
Mentor U.S. Government
Cash Management Portfolio
Six Months Year Ended
Ended 4/30/98 10/31/97
----------------- -----------------
<S> <C> <C>
Shares sold 121,816,621 435,146,664
Shares issued upon reinvestment of distributions 6,389,607 12,964,685
Shares redeemed (180,167,238) (276,138,685)
------------ ------------
Change in net assets from capital share transactions (51,961,010) 171,972,664
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Mentor Fixed-Income Portfolio
Six Months Year Ended
Ended 4/30/98 10/31/97
--------------- -------------
<S> <C> <C>
Shares sold 1,278,210 553,370
Shares issued upon reinvestment of distributions 259,140 175,684
Shares redeemed (703,906) (179,503)
---------- ---------
Change in net assets from capital share transactions 833,444 549,551
---------- ---------
</TABLE>
Year 2000
The Portfolios receive services from a number of providers which rely on the
smooth functioning of their respective systems and the systems of others to
perform those services. It is generally recognized that certain systems in use
today may not perform their intended functions adequately after the Year 1999
because of the inability of computer software to distinguish the Year 2000 from
the Year 1900. Mentor Advisors is taking steps that it believes are reasonably
designed to address this potential "Year 2000" problem and to obtain
satisfactory assurances that comparable steps are being taken by each of the
Portfolio's other major service providers. There can be no assurance, however,
that these steps will be sufficient to avoid any adverse impact on the
Portfolios from this problem.
24
<PAGE>
Mentor Institutional Trust
Notes to Financial Statements
(continued)
Additional Information (unaudited)
Mentor U.S. Government Cash Management Portfolio
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
<TABLE>
<S> <C> <C> <C>
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 174,718,779 -
Troy A. Peery, Jr. 174,718,779 -
Arnold H. Dreyfuss 174,718,779 -
Thomas F. Keller 174,718,779 -
Peter J. Quinn, Jr. 174,718,779 -
Louis W. Moelchert, Jr. 174,718,779 -
Arch T. Allen, III 174,718,779 -
Weston E. Edwards 174,718,779 -
Jerry R. Barrentine 174,718,779 -
J. Garnett Nelson 174,718,779 -
</TABLE>
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First
Butcher Singer, Inc., with First Union Corporation:
Affirmative 174,718,779
Against -
Abstain -
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition of an
additional interest in Mentor Investment Group, LLC by EVEREN Securities
Holdings, Inc.:
Affirmative 174,718,779
Against -
Abstain -
25
<PAGE>
Mentor Institutional Trust
Notes to Financial Statements
(continued)
Mentor Fixed-Income Portfolio
Shareholders of the Portfolio considered and acted upon the proposals listed
below at a special meeting of shareholders held Monday December 22, 1997. In
addition, below each proposals are the results of that vote.
<TABLE>
<S> <C> <C> <C>
1. To elect the following Trustees:
Affirmative Withheld
Daniel J. Ludeman 3,802,809 -
Troy A. Peery, Jr. 3,802,809 -
Arnold H. Dreyfuss 3,802,809 -
Thomas F. Keller 3,802,809 -
Peter J. Quinn, Jr. 3,802,809 -
Louis W. Moelchert, Jr. 3,802,809 -
Arch T. Allen, III 3,802,809 -
Weston E. Edwards 3,802,809 -
Jerry R. Barrentine 3,802,809 -
J. Garnett Nelson 3,802,809 -
</TABLE>
2. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC to take effect upon the merger of Wheat First
Butcher Singer, Inc., with First Union Corporation:
Affirmative 3,802,809
Against -
Abstain -
3. To approve a new management contract between the Portfolio and Mentor
Investment Advisors, LLC in contemplation of the potential acquisition
of an additional interest in Mentor Investment Group, LLC by EVEREN
Securities Holdings, Inc.:
Affirmative 3,802,809
Against -
Abstain -
26
<PAGE>
Trustees
Daniel J. Ludeman, Trustee & Chairman
Chairman and Chief Executive Officer
Mentor Investment Group, LLC
Arch T. Allen III, Trustee
Attorney at Law
Allen & Moore, LLP
Jerry R. Barrentine, Trustee
J.R. Barrentine & Associates
Arnold H. Dreyfuss, Trustee
Former Chairman and Chief Executive Officer
Hamilton Beach/Proctor-Silex, Inc.
Weston E. Edwards, Trustee
President
Weston Edwards & Associates
Thomas F. Keller, Trustee
Former Dean, Fuqua School of Business
Duke University
Louis W. Moelchert, Jr., Trustee
Vice President for Business & Finance
University of Richmond
J. Garnett Nelson, Trustee
Consultantr
Mid-Atlantic Holdings, LLC
Troy A. Peery, Jr., Trustee
President
Heilig-Meyers Company
Peter J. Quinn,Jr.,Trustee
Managing Director
Mentor Investment Group, LLC
Officers
Paul F. Costello, President
Managing Director
Mentor Investment Group, LLC
Terry L. Perkins, Treasurer
Senior Vice President
Mentor Investment Group, LLC
Geoffrey B. Sale, Secretary
Associate Vice President
Mentor Investment Group, LLC
Michael A. Wade, Assistant Treasurer
Vice President
Mentor Investment Group, LLC
Mentor Institutional Trust
o U.S. Government Cash
Management Portfolio
o Fixed-Income Portfolio
-------------------------------------
SEMI-ANNUAL REPORT
-------------------------------------
April 30, 1998
[MENTOR INVESTMENT GROUP LOGO]
