[Flag Logo]
FLAG INVESTORS
FLAG
INVESTORS
REAL ESTATE
SECURITIES
FUND
ANNUAL REPORT
DECEMBER 31, 1996
<PAGE>
REPORT HIGHLIGHTS
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(bullet) Your Fund's Class A Shares achieved a total return of 32.7% for 1996
and 25.3% (annualized) for the two years since the Fund's inception.
(bullet) Hotel and office companies were the best performing REITs in 1996. All
REITS except outlet centers performed well.
(bullet) With new development at reasonable levels and rents and occupancies at
attractive levels, the outlook for real estate remains favorable.
(bullet) The REIT industry should continue to experience strong growth over the
next few years as a result of the transition of real estate ownership
from the private market to the public market.
(bullet) We expect a dramatic increase in the size and quality of many real
estate companies in the next few years.
<PAGE>
FUND PERFORMANCE
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment in Class A Shares*
January 3, 1995-December 31, 1996
[Graph appears here--plot points are listed below]
$10,000 invested in the Real Estate Securities Fund
Class A Shares at inception on January 3, 1995
was worth $15,684 on December 31, 1996.
1/95 $10,000
3/95 10,770
6/95 11,421
9/95 11,993
12/95 12,756
3/96 13,252
6/96 13,329
9/96 15,576
12/96 15,684
* These figures assume the reinvestment of dividends and capital gains
distributions and exclude the impact of any sales charge. If the sales charge
were reflected, the quoted performance would be lower. Since investment return
and principal value will fluctuate, an investor's shares may be worth more or
less than their original cost when redeemed. Past performance is not an
indicator of future results.
1
<PAGE>
LETTER TO SHAREHOLDERS
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Dear Shareholders:
We are pleased to submit to you the second annual report of the Flag
Investors Real Estate Securities Fund.
The Fund commenced operations on January 3, 1995 with a net asset value
(NAV) of $10.00 per share. On December 31, 1996, the NAVwas $13.89 per Class A
Share and $13.84 per Class B Share. In 1996, twelve monthly dividends and one
capital gains distribution were paid, totaling $0.82 for Class A Shares and
$0.748 for Class B Shares.
The Fund's total return performance for the twelve months ended December
31, 1996 and since its inception are shown in the table below.
Total Return Performance*
<TABLE>
<CAPTION>
Class A Class B Wilshire Real Estate Securities Index
- -----------------------------------------------------------------------------------------
<S><C>
One Year 32.7% 31.7% 36.8%
Since Inception** (1/3/95) 25.3% 24.4% 24.7%
</TABLE>
Market Commentary
REIT stocks ended the year with a strong, broad-based performance in
November and December. As a result, all of the major property sectors, except
factory outlets, posted outstanding returns in 1996.
Office REITs had the highest total return (51.8%) for 1996. The office
sector continued to show improvement in 1996 with declines in vacancies and
increases in rent. In addition, office REITs were able to acquire a substantial
number of properties at attractive spreads to their cost of capital and at
prices below replacement costs. Industrial REITs (37.0% total return) had a good
year in 1996 as demand, occupancies and rents remained high in an excellent
busi-
- --------------
* These figures assume the reinvestment of dividends and capital
gains distributions and exclude the impact of any sales charge. If the
sales charge were reflected, the quoted performance would be lower.
Performance figures for the classes differ because each class maintains a
distinct expense structure. For further details on expense structures,
please refer to the Fund's prospectus. Since investment return and
principal value will fluctuate, an investor's shares may be worth more
or less than their original cost when redeemed. The Wilshire Real Estate
Securities Index is an unmanaged index that is widely recognized as an
indicator of performance in the real estate sector. Past performance is
not an indicator of future results. Please review the Additional
Performance Information on page 7.
** Annualized.
2
<PAGE>
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ness environment for industrial properties. Many of the companies in the
Fund's portfolio invest in both the office and industrial sectors.
Hotel REITs had the second highest total return in 1996 (49.2%). The
full-service hotel sector, which we have concentrated on for your portfolio,
continues to benefit from limited new construction, strong demand, high
occupancy levels and increasing room rates. Acquisition volume remained at a
high level in 1996, and several of the better companies doubled in size.
Regional mall REITs also had an exceptional return (44.8%) in 1996. This
return is a recovery from a poor year in 1995 and is based on 1996's improvement
in retail sales and slowdown in construction of retail properties. The mall
sector was also positively impacted by high-profile mergers involving four of
the largest mall companies.
Self-storage REITs (42.0% total return) continued to show strong external
growth, but internal growth slowed slightly.
The manufactured housing sector (34.9% total return) continued to benefit
from strong demand for home sites and relatively little new development in 1996.
Retail/neighborhood and community center REITs had a strong year (33.9%
total return) after a poor 1995, as consumer spending and retail sales were
better than expected and new construction began to taper off slightly.
In the apartment sector (28.4% total return), the pace of new construction
remained in balance with growth in demand on a nationwide basis. However,
selected markets were negatively impacted by temporary excesses in new supply.
Most apartment companies showed good growth in their operating incomes, although
a few suffered the effects of too much new residential construction in their
markets.
Health care REITs (19.9% total return) met their earnings targets for the
year. However, their projected growth rates tend to be lower than those for the
REITs in other property types, and there is less current interest in these
stocks.
3
<PAGE>
LETTER TO SHAREHOLDERS (CONCLUDED)
- --------------------------------------------------------------------------------
Portfolio
The composition of the Fund's portfolio as of December 31, 1996, is
illustrated below.
[Pie Chart appears here]
Health Care 6%
Hotels 18%
Factory Outlets 3%
Retail/Neighborhood
and Community Centers 10%
Self-Storage 6%
Industrial/Office 19%
Manufactured
Housing 4%
Regional Malls 8%
Apartments 26%
Compared with the year-end 1995 portfolio, there has been an increase in the
weightings for hotels and office/industrial companies, and a decrease in the
weightings for apartment, shopping center, regional mall and health care REITs.
Outlook
The current real estate expansion that began in the early 1990s appears to
be at its midpoint. For most property types and markets, new construction
continues to be in line with or below the growth in demand. We believe the
expansion will continue into 1997 and 1998, and we are hopeful that it will
continue into the next century.
The equity market capitalization for REITs has increased by 57%, from $49.9
billion in 1995 to $78.3 billion in 1996. Based on an industry survey conducted
by Institutional Real Estate Newsletter, it appears that pension funds are
planning to put a substantial amount of new money into REITs in 1997.
4
<PAGE>
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We continue to believe the REIT industry will benefit from the strong
movement toward real estate securitization in the United States. Although we
believe the total market capitalization of the REIT industry will grow
dramatically by the turn of the century, we do not believe that the number of
REITs will increase substantially. As a result, there should be larger, more
dominant REITs with individual company market capitalizations at the $1 billion
to $3 billion levels. Our investment strategy is to identify and invest in those
REITs with the potential to be the dominant companies in the industry in the
early 2000s.
We thank you for your participation in the Fund.
Very truly yours,
/s/ William K. Morrill, Jr. /s/ Keith R. Pauley
- --------------------------- ------------------------
William K. Morrill, Jr. Keith R. Pauley
President Executive Vice President
January 17, 1997
5
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Dividend Declaration
1996 Year-End Dividend
The Board of Directors has declared a year-end per share distribution
payable on December 30, 1996 to shareholders of record on December 20, 1996.
Class A Class B
Shares Shares
------- -------
Long-term capital gains $.150 $.150
Short-term capital gains .070 .070
----- -----
Total distributions $.220 $.220
Dividends for Calendar 1996
Total dividends declared for calendar 1996 are as follows:
Class A Class B
Shares Shares
------- -------
Income $.585 $.513
Long-term capital gains .150 .150
Short-term capital gains .070 .070
Return of capital .015 .015
----- -----
Total distributions $.820 $.748
Shareholders who have elected to participate in the Fund's dividend
reinvestment plan have received their distribution in additional shares of the
Fund. If you are not currently a plan participant but would like to have your
dividends reinvested at net asset value, please contact your investment
representative or the Fund at 1-800-553-8080.
6
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. To further
assist in this evaluation, the Securities and Exchange Commission (SEC) requires
that we include, on an annual basis, a line graph comparing the Fund's
performance to that of an appropriate market index. This graph must measure the
growth of a $10,000 hypothetical investment from the Fund's inception on January
3, 1995 through the most recent fiscal year-end and must reflect the impact of
the Fund's total expenses and the currently effective 4.50% maximum sales charge
for the Fund's Class A Shares and 4.00% maximum contingent deferred sales charge
for the Fund's Class B Shares.
While the following charts are required by SEC rules, such comparisons are
of limited utility since the index shown is not adjusted for sales charges and
ongoing management, distribution and operating expenses applicable to the Fund.
An investor who wished to replicate the total return of this index would have
had to own the securities that it represents. Acquiring these securities would
require a considerable amount of money and would incur expenses that are not
reflected in the index results.
The SEC also requires that we report the Fund's total return, according to
a standardized formula, for various time periods through the end of the most
recent calendar quarter. The SEC total return figures differ from those we
reported because the time periods may be different and because the SEC
calculation includes the impact of the currently effective maximum sales charge.
These total returns correspond to those experienced by individual shareholders
only if their shares were purchased on the first day of each time period and the
maximum sales charge was paid. Any performance figures shown are for the full
period indicated. Since investment return and principal value will fluctuate, an
investor's shares may be worth more or less than their original cost when
redeemed. Past performance is not an indicator of future results.
7
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Additional Performance Information (concluded)
Change in Value of a $10,000 Investment in Class A Shares*
January 3, 1995-December 31, 1996
[Graph appears here--plot points are listed below]
Flag Investors Wilshire
Real Estate Real Estate
Securities Fund Securities Index
1/95 9,550 10,000
3/95 9,686 10,210
6/95 10,159 10,649
9/95 10,767 11,150
12/95 11,287 11,551
3/96 11,480 12,036
6/96 11,987 12,602
9/96 12,718 13,345
12/96 14,978 15,801
Average Annual Total Return*
Periods Ended 12/31/96 1 Year 5 Years Since Inception**
- --------------------------------------------------------------------------
Class A Shares 26.73% -- 22.44%
* These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
** 1/3/95.
8
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Change in Value of a $10,000 Investment in Class B Shares*
January 3, 1995-December 31, 1996
[Graph appears here--plot points are listed below]
Flag Investors Wilshire
Real Estate Real Estate
Securities Fund Securities Index
1/95 10,000 10,000
3/95 10,125 10,210
6/95 10,602 10,649
9/95 11,218 11,150
12/95 11,740 11,551
3/96 11,911 12,036
6/96 12,418 12,602
9/96 13,147 13,345
12/96 15,057 15,801
Average Annual Total Return*
Periods Ended 12/31/96 1 Year 5 Years Since Inception**
- ---------------------------------------------------------------------------
Class B Shares 28.26% -- 22.78%
* These figures assume the reinvestment of dividends and capital gains
distributions. Past performance is not an indicator of future results.
** 1/3/95.
9
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Net Assets December 31, 1996
<TABLE>
<CAPTION>
Market Percent Unrealized
Market Value of Net Gain/
Shares Security Price (Note 1) Assets (Loss)
- ------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS: 98.2%
Real Estate Investment Trusts: 90.7%
Apartments: 26.1%
30,400 Avalon Properties, Inc. $28.75 $ 874,000 3.5% $ 246,346
20,800 Bay Apartment Communities, Inc. 36.00 748,800 3.0 289,828
8,700 Columbus Realty Trust 22.75 197,925 0.8 11,640
16,300 Equity Residential Properties Trust 41.25 672,375 2.7 197,340
32,300 Evans Withycombe Residential, Inc. 21.00 678,300 2.7 17,941
23,000 Irvine Apartment Communities, Inc. 25.00 575,000 2.3 95,506
35,400 Merry Land & Investment
Company, Inc. 21.50 761,100 3.0 14,164
21,400 Oasis Residential, Inc. 22.75 486,850 1.9 14,344
20,500 Post Properties, Inc. 40.25 825,125 3.3 153,959
47,000 United Dominion Realty Trust 15.50 728,500 2.9 65,051
---------- ---- ----------
6,547,975 26.1 1,106,119
Factory Outlets: 2.6%
18,700 Chelsea GCA Realty, Inc. 34.63 647,488 2.6 124,168
---------- ---- ----------
Health Care: 5.9%
18,000 Health Care Property Investors, Inc. 35.00 630,000 2.5 31,254
35,100 Nationwide Health Properties, Inc. 24.25 851,175 3.4 145,733
---------- ---- ----------
1,481,175 5.9 176,987
Hotels: 11.4%
24,600 FelCor Suite Hotels, Inc. 35.38 870,225 3.5 150,043
26,100 Patriot American Hospitality, Inc. 43.13 1,125,563 4.5 397,357
15,600 Starwood Lodging Trust 55.13 859,950 3.4 316,053
---------- ---- ----------
2,855,738 11.4 863,453
Manufactured Housing: 4.4%
25,500 Manufactured Home
Communities, Inc. 23.25 592,875 2.4 133,249
14,800 Sun Communities, Inc. 34.50 510,600 2.0 133,571
---------- ---- ----------
1,103,475 4.4 266,820
Office/Industrial: 18.4%
14,200 Arden Realty Group, Inc. 27.75 394,050 1.6 70,235
6,400 Beacon Properties Corporation 36.63 234,400 0.9 68,403
5,900 Cali Realty Corporation 30.88 182,162 0.7 22,015
</TABLE>
10
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Percent Unrealized
Market Value of Net Gain/
Shares Security Price (Note 1) Assets (Loss)
- ------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS (continued)
Real Estate Investment Trusts (concluded)
Office/Industrial (concluded)
8,700 CarrAmerica Realty Corporation $29.25 $ 254,475 1.0% $ 34,423
22,400 Duke Realty Investments, Inc. 38.50 862,400 3.4 190,448
34,900 Highwoods Properties, Inc. 33.75 1,177,874 4.7 234,436
25,200 Spieker Properties, Inc. 36.00 907,200 3.6 295,527
18,600 Weeks Corporation 33.25 618,450 2.5 156,344
---------- ---- ----------
4,631,011 18.4 1,071,831
Regional Malls: 6.6%
4,800 Macerich Company 26.13 125,400 0.5 16,699
26,268 Simon DeBartolo Group, Inc. 31.00 814,308 3.2 191,137
56,800 Taubman Centers, Inc. 12.88 731,300 2.9 155,399
---------- ---- ----------
1,671,008 6.6 363,235
Retail/Neighborhood and
Community Centers: 9.7%
17,500 Developers Diversified
Realty Corp. 37.13 649,688 2.6 125,420
18,000 Federal Realty Investment Trust 27.13 488,250 1.9 96,076
14,150 Kimco Realty Corporation 34.88 493,481 2.0 111,244
7,900 Regency Realty Corporation 26.25 207,375 0.8 74,855
11,600 Vornado Realty Trust 52.50 609,000 2.4 182,629
---------- ---- ----------
2,447,794 9.7 590,224
Self-Storage: 5.6%
19,300 Public Storage, Inc. 31.00 598,300 2.4 175,932
10,400 Shurgard Storage Centers,
Inc.--Class A 29.63 308,100 1.3 39,246
12,800 Storage USA, Inc. 37.63 481,600 1.9 66,644
---------- ---- ----------
1,388,000 5.6 281,822
Real Estate Operating Companies: 7.5%
Hotels: 6.5%
29,100 CapStar Hotel Company* 19.63 571,088 2.3 46,379
47,400 Host Marriott Corp.* 16.00 758,400 3.0 113,663
4,000 Interstate Hotels Corporation* 28.25 113,000 0.5 12,669
11,900 Red Roof Inns, Inc.* 15.50 184,450 0.7 (4,392)
---------- ---- ----------
1,626,938 6.5 168,319
</TABLE>
11
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded)
<TABLE>
<CAPTION>
Market Percent Unrealized
Market Value of Net Gain/
Shares Security Price (Note 1) Assets (Loss)
- -----------------------------------------------------------------------------------
<S><C>
COMMON STOCKS (concluded)
Real Estate Operating Companies (concluded)
Regional Malls: 1.0%
8,400 The Rouse Company $31.75 $ 266,700 1.0% $ 71,193
----------- ----- ---------
Total Investment in Securities
(Cost $19,583,131)** 24,667,302 98.2 5,084,171
Other Assets in Excess of Liabilities, Net 443,768 1.8
----------- -----
Net Assets $25,111,070 100.0%
=========== =====
Net Asset Value and Redemption Price Per:
Class A Share
($19,816,307 / 1,427,132 shares outstanding) $13.89
======
Class B Share
($5,294,763 / 382,694 shares outstanding) $13.84***
======
Maximum Offering Price Per:
Class A Share
($13.89 / .955) $14.54
======
Class B Share $13.84
======
</TABLE>
* Non-income producing security.
** Aggregate cost for federal tax purposes was $19,508,529.
*** Redemption value is $13.29 following a maximum 4% contingent deferred sales
charge.
See Notes to Financial Statements.
12
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
Dec. 31,
- --------------------------------------------------------------------------------
1996
Investment Income (Note 1):
Dividends $1,051,673
Interest 12,788
----------
Total income 1,064,461
----------
Expenses:
Investment advisory fee (Note 2) 106,045
Distribution fees (Note 2) 68,483
Registration fees 47,454
Legal 35,482
Printing and postage 34,446
Audit 29,367
Custodian fees 20,692
Accounting fee (Note 2) 19,225
Organizational expense (Note 1) 18,699
Transfer agent fees (Note 2) 15,522
Miscellaneous 3,573
Directors' fees 334
Insurance 176
----------
Total expenses 399,498
Less:Fees waived and expenses reimbursed (Note 2) (167,868)
----------
Net expenses 231,630
----------
Net investment income 832,831
----------
Realized and unrealized gain on investments:
Net realized gain from security transactions 489,391
Change in unrealized appreciation or depreciation of investments 4,266,134
----------
Net gain on investments 4,755,525
----------
Net increase in net assets resulting from operations $5,588,356
==========
See Notes to Financial Statements.
13
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the Period
Year Ended Jan. 3, 1995(1)
Dec. 31, through Dec. 31,
- -------------------------------------------------------------------------------------
1996 1995
<S><C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 832,831 $ 353,419
Net realized gain from security transactions 489,391 47,282
Change in unrealized appreciation or
depreciation of investments 4,266,134 818,037
----------- -----------
Net increase in net assets resulting from operations 5,588,356 1,218,738
----------- -----------
Distributions to Shareholders from:
Net investment income:
Class A Shares (600,459) (185,238)(2)
Class B Shares (158,265) (92,558)(2)
Short-term capital gains:
Class A Shares (100,111) (27,959)
Class B Shares (26,298) (11,617)
Long-term capital gains:
Class A Shares (214,377) --
Class B Shares (56,352) --
Return of capital:
Class A Shares (21,539) (31,299)(2)
Class B Shares (5,650) (15,293)(2)
----------- -----------
Total distributions (1,183,051) (363,964)
----------- -----------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 10,892,733 9,712,132
Value of shares issued in reinvestment of dividends 974,878 246,856
Cost of shares repurchased (1,349,523) (726,085)
----------- -----------
Increase in net assets derived from
capital share transactions 10,518,088 9,232,903
----------- -----------
Total increase in net assets 14,923,393 10,087,677
Net Assets:
Beginning of period 10,187,677 100,000(3)
----------- -----------
End of period $25,111,070 $10,187,677
=========== ===========
</TABLE>
(1) Commencement of operations.
(2) Distributions have been reclassified to reflect the actual return of
capital amounts for 1995.
(3) On July 28, 1994, the Fund sold 10,000 shares to a subsidiary of
Alex. Brown & Sons Incorporated for $100,000.
See Notes to Financial Statements.
14
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Financial Highlights--Class A Shares
(For a share outstanding throughout each period)
For the For the Period
Year Ended Jan. 3, 1995(1)
Dec. 31, through Dec. 31,
- --------------------------------------------------------------------------------
1996 1995
Per Share Operating Performance:
Net asset value at beginning of period $ 11.20 $10.00
------- ------
Income from Investment Operations:
Net investment income 0.61 0.56
Net realized and unrealized gain
on investments 2.90 1.21
------- ------
Total from Investment Operations 3.51 1.77
------- ------
Less Distributions:
Dividends from net investment income (0.58) (0.49)(2)
Distributions from net realized short-term gains (0.07) (0.05)
Distributions from net realized long-term gains (0.15) --
Return of capital (0.02) (0.03)(2)
------- ------
Total distributions (0.82) (0.57)
------- ------
Net asset value at end of period $ 13.89 $11.20
======= ======
Total Return(3) 32.70% 18.19%
Ratios to Average Daily Net Assets:
Expenses 1.25%(4) 1.25%(4,5,6)
Net investment income 5.29%(7) 6.09%(5,6,7)
Supplemental Data:
Net assets at end of period (000) $19,816 $7,171
Portfolio turnover rate 23% 28%
Average commissions per share $ 0.07(8) --
(1) Commencement of operations.
(2) Distributions per share have been reclassified to reflect the actual return
of capital amounts for 1995.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees and reimbursement of expenses (Note 2),
the ratio of expenses to average daily net assets would have been 2.28% and
3.25% (annualized) for the year ended December 31, 1996 and the period
ended December 31, 1995, respectively.
(5) Annualized.
(6) Effective January 1, 1996, the Fund's expense and net investment income
ratios have been based on average daily net assets. Prior to that date they
were based on average monthly net assets. Under the prior method, the ratio
of expenses to average net assets was 1.19% and the ratio of net investment
income to average net assets was 5.95%.
(7) Without the waiver of advisory fees and reimbursement of expenses (Note 2),
the ratio of net investment income to average daily net assets would
have been 4.26% and 3.89% (annualized) for the year ended December 31, 1996
and the period ended December 31, 1995, respectively.
(8) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
15
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Financial Highlights--Class B Shares
(For a share outstanding throughout each period)
For the For the Period
Year Ended Jan. 3, 1995(1)
Dec. 31, through Dec. 31,
- --------------------------------------------------------------------------------
1996 1995
Per Share Operating Performance:
Net asset value at beginning of period $11.18 $10.00
------ ------
Income from Investment Operations:
Net investment income 0.52 0.50
Net realized and unrealized gain
on investments 2.89 1.20
------ ------
Total from Investment Operations 3.41 1.70
------ ------
Less Distributions:
Dividends from net investment income (0.51) (0.42)(2)
Distributions from net realized short-term gains (0.07) (0.05)
Distributions from net realized long-term gains (0.15) --
Return of capital (0.02) (0.05)(2)
------ ------
Total distributions (0.75) (0.52)
------ ------
Net asset value at end of period $13.84 $11.18
====== ======
Total Return(3) 31.67% 17.40%
Ratios to Average Daily Net Assets:
Expenses 2.00%(4) 2.00%(4,5,6)
Net investment income 4.46%(7) 5.39%(5,6,7)
Supplemental Data:
Net assets at end of period (000) $5,295 $3,016
Portfolio turnover rate 23% 28%
Average commissions per share $ 0.07(8) --
(1) Commencement of operations.
(2) Distributions per share have been reclassified to reflect the actual return
of capital amounts for 1995.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees and reimbursement of expenses (Note
2), the ratio of expenses to average daily net assets would have been
3.03% and 4.05% (annualized) for the year ended December 31, 1996 and
the period ended December 31, 1995, respectively.
(5) Annualized.
(6) Effective January 1, 1996, the Fund's expense and net investment income
ratios have been based on average daily net assets. Prior to that date
they were based on average monthly net assets. Under the prior method,
the ratio of expenses to average net assets was 1.90% and the ratio of net
investment income to average net assets was 5.25%.
(7) Without the waiver of advisory fees and reimbursement of expenses (Note 2),
the ratio of net investment income to average daily net assets would have
been 3.43% and 3.09% (annualized) for the year ended December 31, 1996 and
the period ended December 31, 1995, respectively.
(8) Disclosure is required for fiscal years beginning on or after September 1,
1995. Represents average commission rate per share charged to the Fund
on purchases and sales of investments during the period.
See Notes to Financial Statements.
16
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--Significant Accounting Policies
Flag Investors Real Estate Securities Fund, Inc. (the "Fund") was organized
as a Maryland Corporation on May 2, 1994 and commenced operations January 3,
1995. The Fund is registered under the Investment Company Act of 1940 as a
non-diversified, open-end management investment company designed to seek total
return primarily through investments in equity securities of companies that are
principally engaged in the real estate industry. The Class A Shares and Class B
Shares have different sales charges and distribution fees, and the Class B
Shares have a contingent deferred sales charge.
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. Significant
accounting policies are as follows:
A. Security Valuation--Portfolio securities are valued on the basis of
their last sale price. In the event that there are no sales or the
security is not listed, it is valued at its latest bid quotation.
Short-term obligations with maturities of 60 days or less are valued
at amortized cost.
B. Repurchase Agreements--The Fund may agree to enter into tri-party
repurchase agreements. Securities held as collateral for tri-party
repurchase agreements are maintained by the broker's custodial bank in
a segregated account until maturity of the repurchase agreement.
The agreement ensures that the market value of the collateral,
including accrued interest thereon, is sufficient in the event of
default. If the counterparty defaults and the value of the
collateral declines or if the counterparty enters into an
insolvency proceeding, realization of the collateral by the Fund may be
delayed or limited.
C. Federal Income Tax -- No provision is made for federal income taxes as
it is the Fund's intention to continue to qualify as a regulated
investment company and to make requisite distributions to the
shareholders that will be sufficient to relieve it from all or
substantially all federal income and excise taxes. The Fund's policy is
to distribute to shareholders substantially all of its taxable net
investment income and net realized capital gains.
17
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FLAG INVESTORS REAL ESTATE SECURITIES FUND
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Notes to Financial Statements (continued)
NOTE 1--concluded
D. Other -- Security transactions are accounted for on the trade date and
the cost of investments sold or redeemed is determined by use of the
specific identification method for both financial reporting and
income tax purposes. Interest income is recorded on an accrual
basis. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Costs incurred by the Fund in
connection with its organization, registration and the initial public
offering of shares have been deferred and are being amortized on the
straight-line method over a five-year period beginning on the date on
which the Fund commenced its investment activities.
A portion of the dividend income recorded by the Fund is from Real
Estate Investment Trusts ("REITs"). For tax purposes, a portion of
these dividends consists of capital gains and return of capital. For
financial reporting purposes, these dividends are recorded as dividend
income, and the investment in the REIT is reported at market value.
NOTE 2--Investment Advisory Fees, Transactions with Affiliates
and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., serves as the Fund's investment advisor and ABKB/LaSalle
Securities Limited Partnership is the Fund's sub-advisor. As compensation for
its advisory services, ICC receives from the Fund an annual fee, calculated
daily and paid monthly, at the following annual rates based upon the Fund's
average daily net assets: 0.65% of the first $100 million, 0.55% of the next
$100 million, 0.50% of the next $100 million and 0.45% of that portion in excess
of $300 million.
As compensation for its services, ABKB/LaSallereceives a fee from ICC,
payable from its advisory fee, calculated daily and paid monthly at the
following annual rates based upon the Fund's average daily net assets: 0.40% of
the first $100 million, 0.35% of the next $100 million, 0.30% of the next $100
million and 0.25% of that portion in excess of $300 million.
18
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FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
NOTE 2--concluded
ICC has agreed to reduce its aggregate fees attributable to the Fund or
make payments to the Fund, if necessary, to the extent required to satisfy any
expense limitations imposed by any securities laws or regulations thereunder of
any state in which the shares of the Fund are qualified for sale. ICC has
voluntarily agreed to waive its fees to the extent required to maintain expenses
at no more than 1.25% of the Fund's average daily net assets for Class A Shares
and 2.00% for Class B Shares. For the year ended December 31, 1996, ICC waived
fees of $106,045 and reimbursed expenses of $61,823.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily net
assets. ICC received $19,225 for accounting services for the year ended December
31, 1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated daily and paid monthly. ICC received $15,522 for
transfer agent services for the year ended December 31, 1996.
As compensation for providing distribution services, Alex. Brown & Sons
Incorporated receives from the Fund an annual fee, calculated daily and paid
monthly, at an annual rate equal to 0.25% of the average daily net assets for
Class A Shares and 1.00% (includes 0.25% shareholder servicing fee) of the
average daily net assets for Class B Shares. For the year ended December 31,
1996, distribution fees aggregated $68,483, of which $31,554 was attributable to
the Class A Shares and $36,929 was attributable to the Class B Shares.
The fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated to
the Fund for the period January 1, 1996 through December 31, 1996 was $533, and
the accrued liability was approximately $867.
19
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 10 million shares of $.001 par
value capital stock (7 million Class A, 2 million Class B and 1 million
undesignated). Transactions in shares of the Fund were as follows:
Class A Shares
------------------------------
For the For the Period
Year Ended Jan. 3, 1995* to
Dec. 31, 1996 Dec. 31, 1995
------------- ----------------
Shares sold 807,325 655,079
Shares issued to shareholders on
reinvestment of dividends 63,818 16,704
Shares redeemed (84,104) (41,690)
---------- ----------
Net increase in shares outstanding 787,039 630,093
========== ==========
Proceeds from sale of shares $9,428,874 $6,763,257
Value of reinvested dividends 787,477 178,010
Cost of shares redeemed (1,047,300) (439,765)
---------- ----------
Net increase from capital share transactions $9,169,051 $6,501,502
========== ==========
Class B Shares
------------------------------
For the For the Period
Year Ended Jan. 3, 1995* to
Dec. 31, 1996 Dec. 31, 1995
------------- ----------------
Shares sold 124,181 290,349
Shares issued to shareholders on
reinvestment of dividends 15,254 6,473
Shares redeemed (26,509) (27,054)
---------- ----------
Net increase in shares outstanding 112,926 269,768
========== ==========
Proceeds from sale of shares $1,463,859 $2,948,875
Value of reinvested dividends 187,401 68,846
Cost of shares redeemed (302,223) (286,320)
---------- ----------
Net increase from capital share transactions $1,349,037 $2,731,401
========== ==========
*Commencement of operations.
20
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
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NOTE 4--Investment Transactions
Purchases and sales of investment securities, other than short-term
obligations, aggregated $13,781,802 and $3,606,961, respectively, for the year
ended December 31, 1996.
On December 31, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $5,163,165
and aggregate gross unrealized depreciation of all securities in which there was
an excess of tax cost over value was $4,392.
NOTE 5--Net Assets
On December 31, 1996, net assets consisted of:
Paid-in capital:
Class A Shares $15,693,112
Class B Shares 4,058,303
Undistributed net investment income 275,484
Unrealized appreciation of investments 5,084,171
-----------
$25,111,070
===========
21
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
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Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Real Estate Securities Fund, Inc.:
We have audited the accompanying statement of net assets of Flag Investors
Real Estate Securities Fund, Inc. as of December 31, 1996 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 financial
highlights for each of the respective periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards required 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 investments owned as of
December 31, 1996, by correspondence with the custodian and brokers. 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 audit provides 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
Flag Investors Real Estate Securities Fund, Inc. as of December 31, 1996 and the
results of its operations for the year then ended, the changes in its net assets
and its financial highlights for each of the respective periods in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Philadelphia, Pennsylvania
February 4, 1997
22
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Directors and Officers
RICHARD T. HALE
Chairman
CHARLES W. COLE, JR.
Director
ROBERT S. KILLEBREW
Director
JOHN F. KROEGER
Director
LOUIS E. LEVY
Director
EUGENE J. MCDONALD
Director
REBECCA W. RIMEL
Director
CARL W. VOGT, ESQ.
Director
WILLIAM K. MORRILL, JR.
President
KEITH R. PAULEY
Executive Vice President
GARY V. FEARNOW
Vice President
EDWARD J. VEILLEUX
Vice President
SCOTT J. LIOTTA
Vice President
JOSEPH A. FINELLI
Treasurer
EDWARD J. STOKEN
Secretary
LAURIE D. COLLIDGE
Assistant Secretary
Investment Objective
A mutual fund designed to seek total return primarily through investments in
equity securities of companies that are principally engaged in the real estate
industry.
23
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<PAGE>
This report is prepared for the general
information of shareholders. It is authorized for
distribution to prospective investors only when
preceded or accompanied by an effective
prospectus.
For more complete information regarding
any of the Flag Investors Funds, including
charges and expenses, obtain a prospectus from
your investment representative or directly from
the Fund at 1-800-767-FLAG. Read it carefully
before you invest.
<PAGE>
[Flag Logo]
FLAG INVESTORS
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Equity Income
Flag Investors Real Estate Securities Fund
Flag Investors Telephone Income Fund
Balanced
Flag Investors Value Builder Fund
Income
Flag Investors Short-Intermediate Income Fund
Flag Investors Total Return U.S. Treasury Fund Shares
Tax-Free Income
Flag Investors Managed Municipal Fund Shares
Flag Investors Maryland Intermediate Tax-Free Income Fund
Current Income
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ALEX. BROWN &SONS
INCORPORATED
