[FLAG INVESTORS LOGO]
FLAG
INVESTORS
REAL ESTATE
SECURITIES
FUND
SEMI-ANNUAL REPORT
JUNE 30, 1998
<PAGE>
REPORT HIGHLIGHTS
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o Both the Real Estate Group and the Fund trailed the broad market in the first
half.
o Industry fundamentals are excellent, with strong demand and only moderate new
supply.
o Earnings growth is strong in absolute terms, and particularly compared to the
broad market.
o Valuations are compelling. Price earnings ratios are historically low,
dividends are increasing, and payouts are conservative.
o Securitization of institutionally held real estate is still in the very early
stage.
<PAGE>
LETTER TO SHAREHOLDERS
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Dear Shareholders:
We are pleased to report on the Flag Investors Real Estate Securities
Fund's operations for the first half of 1998. The Fund seeks total return with a
significant income component by investing in a diversified portfolio of REITS
and real estate operating companies. As a part of a diversified investment
portfolio, your Fund seeks to produce an attractive risk-adjusted return, and
provide a certain amount of stability in a choppy market.
The sub-advisor and portfolio manager--ABKB/LaSalle Securities Limited--has
ten professionals dedicated solely to investing in public real estate
securities. Its management team brings direct operating experience in property
development, management, investment, and finance as well as more than a decade
of successful REIT portfolio management experience to its efforts on behalf of
your Fund.
Fund Performance
Since its inception at the beginning of 1995, the Flag Investors Real
Estate Securities Fund has consistently produced competitive returns for its
shareholders. For additional information regarding the Fund's performance see
page 6.
Annualized Returns
<TABLE>
<CAPTION>
Since
Year-to-Date 6 month or YTD 1 Year 3 Years Inception*
-----------------------------------------------------------------------------------
<S><C>
Class A Shares -6.0% 7.4% 19.2% 18.4%
...................................................................................
Class B Shares -6.3% 6.5% 18.3% 17.5%
...................................................................................
Institutional Shares -5.9% 7.8% N.A. 9.4%
...................................................................................
Wilshire Real Estate Securities Index** -5.3% 6.4% 18.9% 17.6%
...................................................................................
</TABLE>
- ----------
*Inception dates: Class A 1/3/95, Class B 1/3/95, Institutionl 3/31/97.
**The Wilshire Real Estate Securities Index is a market capitalization weighted
index of publicly trade real estate securities, such as: Real Estate Investment
Trusts (REITs), Real Estate Operating Companies (REOCs) and partnerships. The
Index is comprised of companies whose charter is the equity ownership and
operation of commercial real estate. The Index is rebalanced monthly and returns
are calculated on a buy and hold basis. The Index has been constructed to avoid
survivor bias. The Index is unmanaged and individuals cannot invest in the
Index.
Source: ABKB/LaSalle Securities; Wilshire Associates
Sector total returns during the first half seem to reflect contrarian
thinking over fundamentals. The best performance was turned in by the retail
group, the only sector with a positive total return. Apartments did slightly
better than the sector average, while office/industrial and hotels trailed.
1
<PAGE>
LETTER TO SHAREHOLDERS (CONTINUED)
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Market Commentary--REIT Stocks Trailed the Broad Market
in the Past Six Months
The first half of 1998 was perhaps the most frustrating time for
institutional investors and REIT managements since the renaissance of the
industry began in the early 1990s. Despite real estate industry performance and
an economy that many observers call the best in a decade, the public companies
in the real estate industry traded down in absolute terms, and underperformed
the broad market, particularly the largest companies represented in the S&P 500.
There has been no lack of analysis of the reasons for this performance
differential. We believe it is largely a matter of momentum investors chasing
the climax of a record-setting bull market, considerable concern over
legislation affecting a few REITS (largely unfounded, in our view), and some
perfectly legitimate concerns over whether the rapidly falling capitalization
rates that increase the value of properties already in REIT portfolios also hurt
the potential for continued attractive spread investing or increase the
potential for new construction.
But the Business Fundamentals and Relative Values of Real Estate
Stocks Have Never Been Better!
Funds From Operations (FFO) multiples are at their lowest level since 1990;
the margin between REIT FFO multiple/S&P price earnings ratio margin has never
been wider. New construction is at modest levels in most sectors and regions,
and there is no glut on the horizon. Solid rental rate rises are being achieved
and are expected to continue for several years.
As the first quarter's earnings results showed, the companies' operations
are strong and getting stronger. Most analysts underestimated per share gains
early in the year. We continue to project that our portfolio companies will
produce 1998 per share growth averaging nearly 20%, and 1999's growth should be
well into the teens, both well above our long term growth rates of 6 to 8% for
quality property companies. These operating gains are close to twice those
projected for the broad market.
Flag Investors Portfolio Distribution at June 30, 1998
The principal sector overweighting is in full-service hotels. The Fund has
major holdings in two paired-share REITS whose price has been impacted by
2
<PAGE>
- --------------------------------------------------------------------------------
pending legislation. We believe this legislation will have only moderate impact
on these companies' future operations, that they will continue to be among the
fastest growing and best run companies in the real estate business, and that the
stocks are oversold and will provide significant above average performance in
the next several quarters.
The fund is moderately overweighted in office and industrial, and at a
market weighting in apartments. Retail is significantly underweighted, and we
are making selective additional investments in those companies we think will
benefit most from an improving retail environment.
In the first half we added several investments of note, including NorthStar
Capital Partners, an opportunity fund providing entry-level equity capital to a
variety of fast-growing pre-IPO real estate companies, and Signature Resorts,
the largest developer and operator of time share resorts worldwide. These new
holdings offer the Fund additional exposure to companies we think can become the
leaders of tomorrow, and to emerging areas of real estate activity.
Industry Trends: 1999 and Beyond
We find it useful to periodically look at the longer-term trends that will
affect the real estate business and the investors and operators who participate
in it. Our current perspective follows:
o Operating performance in 1997 and 1998 is at historically high levels for
most real estate companies and sectors, particularly hotels and
office/industrial. Earnings growth is nearly twice that of the broad
market. This differential should moderate somewhat in 1999-2000, but real
estate companies should still provide attractive earnings growth for the
next several years.
o Hotels and office/industrial companies should continue to produce strong
earnings results, with moderating growth trends. Apartments are in
equilibrium and should produce trend-line growth. Health care and other
net lease companies will provide additional insulation and relatively
high yield in an unsettled environment.
o Retail businesses are in a difficult fundamental environment, with supply
still continuing in excess of demand, but with an improving trend.
Dominant malls, insulated grocery-anchored strip centers, and companies
skilled in repositioning properties should be able to do well in this
envi-
3
<PAGE>
LETTER TO SHAREHOLDERS (CONCLUDED)
- --------------------------------------------------------------------------------
ronment, and the anticipation of better times is likely to show up in
stock prices before showing up in operating results.
o As capitalization rates fall, properties already owned become more
valuable, causing companies' net asset values to rise. Property
acquisition will continue to become less profitable, with eroding
spreads. Competition with private debt and equity providers, especially
pension funds, will intensify. Companies without development capacity may
become more passive.
o Development activity will continue to increase, with stabilized returns
on new development well above yields on acquisitions. This could retard
short-term earnings growth for some companies. Companies with expertise
in rehab and repositioning should prosper.
o Consolidation will continue, but combinations between equals will produce
limited stock market profits in the short term. Shareholders will do
better selling to a stronger, more profitable company. Smaller companies
not open to this possibility will be left behind.
o The timing and magnitude of renewed inflation remain an open question.
Moderate rates of inflation and higher interest rates will favor those
companies with appropriate leverage and financing in place. Real estate
does best in times of moderate, but visible inflation.
o Cost of capital will become more critical as margins thin. Industry
leverage will increase, and per share growth is likely to accelerate as
debt expands. Beyond the point of appropriate leverage, however,
declining earnings quality will hurt stock prices.
o Almost all regions are healthy today; longer term, above average economic
growth rates should make California, Texas, and Florida especially
attractive. Parts of California and Florida are insulated from rapid
increases in supply. Many urban centers should be attractive long term
including New York City, San Francisco and Boston; also Chicago, Los
Angeles, Miami, and Washington DC.
o Fee businesses and joint-venture, general partner or co-investment
positions will be used to leverage Return On Equity and increase access
to deal flow.
4
<PAGE>
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o Company selection will increasingly replace sector and geography as the
key factor in producing superior investment returns. Management and
capital skills will come to the fore. Diversified companies with
entrepreneurial management may be well received.
Conclusion
While the first half of 1998 has been a sober time, we are convinced that
the fundamentals of the public real estate business are intact, and that these
fundamentals will translate into positive absolute returns, and excellent
relative returns, especially if there is weakness in the broad market. In
summary:
o Industry fundamentals are excellent, with strong demand and only moderate
new supply.
o Earnings growth is strong in absolute terms, and particularly compared to
the broad market.
o Securitization of institutionally held real estate is still in the very
early stage.
o Valuations are compelling. Price earnings ratios are historically low,
dividends are increasing, and payouts are conservative.
We thank you for your participation in the Fund, and welcome your comments
and questions.
/s/ William K. Morrill, Jr. /s/ Keith R. Pauley
___________________________ ___________________
William K. Morrill, Jr. Keith R. Pauley, CFA
President Executive Vice President
5
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FLAG INVESTORS REAL ESTATE SECURITIES FUND
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Additional Performance Information
The shareholder letter included in this report contains statistics designed
to help you evaluate the performance of your Fund's management. The Securities
and Exchange Commission (SEC) requires that when we report such figures, we also
include 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 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.
Average Annual Total Return
Periods Ended 6/30/98 1 Year 5 Years Since Inception*
---------------------------------------------------------------------------
Class A Shares 2.52% -- 16.80%
...........................................................................
Class B Shares 2.54% -- 16.91%
...........................................................................
Institutional Shares 7.84% -- 9.40%
...........................................................................
*Inception dates: Class A 1/3/95, Class B 1/3/95, Institutional 3/31/97.
The Fund's 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.
6
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Net Assets June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Percent Unrealized
Market Market of Net Gain/
Shares Securities Price Value Assets (Loss)
- ------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS: 98.0%
Real Estate Investment Trust: 87.8%
Apartments: 16.9%
43,000 Apartment Investment &
Management Company $39.50 $ 1,698,500 3.2% $ 296,360
80,085 Avalon Properties, Inc. 38.00 3,043,230 5.8 574,149
15,104 Camden Property Trust 29.75 449,344 0.8 1,495
30,750 Equity Residential
Properties Trust 47.44 1,458,703 2.7 258,985
29,300 Irvine Apartment
Communities, Inc. 28.94 847,869 1.6 192,883
38,653 Post Properties, Inc. 38.50 1,488,121 2.8 117,231
---------- ---- ----------
8,985,767 16.9 1,441,103
Factory Outlets: 2.0%
27,200 Chelsea GCA Realty, Inc. 40.00 1,088,000 2.0 230,524
---------- ---- ----------
Hotels: 12.3%
18,700 American General
Hospitality Corp. 21.25 397,375 0.7 (70,964)
104,401 Patriot American Hospitality, Inc. 23.94 2,499,099 4.7 380,074
75,600 Starwood Lodging Trust 48.31 3,652,425 6.9 482,993
---------- ---- ----------
6,548,899 12.3 792,103
Manufactured Housing: 1.6%
26,200 Sun Communities, Inc. 33.13 867,875 1.6 107,253
---------- ---- ----------
Office/Industrial: 34.1%
50,000 Beacon Capital Partners (1) 20.00 1,000,000 1.9 0
56,900 Boston Properties, Inc. 34.50 1,963,050 3.7 154,950
23,200 Brandywine Realty Trust 22.38 519,100 1.0 (39,303)
35,400 Crescent Real Estate
Equities Company 33.63 1,190,325 2.2 (88,038)
90,200 Duke Realty Investments, Inc. 23.69 2,136,613 4.0 495,598
96,680 Equity Office Properties Trust 28.38 2,743,291 5.2 222,411
21,700 First Industrial Realty Trust, Inc. 31.75 688,975 1.3 (35,805)
57,300 Mack-Cali Realty Corporation 34.38 1,969,687 3.7 (87,217)
11,000 PS Business Parks Inc. 23.50 258,500 0.5 (9,625)
66,700 Reckson Associates Realty Corp. 23.63 1,575,788 3.0 151,689
32,016 Reckson Service Industries, Inc.* 3.31 106,053 0.2 (114,823)
</TABLE>
7
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Percent Unrealized
Market Market of Net Gain/
Shares Securities Price Value Assets (Loss)
- ------------------------------------------------------------------------------------
<S><C>
COMMON STOCKS (concluded)
Real Estate Investment Trusts (concluded)
Office/Industrial (concluded)
18,000 SI Green Realty Corp. $22.50 $ 405,000 0.8% $ 2,257
60,000 Spieker Properties, Inc. 38.75 2,325,000 4.4 462,910
36,700 Weeks Corporation 31.63 1,160,637 2.2 104,447
----------- ---- ----------
18,042,019 34.1 1,219,451
Regional Malls: 2.7%
15,400 Macerich Company 29.31 451,413 0.8 29,818
31,068 Simon DeBartolo Group, Inc. 32.50 1,009,710 1.9 154,315
----------- ---- ----------
1,461,123 2.7 184,133
Retail/Neighborhood and Community Center: 1.9%
25,900 Developers Diversified Realty
Corporation 39.19 1,014,956 1.9 174,237
----------- ---- ----------
Self-Storage: 4.3%
52,500 Public Storage, Inc. 28.00 1,470,000 2.8 114,068
23,100 Storage USA, Inc. 35.00 808,500 1.5 (4,160)
----------- ---- ----------
2,278,500 4.3 109,908
Diversified/Other: 12.0%
97,400 Catellus Development* 17.69 1,722,763 3.2 (85,883)
32,900 Commercial Net Lease Realty 16.19 532,569 1.0 33,546
4,000 Corrections Corp. of America 23.42 93,897 0.2 0
105,000 Northstar Capital Partners (1) 20.07 2,107,500 4.0 0
48,600 Vornado Realty Trust 39.69 1,928,813 3.6 655,300
----------- ---- ----------
6,385,542 12.0 602,963
Real Estate Operating Companies: 10.2%
Diversified: 0.7%
120,500 Capital Trust - Class A * 9.63 370,562 0.7 (52,601)
----------- ---- ----------
Hotels: 9.5%
20,500 Capstar Hotel Company * 28.00 574,000 1.1 (129,675)
120,500 Host Marriott Corp. * 17.81 2,146,406 4.0 144,433
140,500 Signature Resorts, Inc.* 16.50 2,318,250 4.4 31,561
----------- ---- ----------
5,038,656 9.5 46,319
Total Common Stocks
(Cost $47,226,507) 52,081,899 98.0 4,855,393
----------- ---- ----------
</TABLE>
8
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Percent
Principal Market of Net
(000) Securities Value Assets
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS: 1.1%
$598 Goldman Sachs & Co., 5.40%
Dated 6/30/98, to be repurchased at
$598,090 on 7/1/98, collateralized by
U.S. Treasury Notes with a market
value of $610,109.
(Cost $598,000) $ 598,000 1.1%
----------- -----
Total Investment in Securities-- 99.1%
(Cost $47,824,507) 52,679,899 99.1
Other Assets in Excess of Liabilities 496,391 0.9
----------- -----
Net Assets $53,176,290 100.0%
=========== =====
Net Asset Value and Redemption Price Per:
Class A Share
($41,859,698 / 2,877,428 shares outstanding) $14.55
======
Class B Share
($10,355,750 / 714,567 shares outstanding) $14.49***
======
Institutional Share
($960,842 / 65,482 shares outstanding) $14.67
======
Maximum Offering Price Per:
Class A Share
($14.55 / 0.955) $15.24
======
Class B Share $14.49
======
Institutional Share $14.67
======
- ---------
*Non-income producing security.
***Redemption value is $13.91 following a maximum 4% contingent deferred sales
charge.
(1) Restricted Securities.
See Notes to Financial Statements.
9
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statement of Operations
For the Six
Months Ended
June 30,
- --------------------------------------------------------------------------------
1998(1)
Investment Income:
Dividends $ 1,131,334
Interest 24,780
-----------
Total income 1,156,114
-----------
Expenses:
Investment advisory fee 169,785
Distribution fee 102,794
Legal 58,387
Accounting fee 21,367
Transfer agent fee 30,041
Registration fees 13,260
Printing and postage 20,133
Organizational expense 14,047
Custodian fee 7,240
Miscellaneous 20,168
-----------
Total expenses 457,222
Less:Fees waived (93,220)
-----------
Net expenses 364,002
-----------
Net investment income 792,112
-----------
Realized and unrealized gain (loss) on investments:
Net realized gain from security transactions 770,670
Change in unrealized appreciation/depreciation of investments (4,825,690)
-----------
NET LOSS ON INVESTMENTS (4,055,020)
-----------
Net decrease in net assets resulting from operations $(3,262,908)
===========
- -------
(1) Unaudited
See Notes to Financial Statements.
10
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Six For the
Month Period Year Ended
Ended June 30 December 31,
- -----------------------------------------------------------------------------------
1998(1) 1997
<S><C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 792,112 $ 1,467,633
Net realized gain from security transactions 770,670 1,997,900
Change in unrealized appreciation/
depreciation of investments (4,825,690) 4,596,911
----------- -----------
Net increase/(decrease) in net assets resulting
from operations (3,262,908) 8,062,444
----------- -----------
Distributions to Shareholders from:
Net investment income:
Class A Shares (833,353) (1,271,684)
Class B Shares (164,550) (238,106)
Institutional Shares (11,442) (1,925)
Net realized capital gains:
Class A Shares -- (1,205,375)
Class B Shares -- (274,879)
Institutional Shares -- (8,516)
----------- -----------
Total distributions (1,009,345) (3,000,485)
----------- -----------
Capital Share Transactions:
Proceeds from sale of shares 9,916,268 22,600,633
Value of shares issued in reinvestment of dividends 810,541 2,621,448
Cost of shares repurchased (5,133,663) (3,539,713)
----------- -----------
Increase in net assets derived from
capital share transactions 5,593,146 21,682,368
----------- -----------
Total increase in net assets 1,320,893 26,744,327
Net Assets:
Beginning of period 51,855,397 25,111,070
----------- -----------
End of period (Including undistributed net
investment income of $158,837 and 376,070
respectively) $53,176,290 $51,855,397
=========== ===========
</TABLE>
- ------
(1) Unaudited
See Notes to Financial Statements.
11
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
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Financial Highlights--Class A Shares
(For a share outstanding throughout each period)
For the
Six Month
Period Ended
June 30,
- --------------------------------------------------------------------------------
1998(+)
Per Share Operating Performance:
Net asset value at beginning of period $ 15.78
-------
Income from Investment Operations:
Net investment income 0.23
Net realized and unrealized gain/(loss) on investments (1.16)
-------
Total from Investment Operations (0.93)
-------
Less Distributions:
Distributions from net investment income (0.30)
Distributions from net realized capital gains --
Return of capital --
-------
Total distributions (0.30)
-------
Net asset value at end of period $ 14.55
=======
Total Return(3) (5.95)%
Ratios to Average Daily Net Assets:
Expenses(4,7) 1.25%(6)
Net investment income(5,7) 3.17%(6)
Supplemental Data:
Net assets at end of period (000) $41,860
Portfolio turnover rate 13%
12
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
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<TABLE>
<CAPTION>
For the Period
For the Years January 3, 1995(1)
Ended December 31, through December 31,
----------------------------------------------------
1997 1996 1995
<S><C>
Per Share Operating Performance:
Net asset value at beginning of period $ 13.89 $ 11.20 $10.00
------- ------- ------
Income from Investment Operations:
Net investment income 0.52 0.61 0.56
Net realized and unrealized gain/(loss) on investments 2.44 2.90 1.21
------- ------- ------
Total from Investment Operations 2.96 3.51 1.77
------- ------- ------
Less Distributions:
Distributions from net investment income (0.60) (0.58) (0.49)(2)
Distributions from net realized capital gains (0.47) (0.22) (0.05)
Return of capital -- (0.02) (0.03)(2)
------- ------- ------
Total distributions (1.07) (0.82) (0.57)
------- ------- ------
Net asset value at end of period $ 15.78 $ 13.89 $11.20
======= ======= ======
Total Return(3) 22.01% 32.70% 18.19%
Ratios to Average Daily Net Assets:
Expenses(4,7) 1.25% 1.25% 1.25%(6)
Net investment income(5,7) 3.87% 5.29% 6.09%(6)
Supplemental Data:
Net assets at end of period (000) $41,773 $19,816 $7,171
Portfolio turnover rate 35% 23% 28%
</TABLE>
- -----------
(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 1.61%
(annualized), 1.58%, 2.28% and 3.25% (annualized) for the period ended June
30, 1998 and for the years ended December 31, 1997 and 1996 and the period
ended December 31, 1995, respectively.
(5) 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 2.81% (annualized), 3.54%, 4.26% and 3.89% (annualized) for the period
ended June 30, 1998 and for the years ended December 31, 1997 and 1996 and
the period ended December 31, 1995, respectively.
(6) Annualized.
(7) 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%.
(+) Unaudited
See Notes to Financial Statements.
13
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
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Financial Highlights--Class B Shares
(For a share outstanding throughout each period)
For the
Six Month
Period Ended
June 30,
- --------------------------------------------------------------------------------
1998(+)
Per Share Operating Performance:
Net asset value at beginning of period $ 15.71
-------
Income from Investment Operations:
Net investment income 0.17
Net realized and unrealized gain/(loss) on investments (1.15)
-------
Total from Investment Operations (0.98)
-------
Less Distributions:
Dividends from net investment income (0.24)
Distributions from net realized capital gains 0.00
Return of capital --
-------
Total distributions (0.24)
=======
Net asset value at end of period $ 14.49
Total Return (6.29)%
Ratios to Average Daily Net Assets:
Expenses(4,7) 2.00%(6)
Net investment income(5,7) 2.44%(6)
Supplemental Data:
Net assets at end of period (000) $10,356
Portfolio turnover rate 13%
14
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
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<TABLE>
<CAPTION>
For the Period
For the Year January 3, 1995(1)
Ended December 31, through December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S><C>
Per Share Operating Performance:
Net asset value at beginning of period $13.84 $11.18 $10.00
------ ------ ------
Income from Investment Operations:
Net investment income 0.42 0.52 0.50
Net realized and unrealized gain/(loss) on investments 2.42 2.89 1.20
------ ------ ------
Total from Investment Operations 2.84 3.41 1.70
------ ------ ------
Less Distributions:
Dividends from net investment income (0.50) (0.51) (0.42)(2)
Distributions from net realized capital gains (0.47) (0.22) (0.05)
Return of capital -- (0.02) (0.05)(2)
------ ------ ------
Total distributions (0.97) (0.75) (0.52)
------ ------ ------
Net asset value at end of period $15.71 $13.84 $11.18
====== ====== ======
Total Return 21.11% 31.67% 17.40%
Ratios to Average Daily Net Assets:
Expenses(4,7) 2.00% 2.00% 2.00%(6)
Net investment income(5,7) 3.12% 4.46% 5.39%(6)
Supplemental Data:
Net assets at end of period (000) $9,799 $5,295 $3,016
Portfolio turnover rate 35% 23% 28%
</TABLE>
- ---------
(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 (Note 2), the ratio of expenses to
average daily net assets would have been 2.36% annualized, 2.33%, 3.03% and
4.05% (annualized) for Class B Shares for the period ended June 30, 1998 and
for the years ended December 31, 1997 and 1996 and the period ended December
31, 1995, respectively.
(5) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.08% annualized, 2.79%,
3.43% and 3.09% (annualized) for Class B Shares for the period ended June
30, 1998 and for the years ended December 31, 1997 and 1996 and the period
ended December 31, 1995, respectively.
(6) Annualized.
(7) Effective January 1, 1996, the Fund's expense and net investment income
ratios are 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%.
(+) Unaudited
See Notes to Financial Statements.
15
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Financial Highlights--Institutional Shares
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Six For the Period
Month Period March 31, 1997(1)
Ended June 30, through December 31,
- ---------------------------------------------------------------------------------------
1998(+) 1997
<S><C>
Per Share Operating Performance:
Net asset value at beginning
of period $15.91 $14.19
------ ------
Income from Investment Operations:
Net investment income 0.27 0.47
Net realized and unrealized
gain/(loss) on investments (1.19) 2.14
------ ------
Total from Investment Operations (0.92) 2.61
------ ------
Less Distributions:
Dividends from net investment
income (0.32) (0.42)
Distributions from net realized
capital gains 0.00
Return of capital -- (0.47)
------ ------
Total distributions (0.32) (0.89)
------ ------
Net asset value at end of period $14.67 $15.91
====== ======
Total Return (5.86)% 18.84%
Ratios to Average Daily Net Assets:
Expenses(2,5) 1.00%(4) 1.00%(4)
Net investment income(3,5) 3.79%(4) 4.30%(4)
Supplemental Data:
Net assets at end of period (000) $960,842 $ 288
Portfolio turnover rate 13% 35%(4)
</TABLE>
- ---------
(1) Commencement of operations.
(2) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.36% annualized and 1.39%
(annualized) for Institutional shares for the periods ended June 30, 1998
and December 31, 1997, respectively.
(3) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 3.43% annualized and
3.73% (annualized) for Institutional shares for the periods ended June 30,
1998 and December 31, 1997, respectively.
(4) Annualized.
(5) Effective January 1, 1996, the Fund's expense and net investment income
ratios are 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%.
(+) Unaudited
See Notes to Financial Statements.
16
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--Significant Accounting Policies (unaudited)
Flag Investors Real Estate Securities Fund, Inc. (the "Fund"), which was
organized as a Maryland Corporation on May 2, 1994 and commenced operations
January 3, 1995, is registered under the Investment Company Act of 1940 as a
non-diversified open-end investment management company. Its objective is to seek
total return primarily through investments in equity securities of companies
that are principally engaged in the real estate industry.
The Fund consists of three share classes: Class A Shares and Class B
Shares, which both commenced January 3, 1995, and Institutional Shares, which
commenced March 31, 1997.
The Class A and Class B Shares are subject to different sales charges. The
Class A Shares have a 4.50% maximum front-end sales charge and the Class B
Shares have a 4.00% maximum contingent deferred sales charge. In addition, each
class has a different distribution fee. The Institutional Shares have neither a
sales charge nor a distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:
A. Security Valuation--The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price reported
for the day. If there are no sales or the security is not traded on a
listed exchange, the Fund values the security at its last bid price in
the over-the-counter market. When a market quotation is unavailable, the
Investment Advisor determines a fair value using procedures that the
Board of Directors establishes and monitors. The Fund values short-term
obligations with maturities of 60 days or less at amortized cost. As of
June 30, 1998, there were no Board valued securities.
B. Repurchase Agreements-- The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a
17
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 1--concluded
separate account until the repurchase agreement matures. The agreement
ensures that the collateral's market value, including any accrued
interest, is sufficient if the broker defaults. The Fund's access to the
collateral may be delayed or limited if the broker defaults and the
value of the collateral declines or if the broker enters into an
insolvency proceeding.
C. Federal Income Tax -- The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and
gains that are available for distribution under income tax regulations.
The Fund is organized as a regulated investment company. As long as it
maintains this status and distributes to its shareholders substantially
all of its taxable net investment income and net realized capital gains,
it will be exempt from most, if not all, federal income and excise
taxes. As a result, the Fund has made no provisions for federal income
taxes.
D. Securities Transactions, Investment Income, Distributions and Other --
The Fund uses the trade date to account for security transactions and
the specific identification method for financial reporting and income
tax purposes to determine the cost of investments sold or redeemed.
Interest income is recorded on an accrual basis and includes the pro
rata amortization of premiums and accretion of discounts when
appropriate. Income and common expenses are allocated to each class
based on its respective average net assets. Class specific expenses are
charged directly to each class. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. The Fund has deferred
the costs incurred by its organization and the initial public offering
of shares. These costs are being amortized on the straight-line method
over a five-year period, which began when the Fund commenced operations.
Real Estate Investment Trusts ("REITs") provide the majority of the
dividend income that the Fund records. For income tax purposes, a
portion of these dividends consists of capital gains and return of
capital. For financial reporting purposes, the Fund records these
dividends as dividend income and records the investment in the REIT at
market value.
18
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust Corporation, is the Fund's investment advisor and ABKB/LaSalle Securities
Limited Partnership ("ABKB/LaSalle") is the Fund's subadvisor. As compensation
for its advisory services, the Fund pays ICC an annual fee based on the Fund's
average daily net assets. This fee is calculated daily and paid monthly at the
following annual rates: 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 the amount over $300
million.
As compensation for its subadvisory services, ICC pays ABKB/LaSalle a fee
from its advisory fee based on the Fund's average daily net assets. This fee is
calculated daily and paid monthly at the following annual rates: 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 the amount over $300 million. At June 30, 1998, accrued
advisory fees owed by the Fund amounted to $11,666, net of waived expenses of
$15,807.
ICC has voluntarily agreed to waive its aggregate fees so that ordinary
Fund expenses for any fiscal year do not exceed 1.25% of the Class A Shares'
average daily net assets, 2.00% of the Class B Shares' average daily net assets
and 1.00% of the Institutional Shares' average daily net assets. for the six
month period ended June 30, 1998, icc waived fees of $93,220.
Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor or subadvisor.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. At June 30, 1998 amount owed by the Fund for accounting services
amounted to $3,499.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. At June 30, 1998 the Fund owed
$13,291 for transfer agent services.
Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997, PNC Bank served as the Fund's custodian.
For the six month period ended June 30, 1998, the Fund accrued $7,240 in custody
expenses.
19
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2--concluded
As compensation for providing distribution services, the Fund pays ICC
Distributors, Inc. ("ICC Distributors"), which is not related to ICC, an annual
fee that is calculated daily and paid monthly. This fee is paid at an annual
rate equal to 0.25% of the Class A Shares' average daily net assets and 1.00%
(including a 0.25% shareholder servicing fee) of the Class B Shares' average
daily net assets. At June 30, 1998 accrued distribution fees owed by the Fund
amounted to $16,591. For the six month period ended June 30, 1998, distribution
fees aggregated $102,794, of which $51,884 was attributable to the Class A
Shares and $50,910 was attributable to the Class B Shares.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the six month
period ended June 30, 1998 was $235, and the accrued liability was $1,225.
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 15 million shares of $.001 par
value capital stock (7 million Class A, 2 million Class B, 5 million
Institutional Class and 1 million undesignated). Transactions in shares of the
Fund were as follows:
<TABLE>
<CAPTION>
Class A Shares
------------------------------
For the
Six Month For the
Period Ended Year Ended
June 30, 1998* Dec. 31, 1997
-------------- -------------
<S><C>
Shares sold 464,950 1,256,866
Shares issued to shareholders on
reinvestment of dividends 44,807 146,244
Shares redeemed (279,648) (182,922)
----------- -----------
Net increase in shares outstanding 230,109 1,220,188
=========== ===========
Proceeds from sale of shares $ 6,997,040 $18,297,796
Value of reinvested dividends 678,416 2,192,511
Cost of shares redeemed (4,168,253) (2,675,100)
----------- -----------
Net increase from capital share transactions $ 3,507,203 $17,815,207
=========== ===========
</TABLE>
- ---------
* Unaudited
20
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
NOTE 3--concluded
<TABLE>
<CAPTION>
Class B Shares
-------------------------------
For the
Six Month For the
Period Ended Year Ended
June 30, 1998* Dec. 31, 1997
-------------- -------------
<S><C>
Shares sold 147,092 272,248
Shares issued to shareholders on
reinvestment of dividends 8,472 28,690
Shares redeemed (64,530) (60,099)
---------- ----------
Net increase in shares outstanding 91,034 240,839
========== ==========
Proceeds from sale of shares $2,215,827 $4,002,637
Value of reinvested dividends 127,807 428,928
Cost of shares redeemed (965,410) (864,613)
---------- ----------
Net increase from capital share transactions $1,378,224 $3,566,952
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Institutional Class Shares
-------------------------------
For the For the Period
Six Month March 31,
Period Ended 1997(1) through
June 30, 1998* Dec. 31, 1997
-------------- ---------------
<S><C>
Shares sold 47,072 18,118
Shares issued to shareholders on
reinvestment of dividends 290 1
Shares redeemed -- --
-------- --------
Net increase in shares outstanding 47,362 18,119
======== ========
Proceeds from sale of shares $703,400 $300,200
Value of reinvested dividends 4,318 9
Cost of shares redeemed -- --
-------- --------
Net increase from capital share transactions $707,718 $300,209
======== ========
</TABLE>
- ---------
(1) Commencement of operations.
* Unaudited
21
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 4--Investment Transactions
Excluding short-term obligations, purchases of investment securities
aggregated $11,503,107 and sales of investment securities aggregated $6,944,132
for the period ended June 30, 1998. At June 30, the payable for investments
purchased amounted to $121,378.
On June 30, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $5,573,485,
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $718,094.
NOTE 5--Net Assets
On June 30, 1998, net assets consisted of:
Paid-in capital:
Class A Shares $37,015,523
Class B Shares 9,003,479
Institutional Shares 1,007,928
Undistributed net investment income 14,312
Accumulated net realized gain from security transactions 1,279,655
Unrealized appreciation of investments 4,855,393
-----------
$53,176,290
===========
22
<PAGE>
FLAG INVESTORS REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Directors and Officers
RICHARD T. HALE
Chairman
James J. Cunnane CARL W. VOGT, ESQ.
Director Director
JOHN F. KROEGER WILLIAM K. MORRILL, JR.
Director President
LOUIS E. LEVY KEITH R. PAULEY
Director Executive Vice President
EUGENE J. MCDONALD JOSEPH A. FINELLI
Director Treasurer
REBECCA W. RIMEL AMY M. OLMERT
Director Secretary
TRUMAN T. SEMANS SCOTT J. LIOTTA
Director 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
<PAGE>
This page intentionally left blank.
<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 INVESTORS LOGO]
Growth
Flag Investors Emerging Growth Fund
Flag Investors Equity Partners Fund
Flag Investors International Fund
Specialty
Flag Investors Real Estate Securities Fund
Flag Investors Communications 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
Current Income
Flag Investors Cash Reserve Prime Shares
P.O. Box 515
Baltimore, Maryland 21203
800-767-FLAG
Distributed by:
ICC DISTRIBUTORS, INC.
S-A424/425/452
