Scudder
Pathway Series:
International Portfolio
Annual Report
August 31, 1998
Pure No-Load(TM) Funds
A mutual fund which seeks maximum total return by investing in a select mix of
international and global Scudder Funds.
A pure no-load(TM) fund with no commissions to buy, sell, or exchange shares.
SCUDDER (logo)
<PAGE>
Scudder Pathway Series: International Portfolio
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Date of Inception: 11/15/96 Total Net Assets as of Ticker Symbol: SPIPX
8/31/98: $8.82 million
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o For the abbreviated 11-month fiscal period ended August 31, 1998, Scudder
Pathway International Portfolio returned -10.31%, reflecting generally negative
investor sentiment abroad, especially toward the end of the period.
o With the exception of the United States and Europe, the world's stock markets
ended the period with negative returns as the Asian crisis deepened, profit
growth decelerated, and Russia devalued their currency and imposed a debt
moratorium.
o The differing performances of the world's markets highlighted the importance
of diversification and asset allocation in international investing.
Table of Contents
3 Letter from the Series' President 14 Financial Highlights
4 Performance Update 15 Notes to Financial Statements
5 Portfolio Summary 17 Report of Independent Accountants
6 Portfolio Management Discussion 18 Tax Information
8 Glossary of Investment Terms 20 Officers and Trustees
9 Portfolio Highlights 21 Investment Products and Services
10 Investment Portfolio 22 Scudder Solutions
11 Financial Statements
2 - Scudder Pathway Series: International Portfolio
<PAGE>
Letter from the Series' President
Dear Shareholders,
Over the abbreviated 11-month fiscal period, the economic crisis in the
emerging markets spread across the globe, causing investors to seek refuge in
safer havens such as U.S. Treasury bonds and stocks of large, familiar
companies. In the process, many other asset classes were driven down. In a
broad-based market downdraft such as this, shares of even fundamentally sound
companies can get hit hard.
As difficult as these sell-offs are to deal with, they can provide
extraordinary opportunities for those willing to endure short-term volatility.
Over the long-term, we believe that stocks with attractive fundamentals will
ultimately return to favor. In this challenging climate, we believe investors
should remain focused on their long-term investment goals and practice
diversification across domestic large- and small-cap stocks, bonds, and foreign
securities.
The Pathway Series portfolios weathered an often times difficult and
volatile period by maintaining exposure to a broad range of asset classes and by
pursuing a long-term approach. For this report, we asked lead portfolio manager
Ben Thorndike to discuss the market environment and the investment team's asset
allocation strategy for the 11-month period. Highlights of the team's strategy
and outlook begin on page 6.
For those of you who are interested in new Scudder funds, we recently
introduced two international funds: Scudder International Growth Fund -- which
seeks to invest in high growth opportunities in both developed and developing
markets, and Scudder International Value Fund -- which seeks to invest in
undervalued foreign securities. For further information on these new funds,
please call Scudder Investor Information at 1-800-225-2470.
Thank you for your investment in Scudder Pathway Series. If you have any
questions about your Fund, please call Scudder Investor Relations at the number
above, or visit our Internet Web site at http://funds.scudder.com.
Sincerely,
/s/Daniel Pierce
Daniel Pierce
President,
Scudder Pathway Series
3 - Scudder Pathway Series: International Portfolio
<PAGE>
PERFORMANCE UPDATE as of August 31, 1998
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Portfolio Index Comparisons
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Total Return
- -----------------------------------------------
Period Ended Growth of Average
8/31/98 $10,000 Cumulative Annual
- -----------------------------------------------
Scudder Pathway Series: International Portfolio
- -----------------------------------------------
1 Year $ 9,478 -5.22% -5.22%
Life of
Portfolio* $ 10,456 4.56% 2.52%
- -----------------------------------------------
MSCI ALL COUNTRY (EX U.S.) INDEX (75%),
JP MORGAN NON-U.S. GLOBAL GOVERNMENT BOND
INDEX (20%), 3-MONTH T-BILL (5%)
- -----------------------------------------------
1 Year $ 9,647 -3.53% -3.53%
Life of
Portfolio* $ 9,924 -.76% -.43%
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*The Portfolio commenced operations on November 15, 1996.
Index comparisons begin November 30, 1996.
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Growth of a $10,000 Investment
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A chart in the form of a line graph appears here, illustrating the Growth of a
$10,000 Investment. The data points from the graph are as follows:
Scudder Pathway Series: International Portfolio
Year Amount
- ----------------------
11/96* $10,000
2/97 $10,439
5/97 $10,984
8/97 $10,959
11/97 $10,686
2/98 $11,603
5/98 $12,304
8/98 $10,386
MSCI All Country (ex U.S.) Index
Year Amount
- ----------------------
11/96* $10,000
2/97 $ 9,889
5/97 $10,563
8/97 $10,511
11/97 $ 9,942
2/98 $11,050
5/98 $11,272
8/98 $ 9,728
MSCI All Country (ex U.S.) Index (75%),
JP Morgan Non-U.S. Global Government Bond
Index (20%), 3-month T-Bill (5%)
Year Amount
- ----------------------
11/96* $10,000
2/97 $ 9,807
5/97 $10,329
8/97 $10,288
11/97 $ 9,938
2/98 $10,793
5/98 $10,984
8/98 $ 9,924
The MSCI All Country (ex U.S.) Index is a market value-weighted measure of
stocks of 46 countries. The JP Morgan Non-U.S. Global Government Bond Index is a
market value-weighted measure of bonds excluding U.S. bonds. Index returns
assume reinvestment of dividends and do not reflect any fees or expenses.
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Returns and Per Share Information
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A chart in the form of a bar graph appears here, illustrating the Fund Total
Return (%) and Index Total Return (%) with the exact data points listed in the
table below.
1997(a) 1998(b)(c)
--------------------
Net Asset Value...... $13.59 $11.70
Income Dividends..... $ .25 $ .16
Capital Gains
Distributions........ $ .10 $ .35
Portfolio Total
Return (%)........... 16.58 -10.31
Blended Index Total
Return (%)........... 7.34 -7.55
Performance is historical, assumes reinvestment of all dividends and capital
gains, and is not indicative of future results. Total return and principal value
will fluctuate, so an investor's shares, when redeemed, may be worth more or
less than when purchased. If the Adviser had not maintained some of the
Underlying Funds' expenses, the total return for the Portfolio would have been
lower.
(a) For the period November 15, 1996 (commencement of operations) to September
30, 1997. Index comparisons begin November 30, 1996.
(b) For the eleven month period ended August 31, 1998.
(c) On August 12, 1998, the Board of Trustees of the Portfolio changed the
fiscal year end from September 30 to August 31.
4 - Scudder Pathway Series: International Portfolio
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Portfolio Summary as of August 31, 1998
THE PRINTED DOCUMENT CONTAINS A PIE CHART HERE:
PIE CHART TITLE:
Asset Allocation
CHART DATA:
Money Market 2%
Fixed Income 10%
Equity 88%
---------------------------------------
100%
---------------------------------------
CALLOUT:
The Portfolio's significant emphasis on international equity funds increased
slightly over the period.
Asset Class Ranges
Money Market 0-20%
Fixed Income Funds 0-40%
Equity Funds 60-100%
CALLOUT:
Portfolio allocations are derived from the risk profile for the Fund; changes
are expected to be modest and infrequent.
Portfolio Holdings
Scudder International Fund 55%
----------------------------------------
Scudder Greater Europe Growth Fund 12%
----------------------------------------
Scudder International Growth
and Income Fund 10%
----------------------------------------
Scudder Emerging Markets Growth Fund 7%
----------------------------------------
Scudder Emerging Markets Income Fund 6%
----------------------------------------
Scudder Latin America Fund 4%
----------------------------------------
Scudder International Bond Fund 4%
----------------------------------------
Scudder Cash Investment Trust 2%
----------------------------------------
100%
----------------------------------------
CALLOUT:
The majority of portfolio holdings outperformed their respective benchmarks, but
the overall weakness in the emerging markets held back returns for many
international investors.
For more complete details about the Portfolio's investments, see page 5. A
quarterly Fund Summary and Portfolio Holdings are available upon request.
5 - Scudder Pathway Series: International Portfolio
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Portfolio Management Discussion
We asked Benjamin W. Thorndike, lead portfolio manager of Scudder Pathway
Series: International Portfolio, to discuss the market environment and Scudder's
current investment strategy.
Q: For the 11-month fiscal period which ended August 31, 1998 there were more
dark clouds than bright spots in the foreign markets. How would you characterize
this environment?
A: It's been a difficult period for international investors. The Asian financial
crisis, which had been brewing since the devaluation of the Thai baht more than
a year ago, deepened and spread to other countries including the major economies
of South Korea and Japan. In August, investors were surprised with the
devaluation of the Russian currency and a moratorium on its local currency debt
payments. This sent shocks through the world's financial markets. Emerging
markets stocks fell sharply and investors fled to the relative safety of U.S.
Treasury securities and stocks of well known U.S. growth companies. At the end
of the period, markets in Europe and the United States were virtually the only
ones with positive returns. Despite the troubles in Asia and other emerging
markets, the fundamentals of many of the world's economies are still positive.
Q: How did the meltdown in the emerging markets come about?
A: A combination of overextended banking systems and excessive corporate
leverage dependent on short-term dollar financing contributed to the collapse of
the Asian currencies. The devaluations only added fuel to an already global
deflationary trend over the last few years. When we say deflationary, we're
describing the increasing tendency for prices of goods and commodities to
decline. After the devaluations, exports from Southeast Asia became cheaper and
the region's imports dropped off. As a result, companies in the United States
and Europe (which do significant business in Southeast Asia), are experiencing
lower sales and revenues. Diminished Asian demand also weakened corporate
pricing power globally, which has crimped earnings at many companies.
Q: To what do you attribute the crisis?
A: The problem lies not only with the world's economies but in the financial
markets. Over the last 10-15 years, in response to global competition, U.S.
businesses have restructured to succeed in the information age. Europe is not
far behind, and even many emerging markets have been on the same road. However,
liquidity and credit have been too freely available over the last five years,
and investors and lenders have exercised little caution in their financial
decisions. Analysis of risk has not been a major element in the investment
decision.
Q: Some Latin American markets have declined more than Asia. Why?
A: As the crisis unfolded in Russia and worsened in Asia, many Latin American
markets were the only source of liquidity for those invested in the emerging
markets. Latin America has traditionally depended on external savings to
supplement inadequate domestic savings in order to finance economic development.
While direct equity investment by foreign companies has grown rapidly in recent
years, the region still depends heavily on borrowed money. As a result, Latin
American markets are vulnerable when events in other emerging markets shake
6 - Scudder Pathway Series: International Portfolio
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investor confidence, despite otherwise favorable fundamentals in many countries.
Q: What should investors do in this environment?
A: It might be easy for some investors to look at what has happened over the
last 11 months and consider heading for the exits, so to speak, with regard to
investing. However, investing has always involved risk -- it just hasn't been as
visible until recently. We believe that recent events have actually created a
number of opportunities for long-term investors. For many companies with solid
earnings and growing businesses, valuations have become more attractive. In
addition, this has been a good opportunity to add to existing holdings at lower
prices.
Q: What is your outlook?
A: We think the world is headed for a period of slower, but sustainable growth
as it adjusts to the current deflationary environment. While much of the world's
attention has focused on the troubled emerging markets, we believe Europe -- an
important component of the world's economy -- continues to hold promise. Many
companies there are just beginning to restructure their businesses as
preparations are made for the introduction of a single currency at the start of
1999. This is a major event. Many established companies will be forced to change
in order to compete across Europe and globally. We think this will provide
opportunities for investors, and with the Portfolio's significant exposure to
Europe through several funds, we expect to participate in developments there.
Pathway Series:
International Portfolio
A team approach to investing
The Portfolio is managed by a team of Scudder Kemper Investments, Inc. (the
"Adviser") professionals who each play an important role in the Portfolios'
management process. Team members work together to develop investment
strategies and select securities for the Portfolio. They are supported by the
Adviser's large staff of economists, research analysts, traders, and other
investment specialists who work in our offices across the United States and
abroad. We believe our team approach benefits Fund investors by bringing
together many disciplines and leveraging our extensive resources. All members
of the Pathway investment team are members of Scudder's Global Asset
Allocation Committee, which is responsible for analyzing the global economy
and capital markets, integrating information from the firm's equity and fixed
income specialists, and developing the outlook for the major markets in which
a Portfolio invests.
Lead Portfolio Manager Benjamin W. Thorndike, who has 18 years of investment
experience, joined the Adviser in 1983 as a portfolio manager. Philip Fortuna,
Portfolio Manager, joined the Adviser in 1986 as manager of institutional
equity accounts. Maureen Allyn, Portfolio Manager, is the Adviser's Chief
Economist, a position she has held since 1989, and is responsible for
analyzing both the world and U.S. economies. Edward B. Baldini, Portfolio
Manager, joined the Adviser in 1995 as a member of the Growth and Income
Equity Management Group, focused on institutional client management.
7 - Scudder Pathway Series: International Portfolio
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Glossary of Investment Terms
ASSET ALLOCATION The distribution of assets among the major asset
classes, such as stocks, bonds, and money market
instruments. The asset allocation decision is based
on an investor's objective, investment horizon, and
risk tolerance. An investor with a long-term
investment horizon that is comfortable assuming
additional risk in seeking higher returns may decide
to allocate a higher proportion to stocks than bonds
or money markets.
CURRENCY DEVALUATION A significant decline of a currency's value relative
to other currencies, such as the U.S. dollar. A
devaluation may be prompted by currency trading or
foreign central bank intervention (or the lack of
intervention). For U.S. dollar investors who are
investing overseas, a devaluation of a foreign
currency can have the effect of reducing an
investment's total return.
DIVERSIFICATION The spreading of risk by investing in several asset
categories, industry sectors, or individual
securities. An investor with a broadly diversified
portfolio will likely receive some protection from
the price declines of an individual asset class.
FUNDAMENTAL RESEARCH Analysis of companies based on the projected
impact of management, products, sales, and earnings
on balance sheets and income statements. Distinct
from technical analysis, which evaluates the
attractiveness of a stock based on historical price
and trading volume movements, rather than the
financial results of the underlying company.
INTERNATIONAL MONETARY The IMF is an organization that focuses on lowering
FUND trade barriers and stabilizing currencies. While
also helping developing nations pay their debts, the
IMF usually imposes tough guidelines aimed at
lowering inflation, cutting imports, and raising
exports.
OVER/UNDER WEIGHTING Refers to the allocation of assets-- usually by
sector, industry, or country-- within a portfolio
relative to a benchmark index, e.g., the MSCI All
Country World (ex. U.S.) Index, or an investment
universe. For example, an investment portfolio that
overweights financial stocks holds a higher
percentage of finance stocks than the comparative
benchmark.
(Sources: Scudder Kemper Investments, Inc.; Barron's Dictionary of
Finance and Investment Terms)
8 - Scudder Pathway Series: International Portfolio
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Portfolio Highlights
Pathway International Portfolio
Pathway International Portfolio seeks to maximize total return by investing in a
select mix of established international mutual funds.
Performance
This report covers the abbreviated fiscal period from September 30, 1997 to
August 31, 1998. For the 11-month period, the International Portfolio returned
- -10.31% versus a -7.55% return for the Portfolio's custom benchmark (detailed
performance information is listed on page 4).
The foreign markets generally declined as the Asian crisis spread to other
emerging and developed markets, especially toward the end of the period. Markets
in Europe and the United States were virtually the sole providers of positive
returns while Asian, Latin American, and other emerging equity markets
experienced sharp price declines. Foreign sovereign bonds provided attractive
returns (in U.S. dollar terms) reflecting a "flight to quality" during this
period. While the Portfolio's overweighting in international equity funds (at
88% of assets) made a significant contribution to performance over the first
half of the period, it held back performance significantly relative to its
custom benchmark in the second half, as the equity markets declined sharply.
The Portfolio was anchored by International Fund, at 55% of assets, which
significantly outperformed the equity component of the Portfolio's custom
benchmark, the unmanaged MSCI All Country World (ex. U.S.) Index. A diversified
portfolio with a long-term track record, this Fund has served as a core holding
in the Portfolio. Reflecting the favorable environment and accelerating growth
in Europe, Greater Europe Growth Fund provided outstanding returns relative to
both the market and its peers for the period. In contrast, the emerging equity
markets experienced substantial losses. Despite significant outperformance on a
relative basis, the Portfolio's emerging markets equity fund holdings subtracted
from overall Portfolio performance. The Portfolio's two fixed income fund
holdings provided mixed results, with Emerging Markets Income Fund's sharply
negative return reflecting the crises in the emerging markets.
Portfolio Strategy
The ratio of equity-to-fixed income fund allocations was essentially unchanged
over the period, but several adjustments were made within the equity portion of
the Portfolio. An important contributor to performance, Greater Europe Growth
Fund's weighting was increased over the period from 5% to 12%, reflecting the
favorable conditions in the region. In the second half, International Fund was
reduced in favor of expanding diversification with the addition of International
Growth and Income Fund, which seeks to invest in stocks with above-average
dividend yields and attractive valuations. With regard to the Portfolio's
emerging markets fund holdings, the small position in Pacific Opportunities Fund
was eliminated in 1997, and holdings in Emerging Markets Growth and Latin
America funds were pared back over the second half. In the fixed income area,
holdings remained essentially unchanged over the period.
9 - Scudder Pathway Series: International Portfolio
<PAGE>
Investment Portfolio as of August 31, 1998
<TABLE>
<CAPTION>
Market
Shares Value ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market 2.0%
- ------------------------------------------------------------------------------------------------------------------------------
---------
Scudder Cash Investment Trust (Cost $174,285) ........................................... 174,285 174,285
---------
Fixed Income 9.6%
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Emerging Market Income Fund ..................................................... 82,464 521,998
Scudder International Bond Fund ......................................................... 33,171 325,078
- ------------------------------------------------------------------------------------------------------------------------------
Total Fixed Income (Cost $1,339,742) 847,076
- ------------------------------------------------------------------------------------------------------------------------------
Equity 88.4%
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Scudder Emerging Markets Growth Fund .................................................... 64,761 654,087
Scudder Greater Europe Growth Fund ...................................................... 40,693 1,014,478
Scudder International Fund .............................................................. 100,608 4,886,535
Scudder International Growth & Income Fund .............................................. 76,039 896,494
Scudder Latin America Fund .............................................................. 23,080 368,814
- ------------------------------------------------------------------------------------------------------------------------------
Total Equity (Cost $8,930,311) 7,820,408
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio -- 100.0% (Cost $10,444,338) (a) 8,841,769
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The cost for federal income tax purposes was $10,481,921. At August 31,
1998, net unrealized depreciation for all securities based on tax cost was
$1,640,152. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost
of $71,889 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $1,712,041.
The accompanying notes are an integral part of the financial statements.
10 - Scudder Pathway Series: International Portfolio
<PAGE>
Financial Statements
Statement of Assets and Liabilities
as of August 31, 1998 (Note D)
<TABLE>
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------------
Investments, at market (identified cost $10,444,338) ................ $ 8,841,769
Receivable for Portfolio shares sold ................................ 3,414
Income receivable ................................................... 2,399
----------------
Total assets ........................................................ 8,847,582
Liabilities
- ----------------------------------------------------------------------------------------------------------------------------
Payable for investments purchased ................................... 2,318
Payable for Portfolio shares redeemed ............................... 21,220
----------------
Total liabilities ................................................... 23,538
-------------------------------------------------------------------------------------------
Net assets, at market value $ 8,824,044
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Net Assets
- ----------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ................................. 63,920
Net unrealized appreciation (depreciation) on investments ........... (1,602,569)
Accumulated net realized gain (loss) ................................ 887,051
Paid-in capital ..................................................... 9,475,642
-------------------------------------------------------------------------------------------
Net assets, at market value $ 8,824,044
-------------------------------------------------------------------------------------------
Net Asset Value
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, offering and redemption price per share
($8,824,044 / 754,142 outstanding shares of beneficial
interest, $.01 par value, unlimited number of shares ----------------
authorized) ....................................................... $11.70
----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
11 - Scudder Pathway Series: International Portfolio
<PAGE>
Statement of Operations
for the Eleven Months Ended August 31, 1998 (Note D)
<TABLE>
<S> <C> <C>
Investment Income
- ----------------------------------------------------------------------------------------------------------------------------
Income:
Income distributions from Underlying Funds ........................... $ 134,059
-------------------------------------------------------------------------------------------
Net investment income 134,059
-------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investments
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss):
Investments .......................................................... 260,036
Capital gain distributions from Underlying Funds ..................... 828,098
----------------
1,088,134
Net unrealized appreciation (depreciation) during the period on ----------------
investments ........................................................ (2,329,442)
-------------------------------------------------------------------------------------------
Net gain (loss) on investment transactions (1,241,308)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations $ (1,107,249)
-------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
12 - Scudder Pathway Series: International Portfolio
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Period
November 15,
1996
For the Eleven (commencement
Months Ended of operations) to
August 31, September 30,
Increase (Decrease) in Net Assets 1998 (Note D) 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income ........................................ $ 134,059 $ 61,993
Net realized gain (loss) ..................................... 1,088,134 45,130
Net unrealized appreciation (depreciation) on
investments during the period .............................. (2,329,442) 726,873
---------------- ----------------
Net increase (decrease) in net assets resulting from
operations ................................................. (1,107,249) 833,996
---------------- ----------------
Distributions to shareholders from:
Net investment income ........................................ (126,802) (8,391)
---------------- ----------------
Net realized gain (loss) on investment transactions .......... (277,380) (3,356)
---------------- ----------------
Portfolio share transactions:
Proceeds from shares sold .................................... 5,040,380 12,327,560
Net asset value of shares issued to shareholders in
reinvestment of distributions .............................. 368,824 10,929
Cost of shares redeemed ...................................... (6,801,774) (1,457,693)
---------------- ----------------
Net increase (decrease) in net assets from Portfolio
share transactions ......................................... (1,392,570) 10,880,796
---------------- ----------------
Increase (decrease) in net assets ............................ (2,904,001) 11,703,045
Net assets at beginning of period ............................ 11,728,045 25,000
Net assets at end of period (including undistributed
net investment income of $63,920 and $53,602, ---------------- ----------------
respectively) .............................................. $ 8,824,044 $ 11,728,045
---------------- ----------------
Other Information
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period .................... 863,241 2,083
---------------- ----------------
Shares sold .................................................. 378,568 971,043
Shares issued to shareholders in reinvestment of
distributions .............................................. 30,182 918
Shares redeemed .............................................. (517,849) (110,803)
---------------- ----------------
Net increase (decrease) in Portfolio shares .................. (109,099) 861,158
---------------- ----------------
Shares outstanding at end of period .......................... 754,142 863,241
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
13 - Scudder Pathway Series: International Portfolio
<PAGE>
Financial Highlights
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.
<TABLE>
<CAPTION>
For the Period
For the November 15,
Eleven Months 1996
Ended (commencement
August 31, of operations) to
1998 (a) September 30,
(Note D) 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
----------------------------------
Net asset value, beginning of period .............................................. $ 13.59 $ 12.00
----------------------------------
Income from investment operations:
Net investment income ............................................................. .17 .31
Net realized and unrealized gain (loss) on investment transactions ................ (1.55) 1.63 (b)
----------------------------------
Total from investment operations .................................................. (1.38) 1.94
----------------------------------
Less distributions:
From net investment income ........................................................ (.16) (.25)
From net realized gain (loss) on investments ...................................... (.35) (.10)
----------------------------------
Total distributions ............................................................... (.51) (.35)
----------------------------------
----------------------------------
Net asset value, end of period .................................................... $11.70 $13.59
----------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Total Return (%) (d) .............................................................. (10.31)** 16.58**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ............................................ 9 12
Ratio of operating expenses to average daily net assets (%) (c) ................... -- --
Ratio of net investment income to average daily net assets (%) .................... 1.42* 1.23*
Portfolio turnover rate (%) ....................................................... 52.0* 35.1*
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) The amount shown for a share outstanding throughout the period does not
accord with the change in the aggregate gains and losses in the portfolio
securities during the period because of the timing of sales and
repurchases of Portfolio shares in relation to fluctuating market values
during the period.
(c) This Portfolio invests in other Scudder Funds, and although the Portfolio
did not incur any direct expenses for the period, the Portfolio did bear
its share of the operating, administrative and advisory expenses of the
Underlying Scudder Funds.
(d) Total return would have been lower if the Adviser had not maintained some
of the Underlying Funds' expenses.
* Annualized
** Not annualized
14 - Scudder Pathway Series: International Portfolio
<PAGE>
Notes to Financial Statements
A. Significant Accounting Policies
The International Portfolio (the "Portfolio") is a diversified series of Scudder
Pathway Series (the "Trust"). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company. The series is composed of six
separate diversified portfolios, four of which are currently offered. These
portfolios invest primarily in existing Scudder Funds (the "Underlying Scudder
Funds").
The Portfolio's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed by the Portfolio in the preparation of
its financial statements.
Security Valuation. Investments in the Underlying Scudder Funds are valued at
the net asset value per share of each Underlying Scudder Fund as of the close of
regular trading on the New York Stock Exchange. Money market instruments
purchased with an original maturity of sixty days or less are valued at
amortized cost.
Federal Income Taxes. The Portfolio's policy is to comply with the requirements
of the Internal Revenue Code, as amended, which are applicable to regulated
investment companies, and to distribute all of its taxable income to its
shareholders. Accordingly, the Portfolio paid no federal income taxes and no
provision for federal income taxes was required.
Distribution of Income and Gains. Distributions of net investment income are
made annually. During any particular year net realized gains, in excess of
available capital loss carryforwards, would be taxable to the Portfolio if not
distributed and, therefore, will be distributed to shareholders annually. An
additional distribution may be made to the extent necessary to avoid the payment
of a four percent federal excise tax.
The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. These
differences primarily relate to investments sold at a loss. As a result, net
investment income (loss) and net realized gain (loss) on investment transactions
for a reporting period may differ significantly from distributions during such
period. Accordingly, the Portfolio may periodically make reclassifications among
certain of its capital accounts without impacting the net asset value of the
Portfolio.
The Portfolio uses the identified cost method for determining realized gain or
loss on investments for both financial and federal income tax reporting
purposes.
Other. Investment security transactions are accounted for on a trade date basis.
Distributions of income and capital gains from the Underlying Scudder Funds are
recorded on the ex-dividend date. Income is recorded on the accrual basis.
B. Purchases and Sales of Securities
During the eleven months ended August 31, 1998, purchases and sales of
investment securities (excluding money market investments) aggregated $4,725,467
and $5,563,215, respectively.
15 - Scudder Pathway Series: International Portfolio
<PAGE>
C. Related Parties
Effective December 31, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") and The
Zurich Insurance Company ("Zurich"), an international insurance and financial
services organization, formed a new global investment organization by combining
Scudder's business with that of Zurich's subsidiary, Zurich Kemper Investments,
Inc. As a result of the transaction, Scudder changed its name to Scudder Kemper
Investments, Inc. ("Scudder Kemper" or the "Adviser"). The transaction between
Scudder and Zurich resulted in the termination of the Portfolio's Investment
Management Agreement with Scudder. However, a new Investment Management
Agreement (the "Management Agreement") between the Portfolio and Scudder Kemper
was approved by the Portfolio's Board of Trustees and by the Portfolio's
Shareholders. The Management Agreement, which is effective December 31, 1997, is
the same in all material respects as the corresponding previous Investment
Management Agreement, except that Scudder Kemper is the new investment adviser
to the Portfolio. In accordance with the Portfolio's Management Agreement with
Scudder Kemper, the Adviser regularly provides the Portfolio with continuing
investment management consistent with the Portfolio's investment objective.
On September 7, 1998, Zurich Insurance Company ("Zurich"), majority owner of the
Adviser, entered into an agreement with B.A.T Industries p.l.c. ("B.A.T")
pursuant to which the financial services businesses of B.A.T were combined with
Zurich's businesses to form a new global insurance and financial services
company known as Zurich Financial Services. Upon consummation of the
transaction, the Portfolio's Management Agreement with Scudder Kemper was deemed
to have been assigned and, therefore, terminated. The Board of Trustees of the
Portfolio has approved a new investment management agreement with Scudder
Kemper, which is substantially identical to the former Management Agreement,
except for the dates of execution and termination. The Board of Trustees of the
Portfolio will seek shareholder approval of the new investment management
agreement through a proxy solicitation that is currently scheduled to conclude
in mid-December.
Under the Special Servicing Agreement entered into by the Adviser, the
Underlying Scudder Funds, Scudder Service Corporation, Scudder Fund Accounting
Corporation, Scudder Investor Services, Inc., Scudder Trust Company and the
Portfolio, the Adviser arranges for all services pertaining to the operation of
the Portfolio. If the Trustees determine that the aggregate expenses of the
Portfolio are less than the estimated savings to the Underlying Scudder Funds
from the operation of the Portfolio, each of the Underlying Scudder Funds will
bear those expenses in proportion to the average daily value of its shares owned
by the Portfolio. Consequently, no Underlying Scudder Funds will be expected to
carry expenses that are in excess of the estimate of savings to the respective
underlying Funds. These estimated savings result from the elimination of
separate shareholder accounts which either currently are or have the potential
to be invested in the Underlying Scudder Funds. In the event that the financial
benefits to the Underlying Scudder Funds do not exceed aggregate expenses of the
Portfolio, the Adviser will pay certain costs, on behalf of the Portfolio. For
the eleven months ended August 31, 1998, the Adviser incurred expenses in the
amount of $89,958. In accordance with the Special Servicing Agreement, no
expenses were charged to the Portfolio during the period. The Adviser has
assumed the Portfolio's organizational costs.
D. Year End Change
On August 12, 1998, the Board of Trustees of the Portfolio changed the fiscal
year end from September 30 to August 31.
16 - Scudder Pathway Series: International Portfolio
<PAGE>
Report of Independent Accountants
To the Board of Trustees of Scudder Pathway Series and to the Shareholders of
Scudder Pathway Series: International Portfolio:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Scudder Pathway Series:
International Portfolio (one of the portfolios constituting the Scudder Pathway
Series) (the "Fund") at August 31, 1998, the results of its operations, the
changes in its net assets, and the financial highlights for each of the periods
indicated therein, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 1998 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
October 9, 1998
17 - Scudder Pathway Series: International Portfolio
<PAGE>
Tax Information
The Fund paid distributions of $.02 per share from net long-term capital gains
during its year ended August 31, 1998, none of which represents 20% rate gains.
Pursuant to Section 852 of the Internal Revenue Code, the Fund designates
$930,000 as capital gain dividends for its fiscal year ended August 31, 1998, of
which 90% represents 20% rate gains.
Please consult a tax adviser if you have questions about federal or state income
tax laws, or on how to prepare your tax returns. If you have specific questions
about your Scudder Fund account, please call a Scudder Investor Relations
Representative at 1-800-225-5163.
18 - Scudder Pathway Series: International Portfolio
<PAGE>
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intentionally
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19 - Scudder Pathway Series: International Portfolio
<PAGE>
Officers and Trustees
Daniel Pierce*
President
Dr. Rosita P. Chang
Trustee; Professor of Finance,
University of Rhode Island
Edgar R. Fiedler
Trustee; Senior Fellow and
Economic Counsellor, The
Conference Board, Inc.
Peter B. Freeman
Trustee; Corporate Director and
Trustee
Dr. J. D. Hammond
Trustee; Dean, Smeal College of
Business Administration,
Pennsylvania State University
Richard M. Hunt
Trustee; University Marshal and
Senior Lecturer, Harvard
University
Jerard K. Hartman*
Vice President
Thomas W. Joseph*
Vice President
Thomas F. McDonough*
Vice President and Secretary
Kathryn L. Quirk*
Vice President and Assistant
Secretary
John R. Hebble*
Treasurer
Caroline Pearson*
Assistant Secretary
*Scudder Kemper Investments, Inc.
20 - Scudder Pathway Series: International Portfolio
<PAGE>
Investment Products and Services
The Scudder Family of Funds+++
- --------------------------------------------------------------------------------
Money Market
- ------------
Scudder U.S. Treasury Money Fund
Scudder Cash Investment Trust
Scudder Money Market Series --
Premium Shares*
Managed Shares*
Scudder Government Money Market Series --
Managed Shares*
Tax Free Money Market+
- ----------------------
Scudder Tax Free Money Fund
Scudder Tax Free Money Market Series--
Managed Shares*
Scudder California Tax Free Money Fund**
Scudder New York Tax Free Money Fund**
Tax Free+
- ---------
Scudder Limited Term Tax Free Fund
Scudder Medium Term Tax Free Fund
Scudder Managed Municipal Bonds
Scudder High Yield Tax Free Fund
Scudder California Tax Free Fund**
Scudder Massachusetts Limited Term Tax Free Fund**
Scudder Massachusetts Tax Free Fund**
Scudder New York Tax Free Fund**
Scudder Ohio Tax Free Fund**
Scudder Pennsylvania Tax Free Fund**
U.S. Income
- -----------
Scudder Short Term Bond Fund
Scudder Zero Coupon 2000 Fund
Scudder GNMA Fund
Scudder Income Fund
Scudder High Yield Bond Fund
Global Income
- -------------
Scudder Global Bond Fund
Scudder International Bond Fund
Scudder Emerging Markets Income Fund
Asset Allocation
- ----------------
Scudder Pathway Conservative Portfolio
Scudder Pathway Balanced Portfolio
Scudder Pathway Growth Portfolio
Scudder Pathway International Portfolio
U.S. Growth and Income
- ----------------------
Scudder Balanced Fund
Scudder Dividend & Growth Fund
Scudder Growth and Income Fund
Scudder S&P 500 Index Fund
Scudder Real Estate Investment Fund
U.S. Growth
- -----------
Value
Scudder Large Company Value Fund
Scudder Value Fund***
Scudder Small Company Value Fund
Scudder Micro Cap Fund
Growth
Scudder Classic Growth Fund***
Scudder Large Company Growth Fund
Scudder Development Fund
Scudder 21st Century Growth Fund
Global Equity
- -------------
Worldwide
Scudder Global Fund
Scudder International Value Fund
Scudder International Growth and Income Fund
Scudder International Fund++
Scudder International Growth Fund
Scudder Global Discovery Fund***
Scudder Emerging Markets Growth Fund
Scudder Gold Fund
Regional
Scudder Greater Europe Growth Fund
Scudder Pacific Opportunities Fund
Scudder Latin America Fund
The Japan Fund, Inc.
Industry Sector Funds
- ---------------------
Choice Series
Scudder Financial Services Fund
Scudder Health Care Fund
Scudder Technology Fund
Preferred Series
- ----------------
Scudder Tax Managed Growth Fund
Scudder Tax Managed Small
Company Fund
Retirement Programs and Education Accounts
- --------------------------------------------------------------------------------
Retirement Programs
- -------------------
Traditional IRA
Roth IRA
SEP IRA
Keogh Plan
401(k), 403(b) Plans
Scudder Horizon Plan**+++ +++
(a variable annuity)
Education Accounts
- ------------------
Education IRA
UGMA/UTMA
Closed-End Funds#
- --------------------------------------------------------------------------------
The Argentina Fund, Inc.
The Brazil Fund, Inc.
The Korea Fund, Inc.
Montgomery Street Income Securities, Inc.
Scudder Global High Income Fund, Inc.
Scudder New Asia Fund, Inc.
Scudder New Europe Fund, Inc.
Scudder Spain and Portugal Fund, Inc.
For complete information on any of the above Scudder funds, including management
fees and expenses, call or write for a free prospectus. Read it carefully before
you invest or send money. +++Funds within categories are listed in order from
expected least risk to most risk. Certain Scudder funds may not be available for
purchase or exchange. +A portion of the income from the tax-free funds may be
subject to federal, state, and local taxes. *A class of shares of the Fund.
**Not available in all states. ***Only the Scudder Shares of the Fund are part
of the Scudder Family of Funds. ++Only the International Shares of the Fund are
part of the Scudder Family of Funds. +++ +++A no-load variable annuity contract
provided by Charter National Life Insurance Company and its affiliate, offered
by Scudder's insurance agencies, 1-800-225-2470. #These funds, advised by
Scudder Kemper Investments, Inc., are traded on the New York Stock Exchange and,
in some cases, on various other stock exchanges.
21 - Scudder Pathway Series: International Portfolio
<PAGE>
Scudder Solutions
<TABLE>
<CAPTION>
Convenient ways to invest, quickly and reliably:
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Automatic Investment Plan QuickBuy
A convenient investment program in which money is Lets you purchase Scudder fund shares
electronically debited from your bank account monthly to electronically, avoiding potential mailing delays;
regularly purchase fund shares and "dollar cost average" money for each of your transactions is
-- buy more shares when the fund's price is lower and electronically debited from a previously designated bank
fewer when it's higher, which can reduce your average account.
purchase price over time.*
Automatic Dividend Transfer Payroll Deduction and Direct Deposit
The most timely, reliable, and convenient way to Have all or part of your paycheck -- even government
purchase shares -- use distributions from one Scudder checks -- invested in up to four Scudder funds at
fund to purchase shares in another, automatically one time.
(accounts with identical registrations or the same
social security or tax identification number).
* Dollar cost averaging involves continuous investment in securities regardless of price
fluctuations and does not assure a profit or protect against loss in declining markets.
Investors should consider their ability to continue such a plan through periods of low price
levels.
Around-the-clock electronic account service and information, including some transactions:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Automated Information Line: SAIL(TM) -- Scudder's Web Site -- http://funds.scudder.com
1-800-343-2890
Scudder Electronic Account Services: Offering
Personalized account information, the ability to account information and transactions, interactive
exchange or redeem shares, and information on other worksheets, prospectuses and applications for all
Scudder funds and services via touchtone telephone. Scudder funds, plus your current asset allocation,
whenever you need them. Scudder's Site also
provides news about Scudder funds, retirement
planning information, and more.
Retirees and those who depend on investment proceeds for living expenses can enjoy these convenient,
timely, and reliable automated withdrawal programs:
- ------------------------------------------------------------------------------------------------------------------------------
Automatic Withdrawal Plan QuickSell
You designate the bank account, determine the schedule Provides speedy access to your money by
(as frequently as once a month) and amount of the electronically crediting your redemption proceeds
redemptions, and Scudder does the rest. to the bank account you previously designated.
Distributions Direct
Automatically deposits your fund distributions into the
bank account you designate within three business days
after each distribution is paid.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
22 - Scudder Pathway Series: International Portfolio
<PAGE>
Mutual Funds and More -- Brokerage and Guidance Services:
- ------------------------------------------------------------------------------------------------------------------------------
Scudder Brokerage Services Scudder Portfolio Builder
Offers you access to a world of investments, A free service designed to help suggest ways investors like
including stocks, corporate bonds, Treasuries, plus you can diversify your portfolio among domestic and global,
over 8,000 mutual funds from at least 150 mutual as well as equity, fixed-income, and money market funds,
fund companies. And Scudder Fund Folio(SM) provides using Scudder funds.
investors with access to a marketplace of more than
500 no-load funds from well-known companies--with no Personal Counsel from Scudder(SM)
transaction fees or commissions. Scudder
shareholders can take advantage of a Scudder Developed for investors who prefer the benefits of no-load
Brokerage account already reserved for them, with funds but want ongoing professional assistance in
no minimum investment. For information about managing a portfolio. Personal Counsel(SM) is a highly
Scudder Brokerage Services, call 1-800-700-0820. customized, fee-based asset management service for
individuals investing $100,000 or more.
Fund Folio funds held less than six months will be charged a fee for redemptions. You can buy
shares directly from the fund itself or its principal underwriter or distributor without
paying this fee. Scudder Brokerage Services, Inc., 42 Longwater Drive, Norwell, MA 02061.
Member SIPC.
Personal Counsel From Scudder(SM) and Personal Counsel(SM) are service marks of and represent a
program offered by Scudder Investor Services, Inc., Adviser.
For more information about these services, call a Scudder representative at 1-800-225-5163
- ------------------------------------------------------------------------------------------------------------------------------
Additional Information on How to Contact Scudder:
- ------------------------------------------------------------------------------------------------------------------------------
For existing account services and transactions Please address all written correspondence to
Scudder Investor Relations -- 1-800-225-5163 The Scudder Funds
P.O. Box 2291
For establishing 401(k) and 403(b) plans Boston, Massachusetts
Scudder Defined Contribution Services -- 02107-2291
1-800-323-6105
Or Stop by a Scudder Investor Center
For information about The Scudder Funds, including Many shareholders enjoy the personal, one-on-one service of
additional applications and prospectuses, or for the Scudder Investor Centers. Check for an Investor Center near
answers to investment questions you -- they can be found in the following cities:
Scudder Investor Relations -- 1-800-225-2470 Boca Raton Chicago San Francisco
[email protected] Boston New York
</TABLE>
23 - Scudder Pathway Series: International Portfolio
<PAGE>
About the Fund's Adviser
Scudder Kemper Investments, Inc., is one of the largest and most experienced
investment management oganizations worldwide, managing more than $230 billion in
assets globally for mutual fund investors, retirement and pension plans,
institutional and corporate clients, insurance companies, and private family and
individual accounts. It is one of the ten largest mutual fund companies in the
United States.
Scudder Kemper Investments has a rich heritage of innovation, integrity, and
client-focused service. In 1997, Scudder, Stevens & Clark, Inc., founded 79
years ago as one of the nation's first investment counsel organizations, joined
the Zurich Group. As a result, Zurich's subsidiary, Zurich Kemper Investments,
Inc., with 50 years of mutual fund and investment management experience, was
combined with Scudder. Headquartered in New York, Scudder Kemper Investments
offers a full range of investment counsel and asset management capabilities,
based on a combination of proprietary research and disciplined, long-term
investment strategies. With its global investment resources and perspective,
the firm seeks opportunities in markets throughout the world to meet the needs
of investors.
Scudder Kemper Investments, Inc., the global asset management firm, is a member
of the Zurich Group. The Zurich Group is an internationally recognized leader in
financial services, including property/casualty and life insurance, reinsurance,
and asset management.
This information must be preceded or accompanied by a current prospectus.
Portfolio changes should not be considered recommendations for action by
individual investors.
SCUDDER
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