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SPECTRA | Meeting the challenge
FUND | of investing
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Annual Report
October 31, 1997
December 3, 1997
Fellow Shareholders:
A YEAR-TO-DATE REVIEW
While the fiscal year ended October 31, 1997 resulted in strong performance
returns for all of the major stock market indices, the road was not a smooth
one. Thus far, the calendar year can be divided into two parts. The first part
took place from January all the way through the 27th of October. This period
was generally very positive for the market, but was punctuated by several sharp
downward corrections (e.g., March--April and August--September). The main focus
of investors during this period was the same as it had been since March of
1996--whether or not the Fed would raise rates. Against this background, it is
important to understand that most economists have consistently misunderstood
the nature of the market and the economy. While it is true that the economy was
strong for the first three quarters of 1997, dropping the unemployment rate to
a twenty-four year low of 4.7%, there was no resulting increase in inflation as
most observers had been expecting. In fact, inflation dropped throughout the
year until it finally attained a level which is the lowest in thirty-two years.
The broadest measure of this low inflation is the implicit price deflator,
which fell to a 1.4% annual rate in the third quarter. This occurred despite a
4.9% increase in GDP in the first quarter, a 3.3% increase in the second
quarter and a 3.3% (revised) increase in the third quarter.
Because of the concern about a possible build-up in inflationary pressures,
investors and economists have been primarily concerned with the level of
economic activity. As recently as October 8th, for example, the market was
still focusing on excess strength in the economy. That day, comments from Alan
Greenspan hit both the stock and bond markets hard. In his comments, Greenspan
rebutted the developing theory that there was a new economic paradigm which
allowed for rapid economic expansion without inflation due to improved
productivity. On that day, just over two months ago, the long-bond traded at
6.37% in response to his comments. A week later, the PPI, which had been
negative for six months, shot up .5% in September, further aggravating the
situation.
As it had for eighteen months, Wall Street was nervously awaiting the Federal
Open-Market Committee meeting in November and many expected a rate increase.
Then, on October 27th, the market underwent a gigantic change with the Dow
falling 554 points to 7161, the largest point drop in the history of the
market. This drop was occasioned by a collapse of the Hong Kong market which in
turn had been precipitated by weaknesses in currency markets of other Asian
countries. By November 19th, the stock market had recovered most of its loss
and closed at 7725, higher than its close of October 24th, the Friday before
the big slide. Recently the Dow re-penetrated 8000. It is fair to say, however,
that most of the rebound has been denominated by blue-chip stocks and
utilities, which has caused the S&P 500 to outdistance other market indices as
well as growth stocks in general. The fabric of the market is now very
different than it was prior to the events of late October. The differences are
as follows:
1. It seems fairly obvious that the Federal Reserve will not raise
rates. It declined to do so in November, and most probably will
refrain from doing so in the near future. This is because turmoil
in the currency markets, especially in Asia, has taken center
stage. Consequently, raising rates would exacerbate the trade
imbalance by leading to a stronger dollar and further hurt weak
Asian countries.
2. There is a rapidly emerging viewpoint that the problem with the
economy is not potential inflation, but potential deflation. This
is a result of pressures brought to bear on the American economy by
the stronger dollar, as well as weakness in Asian economics forcing
them into competitive exporting.
The other side of the coin is, of course, that our own exports will
doubtlessly suffer. To put things in perspective, exports from the
United States account for 11% of our GDP, with 2% aimed at the
affected countries of Japan, Korea, Malaysia, Thailand, Philippines
and Indonesia. Presumably, our exports to these countries could
fall as much as 20% which would mean a reduction in GDP of 1/2 of
1%. Obviously, this is a very crude number, but it gives an
indication of the effect.
3. The debt market has reacted to the turmoil in Asia, creating an
offsetting impulse in the market. The long-bond has now fallen to a
yield of 6.01%, down from 6.91% six months ago. This has caused a
considerable flattening of the yield curve. Ninety-day T-bills are
actually higher than they were six months ago and are trading at
5.24%, or only 77 basis points lower than the long-bond. This
flattening of the yield curve suggests that three things can
happen:
1) The price on the long-bond will drop to reassert a more
normal relationship.
2) The Fed will lower interest rates to avert an economic
slowdown.
3) The economy will probably slow, causing the entire structure
of the yield curve to fall, ultimately leading the Fed to
lower interest rates, perhaps after the yield curve inverts.
I believe that given the possibility of a slowing economy, number
one is unlikely, number two is remote at present, and number three
is quite likely, perhaps in 1998.
4. In terms of valuation, the increase in the bond market has made
stocks much more attractive. Presently, the earnings yield on the
S&P 500 is 80% of the yield on the long-bond, which is higher than
the fifteen year average. On our short-term model, the Dow is fully
valued but not over valued. On balance, I would say valuation looks
good. One possibility is that p/e ratios will get to 20 times 1998
EPS next year, driven by low inflation and low interest rates. As
our bottom-up forecast of Dow earnings is $486 per share, this
suggests a Dow of 9720. Let's all hope! Furthermore, while growth
stocks have rallied somewhat this year, at 1.4 times the market
multiple they are still at historically low p/e levels. This is a
function of the significant drop in interest rates. Since quality
growth stocks have typically traded at 1.5 to 2 times the market
multiple, we believe that there is considerable room for further
multiple expansion in the months ahead.
PORTFOLIO MATTERS
The Fund's total return for the year was 26.45% versus a return of 32.11% for
the S&P 500. For most of 1997, investors have been primarily concerned that the
economy was growing too quickly, unemployment levels were too low, and
inflation was just around the corner. It was presumed that these concerns would
lead to a series of increases in Federal Reserve driven rates. The resulting
defensive positioning of investors was characterized by a "flight to quality,"
with investors favoring blue-chip type stocks with predictable earnings over
traditional growth stocks with more explosive earnings potential. Stocks of
companies which are expected to increase their earnings at a faster rate, which
are the types of stocks in which the Fund typically invests, did not fare as
well. Moreover, when the market is apprehensive about the economic future it is
generally not willing to pay high p/e multiples for growth stocks. As a
consequence, very fast growing companies experienced a severe multiple
compression, most notably small cap growth companies. As the Fund employs an
"allcap" (small, medium and large capitalizations) portfolio management
strategy, exposure to small cap growth stocks in the first half of the year
negatively impacted the Fund's return relative to the larger averages,
specifically the S&P 500. Given the possibility of a slowing economy and low
inflation in the coming year, we expect that growth stocks, which are currently
selling at low multiples, should do very well.
LOOKING AHEAD
How can we summarize? I believe that the problems in southeast Asia have a
deflationary component and will result in some slowing of our economy over the
next few years. On the other hand, I believe our economy seems to be in
sufficiently good shape due to low unemployment levels and high productivity to
withstand some slowing. I believe the fourth quarter will be slower than the
third, with growth of possibly 2.5%. Evidence that the economy is starting to
slow is beginning to appear. The most obvious data point is the National
Association of Purchasing Managers Index released several days ago. It fell to
54.4 in November from 56 in October. While this is still positive, it is well
below July's peak of 58.6. Auto sales have also been slow and retail sales are
not that robust, dropping 1.8% in the first week of November. However, those
who are predicting a dire slowdown may be sorely disappointed. The lower
interest rates are spurring real estate activity, leading housing starts to an
eight month high in October. Consumer confidence also remains strong despite
the problems in Asia. This is hardly surprising since most Americans have a
very localized view of the world and probably will not be concerned about Asia
until they see some actual effects on their own economic conditions.
This, plus the low inflation should keep the Federal Reserve from raising rates
for some time. Moreover, an overall pattern of lower interest rates could
result by year-end. I believe there is a strong chance that the yield on the
long-bond will fall below 6% by year-end. Because of the slowing economy, I
believe earnings will increase next year, but modestly. P/E ratios, however,
could reach very high levels because of the lack of inflation and lower
interest rates. Thus, I am still bullish on stocks, especially domestic growth
stocks.
Respectfully submitted,
/s/ DAVID D. ALGER
David D. Alger
President
SPECTRA FUND
$10,000 HYPOTHETICAL INVESTMENT ON JULY 1, 1987
<TABLE>
<CAPTION>
Spectra Fund S&P 500 Index
------------ -------------
<S> <C> <C>
7/1/87.................... $ 10,000 $ 10,000
6/30/88................... $ 9,864 $ 9,311
6/30/89................... $ 10,946 $ 11,223
6/30/90................... $ 13,656 $ 13,074
6/30/91................... $ 15,790 $ 14,041
6/30/92................... $ 17,630 $ 15,927
6/30/93................... $ 21,801 $ 18,098
6/30/94................... $ 25,622 $ 18,353
10/31/94.................. $ 28,166 $ 19,681
10/31/95.................. $ 44,423 $ 24,887
10/31/96.................. $ 50,055 $ 30,883
10/31/97.................. $ 63,295 $ 40,802
</TABLE>
The chart above illustrates the growth in value of a hypothetical $10,000
investment made in Spectra Fund and the S & P 500 Index on July 1, 1987. During
the period from July 1, 1987 through February 11, 1996, the Fund was organized
as a Massachusetts corporation and operated as a closed-end investment company.
The figures for both Spectra Fund and the S & P 500 Index, an unmanaged index
of common stocks, include reinvestment of dividends. Effective October 31,
1994, Spectra changed its fiscal year end from June 30 to October 31.
PERFORMANCE COMPARISON THROUGH OCTOBER 31, 1997
<TABLE>
<CAPTION>
Average Annual Return
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Spectra Fund 26.45% 27.86% 22.51%
S & P 500 Index 32.11% 19.87% 17.17%
-----------------------------
</TABLE>
The Fund's average annual total returns include changes in share price and
reinvestment of dividends and capital gain distributions at market value. Past
performance does not guarantee future results. Investment return and principal
will fluctuate and the Fund's shares when redeemed may be worth more or less
than their original cost.
SPECTRA FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Shares Common Stocks--89.1% Value
------ -------------------------------------- -----------
<S> <C> <C>
AEROSPACE--1.4%
22,200 Sundstrand Corp....................... $ 1,207,125
-----------
APPAREL--.4%
8,600 Tommy Hilfiger Corporation*........... 340,242
-----------
APPLIANCES & TOOLS--2.3%
43,700 Sunbeam Corp.......................... 1,980,177
-----------
AUTOMOTIVE EQUIPMENT & SERVICES--1.0%
30,000 Avis Rent A Car Inc.*................. 823,140
-----------
BROADCASTING--1.8%
58,600 Westinghouse Electric Corp............ 1,549,267
-----------
CHEMICALS--.6%
8,300 DuPont E.I. De Nemours & Co........... 472,062
-----------
COMMUNICATIONS--3.2%
14,900 America Online Inc.*.................. 1,147,300
20,000 Jacor Communications Inc.*............ 837,500
22,200 WorldCom Inc.*........................ 746,475
-----------
2,731,275
-----------
COMMUNICATION EQUIPMENT--7.5%
40,000 Advanced Fibre Communications Inc.*... 1,162,520
50,300 Bay Networks Inc.*.................... 1,590,738
24,800 CIENA Corporation*.................... 1,364,000
18,800 Cisco Systems, Inc.*.................. 1,542,182
13,200 Tellabs, Inc.*........................ 712,800
-----------
6,372,240
-----------
COMPUTER RELATED & BUSINESS
EQUIPMENT--6.0%
28,400 Compaq Computer Corporation*.......... 1,810,500
42,400 Electronics For Imaging Inc.*......... 1,982,200
10,700 International Business Machines Corp.. 1,049,274
10,000 Quantum Corp.*........................ 316,250
-----------
5,158,224
-----------
COMPUTER SERVICES--.7%
6,100 Sterling Commerce, Inc.*.............. 202,447
23,500 Transaction Network Services Inc.*.... 390,688
-----------
593,135
-----------
COMPUTER SOFTWARE--8.1%
12,500 CBT Group PLC ADS*.................... 959,375
13,000 Citrix Systems, Inc.*................. 954,694
15,000 J.D. Edwards & Co.*................... 510,000
21,000 HBO & Company......................... 913,500
19,000 Microsoft Corporation*................ 2,470,000
17,900 Saville Systems PLC ADR*.............. 1,069,525
-----------
6,877,094
-----------
CONGLOMERATE--2.9%
5,100 General Electric Co................... $ 329,270
57,182 Tyco International Ltd................ 2,158,620
-----------
2,487,890
-----------
ENERGY & ENERGY SERVICES--5.1%
30,500 Diamond Offshore Drilling Inc......... 1,898,625
19,000 Nabors Industries Inc.*............... 781,375
9,400 Schlumberger Ltd...................... 822,500
25,000 Unifab International Inc.*............ 800,000
-----------
4,302,500
-----------
FINANCIAL SERVICES--8.4%
22,300 Bank of New York Inc.................. 1,049,505
4,800 Citicorp.............................. 600,302
18,300 E*TRADE Group, Inc.*.................. 565,012
21,600 Federal Home Loan Mortgage Corp....... 818,100
12,300 First Union Corp...................... 603,475
14,800 Household International Inc........... 1,676,100
7,700 Money Store, Inc. (The)............... 218,488
14,850 Morgan Stanley, Dean Witter, Discover
& Co................................. 727,650
25,500 Schwab (Charles) Corporation (The).... 870,188
-----------
7,128,820
-----------
FOODS & BEVERAGES--.5%
10,000 PepsiCo., Inc......................... 368,130
-----------
HEALTH CARE--4.6%
43,100 Guidant Corp.......................... 2,478,250
13,700 McKesson Corp......................... 1,470,188
-----------
3,948,438
-----------
INSURANCE--1.3%
10,500 American International Group, Inc..... 1,071,662
-----------
LEISURE & ENTERTAINMENT--1.7%
4,500 Carnival Corporation Class A.......... 218,250
47,900 International Game Technology......... 1,224,468
-----------
1,442,718
-----------
MEDICAL DEVICES--1.0%
35,000 Biomet Inc............................ 872,830
-----------
MEDICAL SERVICES--.5%
18,000 PhyCor, Inc.*......................... 415,134
-----------
OIL & GAS--2.0%
29,000 Halliburton Co........................ 1,729,125
-----------
PHARMACEUTICALS--12.8%
23,600 Bristol Myers Squibb Co............... $ 2,070,900
28,600 Elan Corp. PLC ADR*................... 1,426,425
24,000 Eli Lilly & Company................... 1,605,000
8,600 Merck & Co., Inc...................... 767,550
17,700 Pfizer Inc............................ 1,252,275
35,300 Schering-Plough Corporation........... 1,979,024
12,200 Warner-Lambert Co..................... 1,746,894
-----------
10,848,068
-----------
POLLUTION CONTROL--2.2%
49,300 USA Waste Services, Inc.*............. 1,824,100
-----------
RETAILING--5.7%
30,000 Home Depot, Inc....................... 1,668,750
17,000 Rite Aid Corp......................... 1,009,375
11,700 Staples Inc.*......................... 307,125
53,100 Wal-Mart Stores Inc................... 1,865,138
-----------
4,850,388
-----------
SEMICONDUCTORS--5.9%
41,600 Altera Corporation*................... 1,846,000
30,100 Linear Technology Corporation......... 1,892,538
8,200 Maxim Integrated Products, Inc.*...... 543,250
7,200 Texas Instruments, Incorporated....... 768,154
-----------
5,049,942
-----------
SEMICONDUCTOR CAPITAL EQUIPMENT--1.5%
11,400 Applied Materials Inc.*............... 380,475
23,400 Teradyne, Inc.*....................... 876,049
-----------
1,256,524
-----------
Total Common Stocks
(Cost $69,681,119)................... 75,700,250
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Short-Term Corporate Notes--14% Value
- ----------- ----------------------------------- -----------
<S> <C> <C>
$ 1,700,000 Bell Atlantic Network Funding Co.,
5.60%, 11/14/97 .................. $ 1,696,562
880,000 Cooperative Association of Tractor
Dealers Inc., 5.53%, 11/3/97...... 879,730
800,000 Cooperative Association of Tractor
Dealers Inc., 5.57%, 11/6/97...... 799,381
1,000,000 Ford Motor Credit Company, 5.60%,
11/13/97.......................... 998,134
530,000 GTE Corp., 5.62%, 11/4/97.......... 529,752
993,000 GTE Funding Inc., 5.56%, 11/6/97... 992,233
1,700,000 McDonald's Corp., 5.57%, 11/5/97... 1,698,948
1,130,000 Mitsui & Co. (USA) Inc., 5.51%,
11/6/97........................... 1,129,135
1,350,000 Triple-A One Plus Funding Corp.,
5.55%, 11/5/97(a)................. 1,349,168
1,880,000 USAA Capital Corporation, 5.55%,
11/6/97........................... 1,878,550
-----------
Total Short-Term Corporate Notes
(Cost $11,951,593)................ 11,951,593
-----------
Total Investments (Cost $81,632,712)(b).. 103.1% 87,651,843
------ -----------
Liabilities in Excess of Other Assets.... (3.1) (2,663,663)
------ -----------
Net Assets............................... 100.0% $84,988,180
====== ===========
<FN>
- -------------------
<F*> Non-income producing security.
<Fa> Pursuant to Securities and Exchange Commission Rule 144A, these
securities may be sold prior to their maturity only to qualified
institutional buyers.
<Fb> At October 31, 1997, the net unrealized appreciation on investments,
based on cost for federal income tax purposes of $81,632,712, amounted to
$6,019,131 which consisted of aggregate gross unrealized appreciation of
$8,049,157 and aggregate gross unrealized depreciation of $2,030,026.
</FN>
</TABLE>
See Notes to Financial Statements.
SPECTRA FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (cost $81,632,712), see
accompanying schedule of investments......................... $87,651,843
Cash.......................................................... 194,845
Receivable for investment securities sold..................... 2,968,001
Receivable for shares of beneficial interest sold............. 712,988
Dividends receivable.......................................... 16,260
Prepaid expenses.............................................. 9,478
-----------
Total Assets.............................................. 91,553,415
-----------
LIABILITIES:
Payable for investment securities purchased................... $6,259,198
Investment advisory fee payable............................... 104,255
Payable for shares of beneficial interest redeemed............ 124,920
Shareholder servicing fee payable............................. 17,376
Trustees' fees payable........................................ 855
Accrued expenses.............................................. 58,631
----------
Total Liabilities......................................... 6,565,235
-----------
NET ASSETS...................................................... $84,988,180
===========
NET ASSETS CONSIST OF:
Paid-in capital............................................... $78,967,491
Undistributed net investment income (accumulated loss)........ (1,254,867)
Undistributed net realized gain .............................. 1,256,425
Net unrealized appreciation................................... 6,019,131
-----------
NET ASSETS...................................................... $84,988,180
===========
Shares of beneficial interest outstanding--Note 4............... 4,939,489
===========
NET ASSET VALUE PER SHARE....................................... $ 17.21
===========
</TABLE>
See Notes to Financial Statements.
SPECTRA FUND
STATEMENT OF OPERATIONS
For the year ended October 31, 1997
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends............................................... $ 233,773
Interest................................................ 168,150
----------
Total Income.......................................... 401,923
Expenses:
Investment advisory fees--Note 2(a)..................... $ 573,068
Shareholder servicing fees--Note 2(e)................... 95,511
Registration fees....................................... 55,810
Shareholder reports..................................... 32,225
Custodian and transfer agent fees....................... 26,003
Professional fees....................................... 22,100
Trustees' fees.......................................... 1,000
Miscellaneous........................................... 2,349
----------
Total Expenses........................................ 808,066
----------
NET INVESTMENT LOSS......................................... (406,143)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments.......................... 1,173,958
Net increase in unrealized appreciation of investments.... 5,079,222
----------
Net realized and unrealized gain on investments....... 6,253,180
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS......... $5,847,037
==========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, October 31,
1997 1996
----------- -----------
<S> <C> <C>
Net investment loss..................................................... $ (406,143) $ (108,583)
Net realized gain (loss) on investments................................. 1,173,958 (79,935)
Net increase in unrealized appreciation of investments.................. 5,079,222 848,827
--------------------------
Net increase in net assets resulting from operations.............. 5,847,037 660,309
Distributions to shareholders:
Net realized gains.................................................... -- (2,133,339)
Net increase from shares of beneficial interest transactions--Note 4.... 67,656,492 7,583,606
--------------------------
Total increase in net assets...................................... 73,503,529 6,110,576
Net assets:
Beginning of year..................................................... 11,484,651 5,374,075
--------------------------
End of year (including accumulated net investment losses of
$1,254,867 and $848,724, respectively)............................... $84,988,180 $11,484,651
==========================
</TABLE>
See Notes to Financial Statements.
SPECTRA FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period
<TABLE>
<CAPTION>
Four Months
Ended
Year Ended October 31, October 31, Year Ended June 30,
---------------------------------------- ------------ --------------------------
1997 1996 1995 1994(i) 1994 1993
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 13.61 $ 20.93 $ 18.82 $ 17.12 $ 19.02 $ 17.93
----------------------------------------------------------------------------------
Net investment loss.......................... (.17)(ii) (0.23)(ii) (0.53) (0.10) (0.28) (0.29)
Net realized and unrealized gain on
investments................................. 3.77 1.22 7.24 1.80 2.66 3.70
----------------------------------------------------------------------------------
Total from investment operations............. 3.60 0.99 6.71 1.70 2.38 3.41
Distributions from net realized gains........ -- (8.31) (4.60) -- (4.28) (2.32)
----------------------------------------------------------------------------------
Net asset value, end of period............... $ 17.21 $ 13.61 $ 20.93 $ 18.82 $ 17.12 $ 19.02
==================================================================================
Total Return(iii)............................ 26.45% 12.68% 57.72% 9.93% 17.53% 23.66%
==================================================================================
Ratios and Supplemental Data:
Net assets, end of period (000's omitted).. $84,988 $11,485 $ 5,374 $ 4,832 $ 4,394 $ 4,884
==================================================================================
Ratio of expenses to average net assets.... 2.12% 2.55%(iv) 3.76%(iv) 2.75%(iv) 2.59%(iv) 2.57%(iv)
==================================================================================
Decrease reflected in above expense ratio
due to expense reimbursements made pursuant
to applicable state expense limits........ -- .69% -- -- -- --
==================================================================================
Ratio of net investment loss to average
net assets............................... (1.06)% (1.69)% (3.05)% (1.72)% (1.47)% (1.55)%
==================================================================================
Portfolio Turnover Rate................... 133.98 % 197.04 % 207.25 % 56.24 % 116.61 % 100.17 %
==================================================================================
Average Commission Rate Paid.............. $ .0711 $ .0661
=====================
<FN>
- -------------------
<Fi> Ratios have been annualized; total return has not been annualized.
<Fii> Amount was computed based on average shares outstanding during the year.
<Fiii> Dividends and distributions paid when the Fund operated as a closed-end
fund (i.e. prior to February 12, 1996) have been reflected as being
reinvested at market value.
<Fiv> Reflects total expenses, including custody fees offset by earnings
credits resulting from balances left on deposit. The expense ratios net
of earnings credits would have been 2.52% and 3.69% for the years ended
October 31, 1996 and 1995, respectively. Expense ratios for the periods
ended prior to October 31, 1995, have been reduced to reflect the effect
of custody fees offset by earnings credits, if any.
</FN>
</TABLE>
See Notes to Financial Statements.
SPECTRA FUND
NOTES TO FINANCIAL STATEMENTS
NOTE 1--Summary of Significant Accounting Policies:
Spectra Fund (the "Fund") is a non-diversified open-end registered
investment company organized as an unincorporated business trust under the laws
of the Commonwealth of Massachusetts. The Fund's investment objective is
capital appreciation. It seeks to achieve its objective primarily by investing
in equity securities.
Prior to February 12, 1996, the Fund operated as a closed-end investment
company and a Massachusetts corporation.
Effective October 31, 1994, the Fund changed its fiscal year end from
June 30 to October 31.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
(a) Investment Valuation--Investments in securities are valued at 4:00 p.m.
Eastern time. Listed and unlisted securities for which such information is
regularly reported are valued at the last reported sales price or, in the
absence of reported sales, at the mean between the bid and asked price, or in
the absence of a recent bid or asked price, the equivalent as obtained from one
or more of the major market makers for the securities to be valued. Short-term
corporate notes are valued at amortized cost which approximates market value.
(b) Securities Transactions and Investment Income--Securities transactions
are recorded on a trade date basis. Realized gains and losses from securities
transactions are recorded on the basis of the first-in, first-out method.
Dividend income is recognized on the ex-dividend date and interest income is
recognized on the accrual basis.
(c) Dividends to Shareholders--Dividends payable to shareholders are recorded
by the Fund on the ex-dividend date. Dividends from net investment income and
dividends from net realized gains are declared and paid annually after the end
of the fiscal year in which earned.
(d) Federal Income Taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income, including net realized
capital gains, to its shareholders. Therefore, no Federal income tax provision
is required.
(e) Other--These financial statements have been prepared using estimates and
assumptions that affect the reported amounts therein. Actual results may differ
from those estimates.
NOTE 2--Investment Advisory Fees and Other Transactions with Affiliates:
(a) Investment Advisory Fees--The Fund pays its investment adviser, Fred
Alger Management, Inc. ("Alger Management"), a monthly fee at an annual rate of
1.50% based on the value of the Fund's average daily net assets.
(b) Transfer Agent Fees--Alger Shareholder Services, Inc. ("Alger Services"),
an affiliate of Alger Management, serves as transfer agent for the Fund. During
the year ended October 31, 1997, the Fund incurred fees of approximately $7,300
for services provided by Alger Services and reimbursed approximately $2,200 for
transfer agent related expenses paid by Alger Services on behalf of the Fund.
(c) Brokerage Commissions--During the year ended October 31, 1997, the Fund
paid Fred Alger & Company, Incorporated ("Alger Inc."), an affiliate of Alger
Management, $127,576 in connection with securities transactions.
(d) Trustees' Fees--Certain trustees and officers of the Fund are directors
and officers of Alger Management, Alger Inc. and Alger Services. The Fund pays
each trustee who is not affiliated with Alger Management or its affiliates an
annual fee of $250.
(e) Shareholder Servicing Fees--The Fund has entered into a shareholder
servicing agreement with Alger Inc. whereby Alger Inc. provides the Fund with
ongoing servicing of shareholder accounts. As compensation for such services,
the Fund pays Alger Inc. a monthly fee at an annual rate equal to .25% of the
Fund's average daily net assets.
NOTE 3--Securities Transactions:
During the year ended October 31, 1997, purchases and sales of investment
securities, excluding short-term securities, aggregated $105,695,912 and
$47,630,994, respectively.
NOTE 4--Share Capital:
The Fund has an unlimited number of authorized shares of beneficial
interest of $.001 par value.
During the year ended October 31, 1997, transactions of shares of
beneficial interest were as follows:
<TABLE>
<CAPTION>
Shares Amount
---------- -----------
<S> <C> <C>
Shares sold.................... 4,597,737 $75,601,379
Shares redeemed................ (501,797) (7,944,887)
-------------------------
Net increase................... 4,095,940 $67,656,492
=========================
</TABLE>
During the year ended October 31, 1996, transactions of shares of
beneficial interest were as follows:
<TABLE>
<CAPTION>
Shares Amount
--------- -----------
<S> <C> <C>
Shares sold..................... 740,865 $ 9,572,977
Shares redeemed................. (154,036) (1,989,371)
------------------------
Net increase.................... 586,829 $ 7,583,606
========================
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of Spectra Fund:
We have audited the accompanying statement of assets and liabilities of
Spectra Fund (a Massachusetts business trust), including the schedule of
investments, as of October 31, 1997, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of
the three years in the period then ended, for the four months in the period
ended October 31, 1994, and for each of the two years in the period ended June
30, 1994. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Spectra Fund as of October 31, 1997, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended, and the financial highlights for each of the
three years in the period then ended, for the four months in the period ended
October 31, 1994, and for each of the two years in the period ended June 30,
1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
December 12, 1997
|
SPECTRA | Meeting the challenge
FUND | of investing
|
Board of Trustees
Fred M. Alger, Chairman
David D. Alger
Arthur M. Dubow
Stephen E. O'Neil
Nathan E. Saint-Amand
John T. Sargent
- ----------------------------------------------
Investment Adviser
Fred Alger Management, Inc.
75 Maiden Lane
New York, N.Y. 10038
- ----------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Alger Shareholder Services, Inc.
30 Montgomery Street, Box 2001
Jersey City, N.J. 07302-9811
- ----------------------------------------------
This report is submitted for the general information of the shareholders of
Spectra Fund. It is not authorized for distribution to prospective investors
unless accompanied by an effective Prospectus for the Fund, which contains
information concerning the Fund's investment policies, fees and expenses as
well as other pertinent information.
