SPECTRA | Meeting the challenge
FUND | of investing
Annual Report
October 31, 1996
December 16, 1996
Fellow Shareholders:
A YEAR-TO-DATE REVIEW
The fiscal year ended October 31, 1996 proved to be an interesting and turbulent
time in the market. Spectra Fund posted a positive return for the twelve-month
period, although it lagged the relevant market index to some degree. The good
news is that we feel that many of the factors which have contributed to our
recent performance are now behind us, setting the stage for a strong rebound
next year.
In a sense, this past year has been almost a circle. We began with the
assumption that the economy was exceedingly weak, went through a period dating
from mid-March to late October during which the popular view was that the
economy was too strong, and are now moving back in the direction of closing the
year where we began it. During this time, the markets' volatility has been
exacerbated by several "fear factors," which I believe are now behind us.
I thought it might be useful to discuss these factors and explain why they are
in our past.
1. The Federal Reserve
Since March, the worries concerning both the bond and stock markets
have been 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 an increase in
Federal Reserve driven rates, most likely the Fed Funds rate, but
also possibly the discount rate. We have maintained that the
marketplace was exaggerating the extent of the strength in the
economy and, as a result, the Fed would not raise rates. Thus far,
we have been correct.
One of the points that we have consistently made has been that the
economy, in the second half, was going to slow dramatically from the
rapid pace of the second quarter. On October 30th, the GDP for the
third quarter was announced and it increased a scant 2.2%, now
revised to 2%. Moreover, consumer spending was up merely .6%, the
smallest increase in almost five years. Real final sales were up
just .4%, the smallest gain since the first quarter of 1993.
Moreover, the implicit price deflator was 1.6%, even lower than the
diminutive 1.8% of the second quarter. Furthermore, payroll
employment growth slowed significantly in the third quarter of 1996.
Average monthly gains amounted to 113,000, well below the rate of
gain in the first half of 1996.
All of this data leads us to the conclusion that there should be no
more concern about the Fed increasing interest rates this year.
2. Clinton-Phobia
One of the market's biggest concerns had been the prospect that the
Democrats would regain control of the political agenda. So intense
was this fear that healthcare stocks, thought to be especially
vulnerable, sold off dramatically prior to the election. As we now
know, the reality is far different. The Republicans retained control
of the House of Representatives. Additionally, they increased their
control of the Senate by two seats. This election essentially forces
a moderate agenda on President Clinton and probably dooms for a long
time to come any return to liberal issues. One can only conclude
that the election was a great triumph for investors.
3. Valuation Fears
I am frequently asked to address the question as to whether the
market is or is not over-valued at present. The answer emphatically
is that it is not. Contrast if you will, the present level of the
S&P Industrials compared to 1987. In 1987, at its peak, the S&P
Industrials was selling in excess of 20x earnings, contrasted with
the long-bond yielding in excess of 9%. At present the S&P
Industrials is selling at 18.1x consensus estimates for 1997, while
the long-bond is yielding 6.7%.
I am also asked whether or not the deceleration of the economy could
put downward pressure on earnings, thereby impacting the market.
Growth stocks tend to do their best during periods of relatively
slack earnings. For example, 1991 was a slow year in the economy,
but one of the best years of performance in our history. The reason
for this is obvious. As the economy slows down, investors turn away
from large, cyclical stocks and concentrate on smaller, growth
stocks which can generate increased earnings independent of the
economy. This is made even more pronounced when it is preceded by a
period during which the multiples on growth stocks have been
compressed relative to the market as a whole. This is certainly the
case in the current environment. For example, we estimate
preliminarily that the 5 year growth rate of the stocks in Spectra
Fund is 23.1% as compared to a trend line growth rate of 7% for the
S&P Industrials. The P/E multiple for the Fund, based on 1997
estimates, is 18.3x which compares with the multiple on the S&P
Industrials at 18.1x. These numbers show that there is very little
premium in terms of valuation between Spectra Fund and the index
despite the fact that the growth rate on the stocks in the Fund is 3
times faster than the index.
We believe, therefore, that we may have a trampoline effect next year. While our
target for the Dow in 1997 is in the 7200 to 7300 range, we believe that the
Fund could do considerably better if everything works right.
PORTFOLIO MATTERS
Spectra Fund's total return for the year was 12.68% versus a return of 24.10%
for the S&P 500. The economic uncertainty which prevailed throughout most of the
year resulted in defensive positioning of investors. As a result, there was a
flight to larger, less volatile, bluechip type stocks. Therefore, the S&P 500
enjoyed a very strong year, driven by the larger, stable companies in the index.
This Fund employs an "allcap" (i.e. small, medium and large capitalizations)
portfolio management strategy, and thus was relatively underweighted in these
strong performing stocks. Additionally, as smaller and mid cap stocks have been
significantly lagging the larger averages, the Fund's exposure to these types of
stocks through its allcap strategy have caused it to underperform the S&P 500,
which has relatively little exposure in these areas.
Although activity in the bond market made the economy look, at times,
overheated, corporate profits in the first half of the year were not that
strong. As a result, earnings for many of the stocks held in the Fund grew at
rates which were below expectations. Specifically, the Fund's overweighting in
the technology sector earlier this year, most notably semiconductors,
contributed to the somewhat lackluster performance. The Fund was impacted
further by its midyear exposure to healthcare related stocks, specifically
HMO's. During the June-July correction, these stocks were especially hard-hit as
increasing medical expenses hurt second quarter earnings. Currently, the Fund is
very well diversified with financial services, communications equipment,
semiconductors and computer software constituting the top 4 industry groups.
LOOKING AHEAD
The longer term looks very bright. Recently I have found myself being asked the
same question, "How long can this bull market go on?" I never hesitate to tell
people that I expect the market, as measured by the Dow Jones Industrial
Average, to hit 10,000 by the end of the decade. I think this answer seems to
many to be either a bit far fetched or a number that I picked because it sounds
good for the media, a nice big, round number. This is how the 10,000 was
derived: I believe that the earnings per share of the Dow will be approximately
$365 in 1996. If the economy is able to grow at a 3% rate in GDP (which it
should, on average), I believe the Dow can grow its earnings at a 10% rate. This
should bring earnings in the year 2000 to about $535 per share. The median
relationship between the earnings yield on the averages and the long-bond has
been 75% over fifteen years. Based on this number, given a 7% long-bond (which
would presume a 3% inflation rate and a 4% real rate of return), the market
should have a multiple of 19x. This, multiplied by its earnings, gives the Dow a
value of 10190; QED!
In conclusion, I don't want to seem Panglossian, but we seem to be in the best
of all possible worlds. Interest rates, politics, inflation, the economy and the
stock market all seem to be going in the right direction at the same time. The
result should be good performance for Spectra Fund.
Respectfully submitted,
/s/ DAVID D. ALGER
David D. Alger
President
SPECTRA FUND
$10,000 HYPOTHETICAL INVESTMENT ON JULY 1, 1986
<TABLE>
<CAPTION>
7/1/86 6/30/87 6/30/88 6/30/89 6/30/90 6/30/91 6/30/92 6/30/93 6/30/94 10/31/94 10/31/95 10/31/96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Spectra Fund $10,000 $11,188 $11,036 $12,246 $15,279 $17,666 $17,724 $24,391 $28,666 $31,513 $49,701 $56,002
S & P 500 Index $10,000 $12,518 $11,655 $14,050 $16,366 $17,577 $19,700 $22,655 $22,974 $24,637 $31,154 $38,659
</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, 1986. During
the period from July 1, 1986 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, 1996
<TABLE>
<CAPTION>
Average Annual Return
1 Year 5 Years 10 Years
-------------------------------
<S> <C> <C> <C>
Spectra Fund 12.68% 23.39% 19.69%
S & P 500 Index 24.10% 15.55% 14.66%
-----------------------------
</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, 1996
<TABLE>
<CAPTION>
Shares Common Stocks--98.7% Value
- ---------------------------------------------------------------
<C> <S> <C>
AEROSPACE--4.5%
3,000 Boeing Company (The)................... $ 286,125
3,000 Sundstrand Corp........................ 120,750
5,000 Wyman Gordon Co.*...................... 110,000
-----------
516,875
-----------
APPAREL--.7%
1,500 Tommy Hilfiger Corporation*............ 78,000
-----------
BIO-TECHNOLOGY--1.1%
2,000 Amgen Inc.*............................ 122,626
-----------
CHEMICALS--2.1%
6,200 Monsanto Co............................ 245,675
-----------
COMMUNICATIONS--6.5%
1,200 LCI International Inc.*................ 38,250
900 Lucent Technologies Inc................ 42,300
900 MFS Communications Co. Inc.*........... 45,113
4,500 Northern Telecom Ltd................... 293,063
1,600 PictureTel Corp.*...................... 43,200
2,500 Saville Systems PLC ADR*............... 107,813
7,200 WorldCom Inc.*......................... 175,500
-----------
745,239
-----------
COMMUNICATIONS EQUIPMENT--11.8%
4,900 Ascend Communications, Inc.*........... 320,338
1,500 Cascade Communications Corp.*.......... 108,938
5,000 Cisco Systems, Inc.*................... 309,375
2,200 Pairgain Technologies, Inc.*........... 151,525
5,500 Tellabs, Inc.*......................... 468,188
-----------
1,358,364
-----------
COMPUTER RELATED & BUSINESS
EQUIPMENT--4.2%
2,600 Sun Microsystems Inc.*................. 158,600
4,000 3 Com Corp.*........................... 270,500
1,200 Xerox Corp............................. 55,650
-----------
484,750
-----------
COMPUTER SERVICES--5.3%
5,300 Automatic Data Processing Inc.......... 220,613
3,700 International Network Services*........ 132,275
2,000 National Data Corp..................... 82,250
3,000 Paychex, Inc........................... 171,000
-----------
606,138
-----------
COMPUTER SOFTWARE--12.7%
4,100 Compuware Corp.*....................... $ 216,275
2,800 Electronics For Imaging Inc.*.......... 201,600
2,500 HBO & Company.......................... 150,313
12,000 Informix Corporation*.................. 266,256
4,100 Medic Computer Systems, Inc.*.......... 115,825
1,600 MicroSoft Corporation*................. 219,600
3,600 Parametric Technology Corporation*..... 175,950
6,500 Structural Dynamics Research Corp.*.... 115,375
-----------
1,461,194
-----------
COMPUTER TECHNOLOGY--4.3%
3,900 Adaptec, Inc.*......................... 237,413
2,700 Citrix Systems, Inc.*.................. 149,175
3,600 Sterling Commerce, Inc.*............... 101,250
-----------
487,838
-----------
CONSUMER PRODUCTS--.9%
1,100 Colgate Palmolive Co................... 101,200
-----------
DEFENSE--1.6%
2,100 Lockheed Martin Corp................... 188,213
-----------
ENERGY & ENERGY SERVICES--1.5%
1,700 Schlumberger Ltd....................... 168,513
-----------
FINANCIAL SERVICES--8.4%
2,500 Chase Manhattan Corp................... 214,375
3,300 Citicorp............................... 326,700
2,451 First Data Corporation................. 195,467
1,000 GreenTree Financial Corp.*............. 39,625
3,700 Money Store, Inc. (The)................ 95,275
3,500 Schwab (Charles) Corporation (The)..... 87,500
-----------
958,942
-----------
FOOD CHAINS--.5%
1,300 Safeway Inc............................ 55,738
-----------
HEALTHCARE--4.4%
1,900 Johnson & Johnson...................... 93,575
2,000 Eli Lilly & Company.................... 141,000
2,000 Merck & Co., Inc....................... 148,250
2,000 SmithKline Beecham PLC ADS............. 125,250
-----------
508,075
-----------
INSURANCE--2.4%
2,500 American International Group, Inc...... 271,563
-----------
LEISURE & ENTERTAINMENT--2.6%
8,600 International Game Technology.......... 181,675
5,500 Mirage Resorts, Incorporated*.......... 121,000
-----------
302,675
-----------
MEDICAL DEVICES--.6%
3,000 Hologic, Inc.*......................... $ 68,250
-----------
MEDICAL SERVICES--.5%
2,000 PhyCor, Inc.*.......................... 62,000
-----------
METALS--.4%
1,500 Titanium Metals Corporation*........... 46,125
-----------
OIL & GAS--.8%
2,000 Tidewater Inc.......................... 87,500
-----------
PHARMACEUTICALS--3.1%
3,200 Astra AB-Sponsored ADS Series A........ 146,800
500 Bristol Myers Squibb Co................ 52,875
1,900 Pfizer Inc............................. 157,225
-----------
356,900
-----------
POLLUTION CONTROL--1.8%
6,300 USA Waste Services, Inc................ 201,600
-----------
RESEARCH--1.4%
5,400 Gartner Group Inc. Class A*............ 166,050
-----------
RESTAURANTS & LODGING--2.1%
6,000 Lone Star Steakhouse & Saloon, Inc.*... 153,750
4,000 Outback Steakhouse, Inc.*.............. 92,752
-----------
246,502
-----------
RETAILING--6.2%
3,800 Gucci Group N.V........................ 262,200
4,500 Home Depot, Inc........................ 246,375
2,500 Nine West Group Inc.*.................. 124,680
2,100 TJX Companies, Inc.*................... 84,000
-----------
717,255
-----------
SEMI-CONDUCTORS--4.0%
2,100 Altera Corporation*.................... $ 130,200
3,000 Intel Corp............................. 329,625
-----------
459,825
-----------
MISCELLANEOUS--2.3%
3,700 Loewen Group Inc....................... 146,617
4,000 Service Corporation International...... 114,000
-----------
260,617
-----------
Total Common Stocks
(Cost $10,393,842).................... 11,334,242
-----------
Warrants
MANUFACTURING
72 Windmere Corp.*
expire 1/19/98 (Cost $54)............. 603
-----------
Preferred Stock--.5%
COMMUNICATIONS
1,300 Nokia Corporation, ADR
(Cost $61,328)........................ 60,288
-----------
<CAPTION>
Principal Short-Term Corporate
Amount Notes--3.3%
- ---------------------------------------------------------------
<C> <S> <C>
$ 173,000 Dynamic Funding Corp. Series A,
5.35%, 11/6/96 ................... 172,870
209,000 Reliastar Mortgage Co., 5.28%,
11/13/96.......................... 208,630
-----------
Total Short-Term Corporate Notes
(Cost $381,500)................... 381,500
-----------
Total Investments (Cost $10,836,724)(a).. 102.5% 11,776,633
Liabilities in Excess of Other Assets.... (2.5) (291,982)
--------------------
Net Assets............................... 100.0% $11,484,651
====================
<FN>
- --------------------
<F1> * Non-income producing security.
<F2> (a) At October 31, 1996, the net unrealized appreciation on investments, based
on cost for federal income tax purposes of $10,836,724, amounted to
$939,909 which consisted of aggregate gross unrealized appreciation of
$1,217,264 and aggregate gross unrealized depreciation of $277,355.
</FN>
</TABLE>
SPECTRA FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (cost $10,836,724), see
accompanying schedule of investments........................ $ 11,776,633
Cash......................................................... 66,352
Receivable for investment securities sold.................... 111,601
Receivable for shares of beneficial interest sold............ 120,897
Dividend receivable.......................................... 2,855
Prepaid expenses and other assets............................ 11,062
------------
Total Assets............................................. 12,089,400
------------
LIABILITIES:
Payable for investment securities purchased.................. $ 557,532
Payable for shares of beneficial interest redeemed........... 1,370
Investment advisory fee payable.............................. 14,083
Trustees' fees payable....................................... 836
Accrued expenses............................................. 30,928
---------
Total Liabilities........................................ 604,749
------------
NET ASSETS..................................................... $ 11,484,651
============
NET ASSETS CONSIST OF:
Paid-in capital.............................................. $ 11,310,999
Undistributed net investment income (accumulated loss)....... (848,724)
Undistributed net realized gain.............................. 82,467
Net unrealized appreciation.................................. 939,909
------------
NET ASSETS..................................................... $ 11,484,651
============
Shares of beneficial interest outstanding--Note 4.............. 843,549
============
NET ASSET VALUE PER SHARE...................................... $ 13.61
============
</TABLE>
See Notes to Financial Statements.
SPECTRA FUND
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends.................................................. $ 28,123
Interest................................................... 25,045
---------
Total Income............................................. 53,168
Expenses:
Investment advisory fees--Note 2(a)........................ $ 99,209
Professional fees.......................................... 31,496
Shareholder reports........................................ 19,830
Shareholder servicing fees--Note 2(e)...................... 12,856
Custodian and transfer agent fees.......................... 20,786
Trustees' fees............................................. 1,000
Miscellaneous.............................................. 23,068
---------
208,245
Less, earnings credits--Note 1(e).......................... (1,947)
Less, expense reimbursements--Note 2(a).................... (44,547)
----------
Total Net Expenses....................................... 161,751
---------
NET INVESTMENT LOSS............................................ (108,583)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments............................. (79,935)
Net increase in unrealized appreciation of investments....... 848,827
---------
Net realized and unrealized gain (loss) on investments... 768,892
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $ 660,309
=========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, October 31,
1996 1995
------------ ------------
<S> <C> <C>
Net investment loss.................................................... $ (108,583) $ (137,274)
Net realized gain (loss) on investments................................ (79,935) 2,271,024
Net change in unrealized appreciation (depreciation) of investments.... 848,827 (410,332)
----------------------------
Net increase in net assets resulting from operations............. 660,309 1,723,418
Dividends to shareholders:
Net realized gains............................................... (2,133,339) (1,180,910)
----------------------------
Net increase from shares of beneficial interest transactions--Note 4.. 7,583,606 --
----------------------------
Total increase in net assets..................................... 6,110,576 542,508
----------------------------
Net assets:
Beginning of year.................................................... 5,374,075 4,831,567
----------------------------
End of year (including accumulated net investment loss of $848,724
and $740,141, respectively)......................................... $ 11,484,651 $ 5,374,075
============================
</TABLE>
See Notes to Financial Statements.
SPECTRA FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period
<TABLE>
<CAPTION>
Year Year Four Months
Ended Ended Ended
October 31, October 31, October 31, Year Ended June 30,
----------- ----------- ----------- ------------------------------------
1996 1995 1994(i) 1994 1993 1992
----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period......... $20.93 $18.82 $17.12 $19.02 $17.93 $19.50
------------------------------------------------------------------------------
Net investment loss.......................... (0.23)(ii) (0.53) (0.10) (0.28) (0.29) (0.22)
Net realized and unrealized gain on
investments................................. 1.22 7.24 1.80 2.66 3.70 1.65
------------------------------------------------------------------------------
Total from investment operations............. 0.99 6.71 1.70 2.38 3.41 1.43
Distributions from net realized gains........ (8.31) (4.60) -- (4.28) (2.32) (3.00)
------------------------------------------------------------------------------
Net asset value, end of period............... $13.61 $20.93 $18.82 $17.12 $19.02 $17.93
==============================================================================
Total Return(iii)............................ 12.68% 57.72% 9.93% 17.53% 23.66% 11.65%
==============================================================================
Ratios and Supplemental Data:
Net assets, end of period (000's omitted).. $11,485 $5,374 $4,832 $4,394 $4,884 $4,603
==============================================================================
Ratio of expenses to average net assets.... 2.55%(iv) 3.76%(iv) 2.75%(v) 2.59%(v) 2.57%(v) 2.14%(v)
==============================================================================
Decrease reflected in above expense ratio
due to expense reimbursements--Note 2(a).. .69% -- -- -- -- --
Ratio of net investment loss to average
net assets................................ (1.69)% (3.05)% (1.72)% (1.47)% (1.55)% (1.07)%
==============================================================================
Portfolio Turnover Rate.................... 197.04% 207.25% 56.24% 116.61% 100.17% 63.54%
==============================================================================
Average Commission Rate Paid............... $.0661
======
<FN>
- --------------------
<F1> (i) Ratios have been annualized; total return has not been annualized.
<F2> (ii) Amount was computed based on average shares outstanding during the year.
<F3> (iii) 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.
<F4> (iv) Reflects total expenses, including fees offset by earnings credits. The
expense ratio net of earnings credits would have been 2.52% and 3.69% for
the years ended October 31, 1996 and 1995, respectively.
<F5> (v) Expense ratios for the periods ended prior to October 31, 1995, do not
reflect the effect of 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.
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. As of October 31, 1996, the net capital loss carryforward of the
Fund which may be used to offset future net realized gains was approximately
$51,000 and expires in 2004.
(e) Earnings Credits--The Fund's custodian fees have been reduced as a result of
earnings credits received on overnight cash balances. Balances left on deposit
with the custodian preclude their use elsewhere.
(f) 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 Management Fees--The Fund's investment adviser is Fred Alger
Management, Inc. ("Alger Management"). Prior to February 12, 1996, the
management agreement with the Adviser provided that the Fund pay Alger
Management its costs for providing services to the Fund.
On February 12, 1996, a new management agreement (the "New Agreement")
became effective which provides for the payment of an investment management fee
based on the value of the average daily net assets of the Fund at the annual
rate of 1.50%.
The New Agreement further provides that if in any fiscal year the
aggregate expenses of the Fund, excluding interest, taxes, brokerage
commissions, distribution fees and extraordinary expenses, exceed the expense
limitation of any state securities laws having jurisdiction over the Fund, Alger
Management will reimburse the Fund for the excess expense to the extent required
by such state laws. During the year ended October 31, 1996, Alger Management
reimbursed the Fund $44,547, pursuant to the state expense limitation applicable
to the Fund. Subsequent to year end, no state expense limitations will apply to
the Fund.
(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, 1996, the Fund incurred fees of approximately $8,200 for
services provided by Alger Services and reimbursed approximately $2,400 for
transfer agent related expenses paid by Alger Services on behalf of the Fund.
(c) Brokerage Commissions--During the year ended October 31, 1996, the Fund paid
Fred Alger & Company, Incorporated ("Alger Inc."), an affiliate of Alger
Management, $17,275 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.
(f) Other Transactions With Affiliates--At October 31, 1996, Alger Management
and its affiliates owned 536,395 shares of the Fund.
NOTE 3--Securities Transactions:
During the year ended October 31, 1996, purchases and sales of investment
securities, excluding short-term securities, aggregated $17,479,555 and
$11,997,625, 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, 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, 1996, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the two
years in the period then ended, for the four months in the period ended October
31, 1994, and for each of the three 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, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our 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, 1996, 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 two years in the
period then ended, for the four months in the period ended October 31, 1994, and
for each of the three years in the period ended June 30, 1994, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
December 16, 1996
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.
