IPS Millennium Fund
Two Centre Square 625 South Gay Street Suite 630 Knoxville,
Tennessee 37902 Phone 615/524-1676 Fax 615/544-0630
Gregory D'Amico Robert Loest Ph.D., CFA
President & Portfolio Manager Senior Portfolio Manager
Fellow Shareholders:
We are pleased to present our first annual report for the 11-month
Fiscal Year ending November 30, 1995. Our first year was short one month
because the Fund did not begin business until January 3, 1995. In spite
of an excellent 1995, a ferocious correction in tech stocks began in 1995's
fourth quarter, although in late January, 1996, it is beginning to look as
though tech stocks have made a bottom and are recovering. The NASDAQ was
down over 6%, and the S&P 500 down about 2.6% in the first 15 days of 1996
alone.
Management's Discussion & Analysis
First, let's analyze 1995, because it offers some interesting insights
into what market sectors did well and which did less well. In spite of the
publicity surrounding large gains in narrower, large stock indexes like the
Dow Jones Industrial Average and the S&P 500 Composite Index, the great
middle of the market, stocks of mid-sized
companies, did not keep pace. The table below shows the Fund's
performance, the Russell Indexes, the S&P 500 Index, and the Value Line
Arithmetic Index covering 1638 large, medium and small companies for 11
months.
<TABLE>
Index 1995 Return (11 mos. through 11/30)
<S> <C>
IPS Millennium Fund 25.9%
Value Line Arithmetic Index 24.7%
Russell Index 1000 32.6%
Russell Index 2000 23.3%
Russell Index 3000 31.6%
S&P 500 Composite Index 31.8%
Index dividends not reinvested
</TABLE>
The Russell 1000 Index is an excellent proxy for large companies,
the Russell 2000 for large plus medium-size companies, and the Russell 3000
for large, medium and small companies. As you can see, adding the 1000
mid-cap stocks to the large-cap stocks of the Russell 1000 Index to produce
the Russell 2000 Index brought the average down considerably. The table
below shows that the second group of 1000 mid-size companies had a return
of 14.0% in 1995, reducing the return for the Russell 2000 Index to 23.3%.
When we then add in the third group of 1000 small companies to get the
Russell 3000 Index, the return jumps to 31.6%. The reason is that these
small-cap companies experienced a return of 46.7% for 1995. The table below
breaks down return by company size.
<TABLE>
Company Size 1995 Return (11 mos. through 11/30)
<S> <C>
Large Companies 31.8%
Mid-Size Companies 14.0%
Small Companies 46.7%
IPS Millennium Fund 25.9%
</TABLE>
Transformed into more meaningful numbers in the second table, you
can see that investors' returns in 1995 depended heavily on the kind of
portfolio with which they began the year. The bull market that began in 1995
was led by giant, multi-national companies, and by the high tech sector, which
consists overwhelmingly of small companies, despite the presence of a few
large ones like Microsoft and Intel. Since most diversified stock mutual
funds contain a large percentage of mid-cap companies (all the bank, REIT,
specialty chemical, property/casualty and consumer retail stocks in the Fund,
for example), as well as large companies (e.g., AT&T, Intel, Motorola and
Johnson & Johnson), our returns for 1995, not surprisingly, fell between
mid-cap and large-cap stock returns.
The Value Line Arithmetic Index (VLA) is equally weighted, while
the S&P 500 Composite Index is a capitalization (size)-weighted index.
Diversified mutual funds must not exceed 5% of their investment in any one
security. Essentially, they are required to invest more or less on an
equally-weighted basis. While the S&P 500 is designed to more accurately
reflect the state of the economy, buying more of a stock simply because
the company is larger is an irrational way to invest. We feel the VLA is
a better measure of the performance of an average stock, and is also more
broadly-based than the S&P 500, containing large-, medium- and small-cap
companies. Thus, in our opinion, the VLA is a better benchmark than the S&P
500 for most individual investors and diversified mutual funds. Due to
these differences in the way various indexes are calculated, the Fund will
use as its benchmark for the market's performance the VLA, which is widely
available on a daily basis in the financial press. Below is a chart of the
performance of the IPS Millennium Fund vs. the VLA, by calendar quarter.
As you can see from the two tables above, it's no mystery why most
stock funds and money managers underperformed the most popular indexes in
1995. Real returns can vary from the popular indexes dramatically over
periods of a year or two, as the tables above clearly show. Even during the
first 29 days of 1996, the Russell 1000 is up 1.2% while the Russell 2000 is
down 1.3%. This is a large disparity in performance for such a short period,
and in opposite directions. Such divergences (often for as long as three years)
often drive investors into index funds after they have beaten diversified
funds. Long term returns for different indexes tend to converge over time,
however. For example, the 5-year DJI average is slightly lower than the
5-year average for mid-cap stocks. As a result, investors should understand
the index with which their fund is being compared, and its long-term
behavior relative to other indexes, so they are not misled by shorter term
disparities in performance.
Delays at the state level prevented investment of Fund assets until
January. This meant that the Fund began the year in cash, and due to diversity
constraints, did not become fully invested until April. This caused first
quarter performance to lag the VLA, as evidenced by the graph above. Once
fully invested, the Fund performed in line with the VLA, and outperformed the
VLA strongly in the most recent quarter. This resulted in IPS Millennium
Fund outperforming its benchmark for the year, despite giving the market a
head start. Pharmaceutical, financial, and software companies contributed
disproportionately to the most recent quarter performance, more than
offsetting declines in the high tech manufacturing sector.
The second factor is that, since one of our primary goals is to hold
most securities for the long term to minimize the drag on performance of
taxes and transaction costs to Fund shareholders, we maintained a substantial
position of 26.6% in the high tech sector through the end of November,
although we did allow cash to build up to 12.9% of assets. Most funds
reduced their exposure to tech stocks, putting extra price pressure on this
sector. Our view is that the fundamentals remain positive and unchanged for
the high tech stocks, and that these companies represent superior long-term
growth potential that justifies tolerating their volatility.
The Current State of the Stock Market
We regard 1995 as the beginning of a new, multi-year bull market.
We feel there are good reasons for our optimism, because in our judgment, the
negatives that caused the correction in stocks the last two months are almost
certainly fully reflected in stock prices now. First of all, we have now
experienced the unknown event we expected would cause a correction, the
budget impasse in Washington. Second, there is still a great deal of doubt the
Fed will continue its short-term rate reductions, since Greenspan seemed to
imply that this was contingent on a balanced budget agreement the President
could sign. Third, worry about a dramatic slow-down in corporate profit
growth is consuming Wall Street, with some justification. Fourth, the
economies of Europe and Japan are in recession, and unemployment is
actually increasing in Germany, hurting the multinationals. Finally,
the worry that chip stocks are seeing a slow-down in demand along with too
large a build-up in capacity has resulted in a major crash in computer and
Internet-related stocks, catching the rest of the market in the downdraft.
Especially in the case of the computer-related companies, it has been
overdone. Intel, for instance, on Jan. 16 was selling at a P/E ratio of 7.3
based on our estimate of next year's earnings, and 8.6 based on this year's.
Computer Associates Int'l was selling for a P/E ratio of 15.8, and is growing
at 20%. U.S. Robotics sold for a P/E of 21 based on 1996 earnings, and is
growing at 35% per year. Motorola sold for a P/E of 12.5, and is growing at
18%. Intel, Motorola and Computer Associates are blue chips, and are
selling for P/E ratios below that of the market or other companies that are
growing much more slowly. Even some of the more seasoned Internet-related
companies are cheap for the first time in a year (especially Cisco Systems,
U.S. Robotics, and Netmanage).
While it may be a few more months before we see the market begin
to focus on other things, the likelihood now is that any surprises are more
likely to be positive than negative. Our view is that continuing healthy
profit gains by growth companies, especially in the relatively ignored
mid-caps, will change the focus of investors more to that sector. Another
positive factor is that Europe and Japan don't have anywhere to go but up.
Also, we believe the manufacturing high tech sector is less cyclical than it
has been in the past, yet it is being treated no differently than
automobiles and paper, where growth is far slower and more cyclical.
Furthermore, short-term interest rates are high relative to longer-term
rates. This situation is unusual, and can only be resolved in one of two
ways: short rates must drop or long rates rise, and dramatically. The only
justification for higher long rates is higher inflation, and our judgement,
and that of many private sector economists world-wide, is that we are in a
long-term low or zero inflation environment, and possibly even a deflationary
one. Thus, short rates must come down. The only question is when and how
fast. The Fed has already made two tentative cuts. Expect more aggressive
cutting later this year, which should be a positive for the stock market.
Finally, a resolution to the budget impasse, or better than expected
profit growth, could provide pleasant upside surprises to the stock market.
We expect the stock market to end 1996 higher than it ended November, 1995,
and we expect mid-cap stocks to improve their performance relative to the
large-caps over the next year or two.
Future Opportunities for IPS Millennium Fund
We are now living in a high tech world. The companies leading
the information revolution today are the Coca Colas, GEs and IBMs of
tomorrow. Not to own these companies is to opt out of the future of the
human race. The downside of such investments is that they will make the
Fund more volatile. Nevertheless, the higher growth is worth the cost for
most investors.
Intel is important, not just due to the growth in computer use and its
market dominance, but because its new generation chips are incorporating the
functions of other chips that used to be separate, and were made by other
companies. Semiconductors are expected to grow globally at over 20% per
year. Intel is growing at the expense of many other chip makers. Motorola
should grow rapidly, as a more diversified company than Intel, by supplying
much of the telecommunications hardware for world growth. Its cellular
phone equipment, the subject of some concern currently, should do well, both
near- and long-term. Global cellular use (including the U.S.) is less than
one percent, and experts in this area estimate growth in this industry at no
less than 40% annually for several years. Equipment makers are likely to do
better than the access and service providers, in our judgement, since they
will still sell their equipment whether the access providers do well or not.
Rapid global growth in the need to process information should
benefit the leaders in this area like Oracle Systems, Computer Associates
and Microsoft. Communications speed and bandwith are currently the
primary impediment to wider use of the Internet and the World Wide Web.
Analog modems are simply too slow to download the rich graphics typical of
the WWW, and drastically limit the ability of consumers to make use of the
WWW. Expect to see companies that provide digital access and high
bandwidth to prosper. Two such companies that the Fund owns are U.S.
Robotics and Cisco Systems.
High tech is not the only area where there is opportunity. We expect
the Federal Reserve to lower short-term rates, so some areas should benefit
disproportionately. Among them we think will be regional banks,
property/casualty insurance companies, and Real Estate Investment Trusts
(REITs). We have been increasing the Fund's position in these sectors
recently. Property/casualty companies and REITs have participated little in
this bull market. While banks have participated somewhat, those banks that
have built valuable niches in service areas are still undervalued.
Traditional banking is in serious trouble, but those banks that understand
this, and that are making progress in developing franchises in service and
information-related areas, should not only do well, they should prosper, and
some may become attractive takeover candidates.
Most adjustable-rate consumer loans and mortgages are keyed to
short-term interest rates. As these come down, refinancing will generate
higher fees for banks, increase their interest rate spread, and give consumers
more spendable income. Lower rates benefit REITs and P/C companies also.
REITs are bought primarily for income, much like electric utilities, although
the better managed ones grow much faster than the utilities. However, REITS
are selling at prices not much different than they were three years ago, while
commercial property management has prospered. The better REITs sport cash
flow and earnings much higher than they were three years ago, dividends are
higher, and the growth rate and dividend coverage is better. In addition to
6% - 7% dividend yields, we are looking for significant appreciation in the
next year or so.
Two other excellent companies we expect to do well are Viking
Office Supply, with about 50% of its business in Europe, and Fastenal, a
company that sells metal fasteners such as screws, nuts & bolts, and
professional tools. They are both expanding very rapidly with a high return
on equity, and their stock and earnings growth curves look much like
Wal-Mart's or Home Depot's in their early years.
We are optimistic regarding the next two years, especially given the
recent market correction in high tech stocks. We would again like to thank
you for your confidence in our management, and wish you a healthy, happy
and prosperous 1996.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and the Board of Trustees
IPS Funds
IPS Millennium Fund
Knoxville, Tennessee
We have audited the accompanying statement of assets and liabilities of IPS
Millennium Fund, including the schedule for investments in securities, as of
November 30, 1995, and the related statement of operations, the statement of
changes in net assets and the selected per share data and ratios for the year
then ended. These financial statements and per share data and ratios are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and per share data and ratios based on
our audit.
We conducted our audit 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 per
share data and ratios 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 November 30, 1995, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and selected per share data and ratios
referred to above present fairly, in all material respects, the financial
position of IPS Millennium Fund as of November 30, 1995, the results of its
operations, its cash flows, the changes in its net assets and the selected
per share data and ratios for the year then ended, in conformity with
generally accepted accounting principles.
Cherry, Bekaert & Holland
Knoxville, Tennessee
January 17, 1996
<PAGE>
IPS MILLENNIUM FUND
Statement of Assets and Liabilities
For the year ending November 30, 1995
<TABLE>
<S>
Assets: <C>
Investments in securities, at value -
identified cost $1,593,898 $1,773,283
Cash ( 2,149)
Accrued income
Dividends 1,920
Interest 682
Other assets 13,829
Total assets 1,787,565
Liabilities:
Payables - Investment securities
purchased 159,125
Accrued expenses 2,840
Total liabilities 161,965
Net Assets at November 30, 1995:
Equivalent to $15.00 per share based on
108,344.903 shares of capital stock
outstanding $1,625,600
</TABLE>
Statement of Operations
For the year ending November 30, 1995
<TABLE>
<S>
Investment Income: <C>
Income
Dividend income 13,071
Interest 4,725
Total income 17,796
Expenses:
Management fees 9,932
Expense reimbursement ( 2,949)
Organizational cost 2,940
Total expense 9,923
Net investment income 7,873
Realized & Unrealized Gain (Loss) on Investments:
Net realized gain on investments 15,391
Change in unrealized appreciation
of investments for the year 179,385
Net gain (loss) on investments 194,776
Net Increase in Net Assets
Resulting from Operations $202,649
</TABLE>
<PAGE>
Statement of Changes in Net Assets
For the year ending November 30, 1995
<TABLE>
<S>
Increase (Decrease) in Net Assets From Operations: <C>
Investment income-net $ 7,873
Net realized gain on investments 15,391
Change in unrealized appreciation 179,385
Net increase in net assets resulting
from operations 202,649
Distributions to Shareholders from-
Investment Income-Net: ( 7,010)
Capital Share Transactions:
Issued-regular 1,448,251
Issued-in lieu of cash distributions 7,063
Redeemed-regular ( 25,353)
Increase (decrease) in net
assets due to capital share
transactions 1,429,961
Net assets
Beginning of year ---
End of year $ 1,625,600
</TABLE>
See notes to financial statements.
<PAGE>
IPS MILLENNIUM FUND
Notes to Financial Statements
November 30, 1995
Note 1 - Significant accounting policies
The Company is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The company began
selling shares and making investments on January 4, 1995.
Security valuation - Investments in securities traded on a national securities
exchange (or reported on the NASDAQ national market) are stated at the last
reported sales price on the day of valuation; other securities traded in the
over-the-counter market and listed securities for which no sale was reported
on that date are stated at the last quoted bid price. Short-term notes are
stated at amortized cost, which is equivalent to value.
Federal income taxes - The Fund's policy is to comply with the requirements
of the Internal Revenue Code that are applicable to regulated investment
companies and to distribute all its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
As of November 30, 1995, net unrealized appreciation on investments for book
and federal income tax purposes aggregated $179,385. The cost of portfolio
securities for book and federal income tax purposes was $1,593,898 at
November 30, 1995.
Distributions to shareholders - Dividends to shareholders are recorded on
the ex-dividend date.
Other - The Fund follows industry practice and records security transactions
on the trade date for performance calculations and the trade date plus one for
fund accounting. Dividend income is recognized on the ex-dividend date, and
interest income is recognized on an accrual basis. Discounts and premiums
on securities purchased are amortized over the life of the respective
securities.
Note 2 - Distributions to shareholders
Distributions were paid as follows for 1995: April 26 was the record date for
an income distribution on April 27 of $0.0526 per share, aggregating
$2,069.87; July 27 was the record date for an income distribution of $0.0413
per share on July 28, aggregating $2,697.71; October 30 was the record date
for an income distribution of $0.0225 per share on October 31, aggregating
$2,243.24. This income will be taxable to shareholders as ordinary income.
Note 3 - Organizational expenses
The Fund has incurred organizational expenses in the amount of $16,218.
Organizational expenses are being amortized monthly over a period of 60
months, beginning on January 1, 1995. The balance outstanding on November
30, 1995 is $12,733.
Note 4 - Capital share transactions
As of November 30, 1995, there were an unlimited number of shares of no par
value capital stock authorized and capital paid in aggregated $1,429,961.
Transactions in capital stock were as follows:
Shares Amount
<TABLE> <C> <C>
<S>
Shares sold 109,910.579 $1,448,251
Shares issued in reinvestment
of dividends 512.742 7,063
110,423.321 1 ,455,314
Shares redeemed 2,078.418 25,353
Net increase 108,344.903 $1,429,961
</TABLE>
Note 5 - Investment transactions
The Fund made purchases and sales of investment securities (excluding short-
term securities) of $1,547,888 and $197,719, respectively during the period
January 1, 1995 through November 30, 1995; purchases of U.S. Government
obligations were $38,982. There was no net loss on investments for the
period.
<PAGE>
Notes to Financial Statements(continued)
November 30, 1995
As of November 30, 1995, the unrealized appreciation of securities was
$179,385; accumulated undistributed net realized gains on investment
transactions totaled $15,391.
Note 6 - Investment advisory fees and other transactions with affiliates
The Fund pays advisory fees for investment management and advisory services
under a management agreement with IPS Advisory, Inc.(the Advisor) Under
the agreement, the advisor will pay all of the Fund's operating expenses,
excluding brokerage fees and commissions, taxes, interest and extraordinary
expenses. The Fund is obligated to pay the Advisor a fee computed and
accrued daily and paid monthly at an annual rate of 1.40% of its average
daily net assets to and including $100,000,000, 1.15% of such assets from
$100,000,000 to and including $250,000,000, and 0.90% of such assets in
excess of $250,000,000.
Certain officers and trustees of the Fund are also officers and directors of
the investment advisor.
Securities Service Network, Inc.(SSNI), the Fund's underwriter, has received
no income from sales commissions earned on sales of the Fund shares, since it
is a no-load fund. Mr. D'Amico and Mr. Loest are registered representatives
of SSNI.
All securities trades for the Fund have been made through SSNI. Mr. D'Amico
and Mr. Loest, as registered representatives of SSNI, receive benefits from
securities trading commissions paid by the Fund to SSNI.
IPS MILLENNIUM FUND
<TABLE>
Supplementary Information, Selected Per Share Data and Ratios
For the year ended November 30, 1995
<S>
Per share data: <C>
Investment Income $ 0.273
Expenses 0.152
Net Investment income 0.121
Net realized and unrealized gain
(loss) on investments 2.982
Total income (loss) from investment
operations 3.103
Dividends from net investment income 0.107
Net asset value:
Beginning of year $12.000
End of year $14.996
Total return 25.13%
Ratios:
Net assets, end of period (thousands) $1,625.6
Ratio of expenses to average net assets 1.4%
Ratio of net income to average net assets 1.0%
Portfolio turnover rate 26.7%
</TABLE>
See notes to financial statements.
