Two Centre Square 625 South Gay Street Suite 630 Knoxville, Tennessee
37902 Phone 423/524-1676 Fax 423/544-0630
Gregory D'Amico Robert Loest, Ph.D., CFA
President & Portfolio Manager Senior Portfolio Manager
Fellow Shareholders:
We are pleased to present our semi-annual report for the six-month period
ended May 31, 1996. The Fund has now been in existence for 18 months.
Since this is our first report for which we have been fully invested for a full
year, the results of the most recent six and 12 month periods should be more
representative than the first six
months or year, since we didn't become fully invested until June of 1995.
Your Fund's performance and our methodology of stock analysis have been
the subject of several positive
news articles during 1996. First, the Knoxville News-Sentinel wrote an
excellent feature piece on IPS Advisory and
the IPS Millennium Fund which generated a great deal of interest regionally.
The Fund was also the subject of a
piece on EVATM (Economic Value Added) analysis by William Rukeyser
that appeared several times on CNNfn, and again on CNN's "Your Money"
program. On June 7 your Fund was ranked the
#5 Growth & Income fund in the
country in the Wall Street Journal mutual fund section by Lipper Analytical
Services, for the year ending 5/30. In
addition, your Fund and IPS Advisory were the subject of a major article in
the Wall Street Journal Southeast
Edition in late June. Finally, IPS Millennium Fund was again ranked the #6
Growth & Income fund in the U.S. in
USA Today's mid-year mutual fund review for the 1996 year-to-date period
ending June 30. As a result of the
publicity, and the Fund's asset base has grown 140% in the six months ending
5/31/96.
Management's Discussion & Analysis
As of July 15, the NASDAQ was down 15.1% from its high on June 5. We
had a similar correction in
January this year. After all, bull markets simply don't go up this much
without significant corrections, and we
expect this correction to extend the bull market. Due to the Fund's exposure
to NASDAQ-based information
sectors, you should expect more volatility than with most growth and income
funds. However, the factors that herald
a recession or a bear market are not in evidence (tight money, rapidly rising
short term rates, a runaway economy,
rising inflation and wages, etc.). Thus, we feel this is simply the correction
analysts have long been expecting, not a
bear market. In fact, more reasonable measures of value like the Value Line
Composite or Barron's 50 Stock
Average have Price/Earnings ratios only slightly above 15, certainly not high
by historical standards.
The volatility of OTC stocks, as measured by the behavior of the
NASDAQ Composite Index, merits some
discussion, in order to be able to interpret what is going on in the overall
stock market. First, we must understand
that the center of gravity of the U.S. equities market is shifting dramatically
since the recovery from the recession of
1991. Historically, dramatic changes in volatility and in volume of trading
in U.S. stock markets have occurred
during the bull market following a correction, especially if that correction
was the result of a recession. During the
dramatic bull market that began in 1982, for instance, volume on all
exchanges increased by an order of magnitude.
<TABLE>
Weekly Volume, in Millions of Shares
Date NASDAQ Volume NYSE Volume
<S> <C> <C>
1/89 538m 793m
1/90 650m 817m
1/91 598m 759m
1/92 1,217m 1,172m
1/93 1,315m 1,076m
1/94 1,588m 1,564m
1/95 1,566m 1,705m
1/96 2,597m 2,063m
6/96 2,858m 1,887m
</TABLE>
The table above illustrates the volume shift to OTC stocks since the
recession of 1991. Note that volume
in the NASDAQ Composite was only about three-quarters that of the NYSE
through the 1980s, and into the early
1990s. Before that, NASDAQ volume was an even smaller fraction of NYSE
volume. In 1992, while volume on
both exchanges surged, the NASDAQ caught up with the NYSE in volume for
the first time in history. Beginning
with 1996, the NASDAQ is clearly becoming the dominant equities market in
the U.S. This is not a temporary
mania like we saw in 1982 - 83, but a fundamental shift in the control of
financial market information and individual
equities from Wall Street and the NYSE to cyberspace, direct on-line
electronic trading and the NASDAQ market.
The majority of growth and new jobs are in the services and information
sectors, which is why we emphasize those
investment areas. The NASDAQ and the World Wide Web are the future of
the financial markets.
We believe this has some important implications for investment policy,
and how portfolio managers
interpret stock market behavior. First of all, it tells us that U.S.
stock markets will become more volatile than they
have been in the past, since they are now dominated by the more volatile
NASDAQ. Higher volatility is a direct,
mathematical result of lower interest rates, so the lower rates of the last
several years have also increased market
volatility. This means the Dow Jones Industrial Average and the S&P 500 are
now less valid as measures of the
overall movement and value in the stock market. For instance, if we continue
to define corrections in terms of how
much the DJIA has dropped, we will be misled about what is going on in the
overall market. A good example is the
correction from mid-December 95 to mid-January 96. The NYSE Composite
dropped 2.6%, while the NASDAQ
Composite dropped 7.7%, nearly three times as much. Judging by their own
portfolios, most investors probably
considered that a correction, even though the NYSE did not indicate it. This
was also clearly a buying opportunity if
you defined the market in terms of the NASDAQ, but not if you looked at the
DJIA or other NYSE-based indexes.
We increased our exposure signifcantly to several NASDAQ companies as a
result, while many other managers sold
stocks. As it turns out, watching the NASDAQ has paid off well for you
through mid-year.
Analysis of Performance
As you will recall from our annual report, we highlighted several
companies we expected to do well this
year in the "Future Opportunities" section, and predicted that interest rates
would drop in the next year or so,
benefiting REITs, electric utilities and financial and insurance companies.
So far, short term rates have fallen and
long term rates have risen, with mixed results, and the fear currently is
that the Federal Reserve will soon raise rates.
We still feel that even if this happens, it will only be a temporary move in
a long-term interest rate decline, but our
time horizon for lower rates is now in 1997. This means our interest
sensitive sectors will probably continue to
underperform for the rest of 1996, and possibly into 1997.
Of the stocks we highlighted, US Robotics, Cisco Systems, Computer
Associates, Microsoft, Oracle,
Intel, Motorola, Viking and Fastenal, every single one has done well, and
some spectacularly well. Our superior
performance for the period has come disproportionately from the high tech
equipment, telecommunications and
software sectors. Small losses occurred in financial, drug, REIT and electric
utility stocks, with the property/casualty
stocks moving sideways. A more detailed position statement accompanies
this report.
Outlook for the Future
We will continue to be fully invested, but we do not expect another 17%
gain the second half of the year. In
fact, we may do well just to recover from the recent correction in tech stocks.
Also, we think you should keep your
eye on the NASDAQ as well as the DJIA and the S&P 500. The NYSE
market cap is still about five times as large
as the NASDAQ's, but the NASDAQ's is growing twice as fast, and volume is
greater.
Our analytical approach using EVATM analysis has served the Fund well
to date, but it would be useless
without a view of the future that accounts for the changes we are seeing in
the financial markets and in our
civilization and technology in general. The U.S. and other advanced nations
have entered what we and some others
increasingly view as a "post-capitalist" world. In this new world, the means of
production are increasingly owned
by the employees, because it is their knowledge that really constitutes the
earning assets of modern companies, not
plant and equipment. Pension plans, which are assets of the employees, also
own nearly half of all corporate stock in
the U.S. New insight into the development of our economy can be gained by a
understanding of chaos theory and
complexity theory, in that many of the newer, high tech and service-oriented
growth companies no longer waste their
energies in cut-throat competition, but have begun to evolve complex new
"corporate ecosystems" organizing
spontaneously around open architectures such as the Intel chip, Microsoft and
Oracle software and the genetic
code, where companies cooperate, not compete, to reduce risk and increase
growth for everyone.
We will continue to look for companies that we feel will do well in this
new world, and that fit our model of
how the economy and our civilization is evolving. We will also continue to
look for combinations of extreme
undervaluation plays in growth stocks, like the Sturm Ruger and Rural/Metro
purchases that have done so well for
the Fund. We hope you are as optimistic about the future as we are. Thank
you for your confidence in IPS
Millennium Fund, and if we can be of assistance to you in any way, please call
us.
Copyright 1996, IPS Advisory, Inc. Page 3
FINANCIAL STATEMENTS
(Unaudited)
IPS MILLENNIUM FUND
Statement of Assets and Liabilities
For the six months ended May 31, 1996
<TABLE>
<S> <C>
Assets:
Investments in securities, at value -
identified cost $2,947,110 $3,573,445
Cash 1
Accrued income
Dividends 3,901
Interest 0
Other assets 12,181
Total assets 3,589,528
Liabilities:
Payables - Investment securities
purchased 0
Accrued expenses 5,095
Total liabilities 5,095
Net Assets at May 31, 1996:
Equivalent to $17.38 per share based on
206,262.445 shares of capital stock
outstanding $3,584,433
</TABLE>
<TABLE> Statement of Operations
For the six months ended May 31, 1996
<S> <C>
Investment Income:
Income
Dividend income 15,607
Interest 4,100
Total income 19,707
Expenses:
Management fees 17,851
Expense reimbursement ( 1,622)
Organizational cost 1,631
Total expense 17,860
Net investment income 1,847
Realized & Unrealized Gain (Loss) on Investments:
Net realized gain on investments 2,619
Change in unrealized appreciation
of investments for the year 446,950
Net gain (loss) on investments 449,569
Net Increase in Net Assets
Resulting from Operations $451,416
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
Statement of Changes in Net Assets
For the six months ended May 31, 1996
<S> <C>
Increase (Decrease) in Net Assets From Operations:
Investment income-net $ 1,847
Net realized gain on investments 2,619
Change in unrealized appreciation 446,950
Net increase in net assets resulting
from operations 451,416
Distributions to Shareholders from-
Investment Income-Net: ( 5,151)
Capital Gains ( 11,105)
( 16,256)
Capital Share Transactions:
Issued-regular 1,564,827
Issued-in lieu of cash distributions 16,251
Redeemed-regular ( 57,406)
Increase (decrease) in net
assets due to capital share
transactions 1,523,672
Net assets
Beginning of period $1,625,600
End of period $3,584,433
</TABLE>
See notes to financial statements.
<PAGE>
IPS MILLENNIUM FUND
Notes to Financial Statements
Six Months Ended May 31, 1996
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 3, 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 May 31, 1996, net unrealized appreciation on investments for book and
federal income tax purposes aggregated $626,335. The cost of portfolio
securities for book and federal income tax purposes was $2,947,110 at May
31, 1996.
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 F.Y. 1995: December 28 was the record
date for an income distribution on December 29 of $0.0218 per share,
aggregating $2,981.32, and for a short term capital gains distribution of
$0.0812 per share on December 29 aggregating $11,104.73; February 28 was
the
record date for an income distribution of $0.013 per share on February 29,
aggregating $2,167.73. 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 3, 1995. The balance outstanding on
May 31, 1996 is $11,370.37.
Note 4 - Capital share transactions
As of May 31, 1996, 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 for the period 11/30/96 through 5/31/96 were as
follows:
<TABLE>
Shares Amount
<S> <C> <C>
Shares sold 100,424.033 $1,597,329
Shares issued in reinvestment
of dividends 1,093.636 16,251
Total 101,517.669 1,581,078
Shares redeemed 3,600.127 57,406
Net increase 97,917.542 $1,523,672
</TABLE>
Note 5 - Investment transactions
The Fund made purchases and sales of investment securities (excluding
short-term securities) of $2,100,296 and $354,186, respectively during the
period November 30, 1995 through May 31, 1996. There was no net loss on
investments for the period.
<PAGE>
Notes to Financial Statements(continued)
Six Months Ended May 31, 1996
As of May 31, 1996, the unrealized appreciation of securities was $626,335;
accumulated undistributed net realized gains on investment transactions
totaled $2,619.45.
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.
<TABLE>
IPS MILLENNIUM FUND
Financial Highlights, Selected Per Share Data and Ratios
For the six months For the 11 months
ended May 31, 1996 ended November 30, 1995
Per share data: Per share data:
<S> <C> <C>
Investment Income $ 0.160 $ 0.273
Expenses 0.145 0.152
Net Investment income 0.015 0.121
Net realized and unrealized gain
(loss) on investments 2.485 2.982
Total income (loss) from investment
operations 2.491 3.103
Dividends from net
investment income (0.035) 0.107
Dividends from net realized gains
on investments (0.081) 0.000
Change in net asset value $2.375 $2.996
Net asset value:
Beginning of year $14.996 $12.000
End of year $17.380 $14.996
Total return (not annualized) 16.805% 25.13%
Ratios:
Net assets, end of
period (thousands) $3,584.4 $1,625.6
Ratio of expenses to average
net assets 1.396% 1.4%
Ratio of net income to average
net assets 0.144%
Portfolio turnover rate 14.30% 26.7%
Average commissions per share $0.105 $0.138
See notes to financial statements.<PAGE>
</TABLE>
<TABLE>
IPS Millennium Fund: Investment Portfolio May 31, 1996
Sector Shares or Market Percent of
Weighting Principal Amount Value Net Assets
<S> <C> <C> <C>
Industrial Cyclicals 4.8%
Fastenal Co. 1,865 $83,925 2.3%
Federal Signal 1,200 $30,150 0.8%
Sturm Ruger & Co Inc. 1,200 $59,550 1.7%
Consumer Retail 7.0%
Nature's Sunshine Prods 2,400 $67,800 1.9%
Polaris Industries 1,900 $65,788 1.8%
Rexall Sundown 900 $23,850 0.7%
Viking Office Products 3,260 $93,318 2.6%
Computer &
Internet Hardware 24.6%
Analog Devices 600 $16,575 0.5%
Applied Materials 2,425 $90,331 2.5%
Cabletron Systems 500 $36,375 1.0%
Cisco 3,100 $169,725 4.7%
EMC Corp 3,000 $66,375 1.9%
Intel, Inc. 2,000 $151,000 4.2%
Linear Technology 1,200 $41,400 1.2%
Motorola, Inc. 2,110 $140,843 3.9%
Shiva Inc. 800 $59,800 1.7%
US Robotics 1,200 $110,100 3.1%
Property/Casualty
Insurance 4.1%
American Inter.Group 400 $37,700 1.1%
Frontier Insurance Group 3,200 $110,000 3.1%
Banking & Brokerage 10.1%
Charles Schwab 2,000 $48,500 1.4%
Corestates Financial 900 $35,437 1.0%
First Tennessee 400 $13,450 0.4%
KeyCorp 800 $31,000 0.9%
Marshall & Ilsley 1,500 $41,250 1.2%
Mercury Finance Co. 4,200 $52,500 1.5%
Nat'l Commerce Bankcorp 1,816 $56,296 1.6%
Northwest Corp. 700 $24,413 0.7%
U.S. Bancorp 800 $28,500 0.8%
Valley National Bankcorp 1,050 $30,581 0.9%
Specialty Chemical 5.3%
International Flavors 850 $41,331 1.2%
Ionics, Inc. 1,420 $70,290 2.0%
Sigma-Aldrich 1,389 $77,784 2.2%
Communications 9.4%
Airtouch Communications 1,300 $41,438 1.2%
Andrew Corporation 2,400 $130,200 3.6%
AT&T Corp. 1,000 $62,375 1.7%
LCI International 1,200 $38,250 1.1%
Lucent Technologies 1,000 $38,000 1.1%
Qualcomm 500 $27,219 0.8%
Information & Services 7.4%
CUC International 1,300 $48,100 1.3%
Devry Inc. 500 $19,875 0.6%
Equifax, Inc. 4,000 $99,000 2.8%
Rural/Metro, Inc. 1,885 $63,147 1.8%
Scientific Games Holdings 1,000 $33,500 0.9%
Software 8.3%
Computer Associates, Inc. 1,360 $98,940 2.8%
Microsoft Corp. 600 $71,250 2.0%
Oracle Systems 3,405 $112,791 3.1%
Physician Computer Network 800 $9,900 0.3%
Raptor Systems Inc. 200 $6,200 0.2%
Drugs 6.0%
Abbott Laboratories, Inc. 1,130 $48,731 1.4%
Becton, Dickinson 300 $25,500 0.7%
Mylan Labs 4,083 $77,577 2.2%
Pfizer, Inc. 600 $42,450 1.2%
Vical 1,000 $19,500 0.5%
Real Estate
Investment Trust 6.5%
Kimco 2,000 $54,750 1.5%
Merry Land & Investment 2,500 $54,687 1.5%
New Plan Realty Trust 3,805 $77,051 2.1%
Washington REIT ,800 $46,200 1.3%
Electric Utilities 1.9%
Duke Power 800 $38,600 1.1%
Wisconsin Energy 1,100 $30,800 0.9%
Money Market Funds 4.2%
Dreyfus Treasury
Prime Money Fund 21,064 $21,064 .6%
Provident Insured
Money 101,007 $101,007 2.8%
Riverfront U.S.
Govt Securities 29,406 $29,406 0.8%
Cash, Payable &
Receivables 0.3%
Excess of Cash &
Receivables over Payables 10,988 $10,988 0.3%
TOTAL INVESTMENTS: $3,584,432 100
</TABLE>
