UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-03641
40|86 Series Trust
(Exact name of registrant as specified in charter)
11825 N. Pennsylvania Street
Carmel, IN 46032
(Address of principal executive offices) (Zip code)
Jeffrey M. Stautz
11825 N. Pennsylvania Street
Carmel, IN 46032
(Name and address of agent for service)
Registrant's telephone number, including area code: 317-817-6422
Date of fiscal year end: December 31, 2005
Date of reporting period: June 30, 2005
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
June 30, 2005
Semi-Annual Report
Equity Portfolio
Balanced Portfolio
High Yield Portfolio
Fixed Income Portfolio
Government Securities Portfolio
Money Market Portfolio
40|86 Series Trust | Semi-Annual Report |
Table of Contents | June 30, 2005 |
Statements of Assets and Liabilities | 2 |
Statements of Operations | 2 |
Statements of Changes in Net Assets | 4 |
Equity Portfolio | |
Portfolio Manager’s Review | 6 |
Schedule of Investments | 7 |
Balanced Portfolio | |
Portfolio Managers’ Review | 14 |
Schedule of Investments | 16 |
High Yield Portfolio | |
Portfolio Managers’ Review | 26 |
Schedule of Investments | 28 |
Fixed Income Portfolio | |
Portfolio Managers’ Review | 33 |
Schedule of Investments | 35 |
Government Securities Portfolio | |
Portfolio Managers’ Review | 42 |
Schedule of Investments | 43 |
Money Market Portfolio | |
Portfolio Manager’s Review | 45 |
Schedule of Investments | 46 |
Financial Highlights | 48 |
Notes to Financial Statements | 54 |
Expense Example | 58 |
Board of Trustees Approval of Investment Advisory Contract | 60 |
Submission of Matters to a Vote of Security Holders | 62 |
Board of Trustees and Officers | 64 |
This report is for the information of 40|86 Series Trust contract owners.
It is authorized for distribution to other persons only when preceded, or accompanied by,
a current prospectus that contains more complete information, including charges and expenses.
40|86 Series Trust | Semi-Annual Report |
Statements of Assets and Liabilities | |
June 30, 2005 (unaudited) |
EQUITY PORTFOLIO | BALANCED PORTFOLIO | ||||||
ASSETS: | |||||||
Investments in securities at cost | $ | 191,223,204 | $ | 51,391,611 | |||
Investments in securities at value (Note 2) | $ | 220,714,441 | $ | 56,469,107 | |||
Interest and dividends receivable | 215,198 | 194,723 | |||||
Receivable from Conseco, Inc. subsidiaries | 20,620 | 2,707 | |||||
Receivable for securities sold | 783,898 | 1,130,536 | |||||
Cash | 899 | 761 | |||||
Prepaid expenses | 6,653 | 1,674 | |||||
Total assets | 221,741,709 | 57,799,508 | |||||
LIABILITIES AND NET ASSETS: | |||||||
Payable to Conseco, Inc. subsidiaries | 89,593 | 24,515 | |||||
Accrued expenses | 176,896 | 50,813 | |||||
Payable for shares redeemed | 121,119 | 42,759 | |||||
Payable for securities purchased | 1,779,070 | — | |||||
Payable upon return of securities on loan | 52,420,508 | 12,358,240 | |||||
Total liabilities | 54,587,186 | 12,476,327 | |||||
Net assets | $ | 167,154,523 | $ | 45,323,181 | |||
NET ASSETS CONSIST OF: | |||||||
Paid-in capital | $ | 135,029,168 | $ | 52,531,479 | |||
Accumulated undistributed net investment income | 296,459 | 723 | |||||
Accumulated undistributed net realized gain (loss) on investments | 2,337,659 | (12,286,517 | ) | ||||
Net unrealized appreciation (depreciation) on investments | 29,491,237 | 5,077,496 | |||||
Net assets | $ | 167,154,523 | $ | 45,323,181 | |||
Shares outstanding (unlimited shares authorized) | 6,541,902 | 3,342,744 | |||||
Net asset value, redemption price and offering price per share | $ | 25.55 | $ | 13.56 | |||
Statements of Operations | |||||||
For the six months ended June 30, 2005 (unaudited) | |||||||
EQUITY PORTFOLIO | BALANCED PORTFOLIO | ||||||
INVESTMENT INCOME: | |||||||
Interest | $ | 18,155 | $ | 345,455 | |||
Dividends | 1,162,633 | 271,455 | |||||
Securities lending income, net | 19,822 | 7,707 | |||||
Total investment income | 1,200,610 | 624,617 | |||||
EXPENSES: | |||||||
Investment advisory fees | 534,271 | 147,904 | |||||
Distribution fees | 205,489 | 56,886 | |||||
Administration fee | 108,262 | 29,977 | |||||
Custody fees | 5,561 | 5,605 | |||||
Auditor fees | 47,067 | 13,197 | |||||
Reports - printing | 10,895 | 2,689 | |||||
Trustee fees and expenses | 22,300 | 5,679 | |||||
Insurance | 2,803 | 749 | |||||
Legal | 22,351 | 5,518 | |||||
Other | 5,133 | 1,302 | |||||
Total expenses before expense reimbursement by Adviser | 964,132 | 269,506 | |||||
Expense reimbursement by Adviser (Note 3) | (59,981 | ) | (19,207 | ) | |||
Net expenses | 904,151 | 250,299 | |||||
Net investment income | 296,459 | 374,318 | |||||
NET REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS: | |||||||
Net realized gain (loss) on sales of investments | 14,874,472 | 1,956,153 | |||||
Net change in unrealized appreciation (depreciation) on investments | (8,461,822 | ) | (1,479,598 | ) | |||
Net realized and unrealized gain (loss) on investments | 6,412,650 | 476,555 | |||||
Net increase in net assets from operations | $ | 6,709,109 | $ | 850,873 | |||
The accompanying notes are an integral part of these financial statements.
2
40|86 Series Trust | Semi-Annual Report |
HIGH YIELD PORTFOLIO | FIXED INCOME PORTFOLIO | GOVERNMENT SECURITIES PORTFOLIO | MONEY MARKET PORTFOLIO | ||||||||||
$ | 8,192,449 | $ | 28,672,246 | $ | 17,268,096 | $ | 30,096,851 | ||||||
$ | 8,272,557 | $ | 29,179,819 | $ | 17,495,726 | $ | 30,096,851 | ||||||
143,648 | 315,621 | 176,153 | 107,712 | ||||||||||
— | — | — | 3,680 | ||||||||||
91,020 | — | — | — | ||||||||||
594,708 | 480,449 | 953 | 37,431 | ||||||||||
405 | 1,158 | 607 | 1,096 | ||||||||||
9,102,338 | 29,977,047 | 17,673,439 | 30,246,770 | ||||||||||
6,181 | 13,103 | 9,918 | 12,305 | ||||||||||
11,391 | 30,318 | 16,810 | 18,344 | ||||||||||
120,264 | 284,951 | 50,944 | 207,071 | ||||||||||
147,050 | — | 750,104 | — | ||||||||||
— | 3,792,853 | 3,064,509 | — | ||||||||||
284,886 | 4,121,225 | 3,892,285 | 237,720 | ||||||||||
$ | 8,817,452 | $ | 25,855,822 | $ | 13,781,154 | $ | 30,009,050 | ||||||
$ | 8,680,386 | $ | 25,788,704 | $ | 13,811,054 | $ | 30,009,050 | ||||||
1,342 | 3,969 | 2,652 | — | ||||||||||
55,616 | (444,424 | ) | (260,182 | ) | — | ||||||||
80,108 | 507,573 | 227,630 | — | ||||||||||
$ | 8,817,452 | $ | 25,855,822 | $ | 13,781,154 | $ | 30,009,050 | ||||||
870,247 | 2,564,078 | 1,184,972 | 30,009,050 | ||||||||||
$ | 10.13 | $ | 10.08 | $ | 11.63 | $ | 1.00 | ||||||
HIGH YIELD PORTFOLIO | FIXED INCOME PORTFOLIO | GOVERNMENT SECURITIES PORTFOLIO | MONEY MARKET PORTFOLIO | ||||||||||
$ | 301,357 | $ | 684,365 | $ | 314,651 | $ | 443,826 | ||||||
3,114 | 9,840 | — | — | ||||||||||
— | 3,001 | 3,141 | — | ||||||||||
304,471 | 697,206 | 317,792 | 443,826 | ||||||||||
28,886 | 65,363 | 34,177 | 79,499 | ||||||||||
10,317 | 32,681 | 17,089 | — | ||||||||||
5,436 | 17,224 | 9,007 | 20,972 | ||||||||||
2,601 | 3,731 | 1,235 | 9,183 | ||||||||||
3,201 | 7,323 | 3,138 | 7,811 | ||||||||||
363 | 1,288 | 434 | 1,460 | ||||||||||
820 | 3,043 | 1,216 | 3,628 | ||||||||||
131 | 387 | 187 | 518 | ||||||||||
780 | 2,706 | 968 | 3,055 | ||||||||||
247 | 699 | 252 | 720 | ||||||||||
52,782 | 134,445 | 67,703 | 126,846 | ||||||||||
(5,326 | ) | (10,256 | ) | (2,766 | ) | (55,297 | ) | ||||||
47,456 | 124,189 | 64,937 | 71,549 | ||||||||||
257,015 | 573,017 | 252,855 | 372,277 | ||||||||||
131,287 | 479,457 | (42,959 | ) | — | |||||||||
(341,629 | ) | (527,056 | ) | 76,572 | — | ||||||||
(210,342 | ) | (47,599 | ) | 33,613 | — | ||||||||
$ | 46,673 | $ | 525,418 | $ | 286,468 | $ | 372,277 |
The accompanying notes are an integral part of these financial statements.
3
40|86 Series Trust | Semi-Annual Report | |||
Statements of Changes in Net Assets | ||||
For the six months ended June 30, 2005 (unaudited) and the year ended December 31, 2004 |
EQUITY PORTFOLIO | BALANCED PORTFOLIO | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
OPERATIONS: | ||||||||||||||||
Net investment income | $ | 296,459 | $ | 543,992 | $ | 374,318 | $ | 920,784 | ||||||||
Net realized gain (loss) on sale of investments | 14,874,472 | 24,272,061 | 1,956,153 | 2,538,443 | ||||||||||||
Net change in unrealized appreciation (depreciation) on investments | (8,461,822 | ) | 5,431,295 | (1,479,598 | ) | 1,286,456 | ||||||||||
Net increase from operations | 6,709,109 | 30,247,348 | 850,873 | 4,745,683 | ||||||||||||
DIVIDENDS AND DISTRIBUTIONS: | ||||||||||||||||
Dividends to shareholders from net investment income | — | (546,828 | ) | (373,595 | ) | (919,319 | ) | |||||||||
Distributions to shareholders of net realized gain | — | (590,150 | ) | — | — | |||||||||||
Net decrease from dividends and distributions | — | (1,136,978 | ) | (373,595 | ) | (919,319 | ) | |||||||||
CAPITAL SHARE TRANSACTIONS: | ||||||||||||||||
Shares sold | 3,159,965 | 5,596,338 | 2,198,887 | 3,728,578 | ||||||||||||
Reinvested dividends and distributions | — | 1,136,978 | 373,595 | 919,319 | ||||||||||||
Shares redeemed | (11,615,541 | ) | (32,740,685 | ) | (4,782,715 | ) | (9,699,876 | ) | ||||||||
Net increase (decrease) from capital share transactions | (8,455,576 | ) | (26,007,369 | ) | (2,210,233 | ) | (5,051,979 | ) | ||||||||
Total increase (decrease) in net assets | (1,746,467 | ) | 3,103,001 | (1,732,955 | ) | (1,225,615 | ) | |||||||||
NET ASSETS: | ||||||||||||||||
Beginning of period | 168,900,990 | 165,797,989 | 47,056,136 | 48,281,751 | ||||||||||||
End of period | $ | 167,154,523 | $ | 168,900,990 | $ | 45,323,181 | $ | 47,056,136 | ||||||||
Including undistributed net investment income of | $ | 293,766 | $ | — | $ | 723 | $ | — | ||||||||
SHARE DATA: | ||||||||||||||||
Shares sold | 129,428 | 261,061 | 164,077 | 295,581 | ||||||||||||
Reinvested dividends and distributions | — | 46,313 | 27,811 | 71,550 | ||||||||||||
Shares redeemed | (472,002 | ) | (1,541,585 | ) | (355,853 | ) | (771,013 | ) | ||||||||
Net increase (decrease) | (342,574 | ) | (1,234,211 | ) | (163,965 | ) | (403,882 | ) | ||||||||
Shares Outstanding | ||||||||||||||||
Beginning of period | 6,884,476 | 8,118,687 | 3,506,709 | 3,910,591 | ||||||||||||
End of period | 6,541,902 | 6,884,476 | 3,342,744 | 3,506,709 |
The accompanying notes are an integral part of these financial statements.
4
40|86 Series Trust | Semi-Annual Report |
HIGH YIELD PORTFOLIO | FIXED INCOME PORTFOLIO | GOVERNMENT SECURITIES PORTFOLIO | MONEY MARKET PORTFOLIO | |||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||
$ | 257,015 | $ | 610,445 | $ | 573,017 | $ | 1,324,808 | $ | 252,855 | $ | 632,105 | $ | 372,277 | $ | 371,524 | |||||||||
131,287 | 594,570 | 479,457 | 523,986 | (42,959 | ) | (217,121 | ) | — | (4,732 | ) | ||||||||||||||
(341,629 | ) | (185,892 | ) | (527,056 | ) | (477,612 | ) | 76,572 | (17,630 | ) | — | — | ||||||||||||
46,673 | 1,019,123 | 525,418 | 1,371,182 | 286,468 | 397,354 | 372,277 | 366,792 | |||||||||||||||||
(255,673 | ) | (615,726 | ) | (570,064 | ) | (1,327,299 | ) | (251,478 | ) | (630,280 | ) | (372,277 | ) | (362,228 | ) | |||||||||
— | (412,986 | ) | — | — | — | — | — | — | ||||||||||||||||
(255,673 | ) | (1,028,712 | ) | (570,064 | ) | (1,327,299 | ) | (251,478 | ) | (630,280 | ) | (372,277 | ) | (362,228 | ) | |||||||||
3,674,796 | 6,858,215 | 2,245,177 | 5,388,883 | 1,514,065 | 4,762,427 | 20,913,336 | 71,999,146 | |||||||||||||||||
255,674 | 1,028,712 | 570,064 | 1,327,299 | 251,478 | 630,280 | 372,277 | 362,228 | |||||||||||||||||
(3,779,787 | ) | (9,942,797 | ) | (4,362,318 | ) | (14,380,783 | ) | (2,583,931 | ) | (13,385,741 | ) | (25,031,592 | ) | (80,575,921 | ) | |||||||||
150,683 | (2,055,870 | ) | (1,547,077 | ) | (7,664,601 | ) | (818,388 | ) | (7,993,034 | ) | (3,745,979 | ) | (8,214,547 | ) | ||||||||||
(58,317 | ) | (2,065,459 | ) | (1,591,723 | ) | (7,620,718 | ) | (783,398 | ) | (8,225,960 | ) | (3,745,979 | ) | (8,209,983 | ) | |||||||||
8,875,769 | 10,941,228 | 27,447,545 | 35,068,263 | 14,564,552 | 22,790,512 | 33,755,029 | 41,965,012 | |||||||||||||||||
$ | 8,817,452 | $ | 8,875,769 | $ | 25,855,822 | $ | 27,447,545 | $ | 13,781,154 | $ | 14,564,552 | $ | 30,009,050 | $ | 33,755,029 | |||||||||
$ | — | $ | — | $ | 3,969 | $ | — | $ | 2,652 | $ | 1,275 | $ | — | $ | 9,296 | |||||||||
362,907 | 654,340 | 223,482 | 533,669 | 130,953 | 405,061 | 20,913,336 | 71,999,146 | |||||||||||||||||
25,205 | 98,065 | 56,754 | 132,228 | 21,794 | 54,114 | 372,277 | 362,228 | |||||||||||||||||
(370,934 | ) | (937,966 | ) | (433,117 | ) | (1,428,026 | ) | (223,914 | ) | (1,150,377 | ) | (25,031,592 | ) | (80,575,921 | ) | |||||||||
17,178 | (185,561 | ) | (152,881 | ) | (762,129 | ) | (71,167 | ) | (691,202 | ) | (3,745,979 | ) | (8,214,547 | ) | ||||||||||
853,069 | 1,038,630 | 2,716,959 | 3,479,088 | 1,256,139 | 1,947,341 | 33,755,029 | 41,969,576 | |||||||||||||||||
870,247 | 853,069 | 2,564,078 | 2,716,959 | 1,184,972 | 1,256,139 | 30,009,050 | 33,755,029 |
The accompanying notes are an integral part of these financial statements.
5
40|86 Series Trust | Semi-Annual Report |
Portfolio Manager’s Review (unaudited) | June 30, 2005 |
Equity Portfolio
How did the Portfolio perform relative to its benchmark?
The 40|86 Series Trust Equity Portfolio returned 4.16% for the six months ended June 30, 2005. The Portfolio’s benchmark, the S&P 500 Index, declined 0.81% for the same period.(1)
What factors contributed to the variance in performance between the Portfolio and its benchmark?
Most of the Portfolio’s out-performance came during the first three months of the year. During the first quarter, each of the three broad factors in our model (Value, Quality and Earnings Expectations) added value. Low volatility and moderate economic and profit growth laid the foundation for a rational market. In such an environment, investors tend to focus on long-term fundamentals, which bodes well for our disciplined philosophy and process.
Which holdings most enhanced the Portfolio’s performance?
Stock selection in Consumer Discretionary (14.9% of the Portfolio), Health Care (10.1%) and Financial (20.5%) sectors contributed the most. The largest individual contributors to the Portfolio’s favorable performance, were over-weight positions in oil refiner and gasoline retailer Valero Energy, insurance provider Aetna and electricity generator and distributor TXU.
Which holdings most negatively impacted the Portfolio’s performance?
Stock selection in the Industrial (14.3% of the Portfolio), Materials (4.7%) and Technology (13.8%) sectors detracted the most. The largest individual detractors, were under-weight positions in health benefits company WellPoint and over-weight positions in semiconductor manufacturer Cree and asset management technology provider SEI Investments.
What is your outlook for the rest of the fiscal year?
We expect investors to continue to focus on companies that exhibit favorable long-term fundamentals. We believe the market will reward those companies that are most suited to withstand downturns. These are the companies that exhibit strong longer-term fundamentals, such as favorable valuations, increasing earnings outlooks and strong balance sheets. Our philosophy will not change based on short-term trends or conditions in the market. Our goal is to add value through security selection while attempting to neutralize other risk factors, such as market timing and sector rotation, for which there is not adequate compensation by the market.
Chicago Equity Partners, LLC
Asset Allocation as a Percent of Total Investments (excluding Securities Lending)
(1) | Past performance does not guarantee future results. Your investment return and principal will fluctuate, and your shares may be worth more or less than their original cost. Total return is provided in accordance with SEC guidelines for comparative purposes and reflects certain contractual expense reimbursements through April 30, 2006. If the expense reimbursement were not in place, the portfolio’s return would have been lower. The total returns shown do not include separate account expenses or the deduction of taxes that a contractholder would pay on portfolio distributions or the redemption of portfolio shares. The S&P 500 Index is an unmanaged index considered to be representative of the U.S. stock market in general. Investors cannot actually invest in an index. |
6
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Equity Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
COMMON STOCKS (99.9%) | ||||
Aerospace & Defense (1.0%) | ||||
34,600 | Rockwell Collins, Inc. | $ | 1,649,728 | |
Air Freight & Logistics (0.6%) | ||||
29,200 | Ryder System, Inc. | 1,068,720 | ||
Auto Components (1.1%) | ||||
22,500 | Autoliv, Inc. | 985,500 | ||
16,700 | BorgWarner, Inc. (c) | 896,289 | ||
1,881,789 | ||||
Beverages (0.8%) | ||||
11,900 | Molson Coors Brewing Co. (c) | 737,800 | ||
23,200 | PepsiAmericas, Inc. (c) | 595,312 | ||
1,333,112 | ||||
Biotechnology (2.0%) | ||||
18,600 | Charles River Laboratories International, Inc. (a)(c) | 897,450 | ||
19,200 | Genzyme Corp. (a) | 1,153,728 | ||
15,000 | Invitrogen Corp. (a)(c) | 1,249,350 | ||
3,300,528 | ||||
Capital Markets (2.1%) | ||||
48,000 | American Capital Strategies Ltd. (c) | 1,733,280 | ||
17,000 | The Bear Stearns Companies Inc. (c) | 1,766,980 | ||
3,500,260 | ||||
Chemicals (2.1%) | ||||
14,000 | FMC Corp. (a) | 785,960 | ||
32,900 | PPG Industries, Inc. | 2,064,804 | ||
15,400 | Praxair, Inc. | 717,640 | ||
3,568,404 | ||||
Commercial Banks (5.5%) | ||||
54,900 | AmSouth Bancorp (c) | 1,427,400 | ||
52,700 | Associated Banc-Corp (c) | 1,773,882 | ||
18,600 | Comerica, Inc. | 1,075,080 | ||
18,600 | Hibernia Corp. | 617,148 | ||
34,500 | Marshall & Ilsley Corp. (c) | 1,533,525 | ||
14,400 | Mercantile Bankshares Corp. | 742,032 | ||
19,100 | UnionBanCal Corp. | 1,278,172 | ||
9,500 | Zions Bancorporation | 698,535 | ||
9,145,774 |
The accompanying notes are an integral part of these financial statements.
7
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Equity Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | ||
Commercial Services & Supplies (3.1%) | |||
41,100 | Copart, Inc. (a)(c) | $ | 978,180 |
25,700 | Equifax, Inc. (c) | 917,747 | |
27,800 | Republic Services, Inc. | 1,001,078 | |
45,900 | RR Donnelley & Sons Co. (c) | 1,584,009 | |
20,000 | West Corp. (a) | 768,000 | |
5,249,014 | |||
Communications Equipment (1.6%) | |||
49,000 | Harris Corp. | 1,529,290 | |
34,500 | Scientific-Atlanta, Inc. | 1,147,815 | |
2,677,105 | |||
Computers & Peripherals (3.0%) | |||
9,600 | Lexmark International, Inc. (a)(c) | 622,368 | |
32,100 | NCR Corp. (a) | 1,127,352 | |
38,300 | QLogic Corp. (a)(c) | 1,182,321 | |
41,400 | SanDisk Corp. (a)(c) | 982,422 | |
76,500 | Western Digital Corp. (a) | 1,026,630 | |
4,941,093 | |||
Construction Materials (1.1%) | |||
26,400 | Martin Marietta Materials, Inc. (c) | 1,824,768 | |
Diversified Financial Services (2.4%) | |||
51,700 | CIT Group, Inc. | 2,221,549 | |
38,600 | Moody’s Corp. (c) | 1,735,456 | |
3,957,005 | |||
Diversified Telecommunication Services (0.6%) | |||
28,400 | CenturyTel, Inc. (c) | 983,492 | |
Electric Utilities (2.3%) | |||
102,100 | PG&E Corp. (c) | 3,832,834 | |
Electrical Equipment (0.6%) | |||
22,200 | Rockwell Automation, Inc. | 1,081,362 | |
Electronic Equipment & Instruments (1.5%) | |||
55,000 | Avnet, Inc. (a)(c) | 1,239,150 | |
34,500 | Ingram Micro, Inc. (a) | 540,270 | |
59,300 | Vishay Intertechnology, Inc. (a)(c) | 703,891 | |
2,483,311 | |||
Energy Equipment & Services (1.2%) | |||
16,000 | Diamond Offshore Drilling (c) | 854,880 | |
40,000 | Patterson-UTI Energy, Inc. | 1,113,200 | |
1,968,080 |
The accompanying notes are an integral part of these financial statements.
8
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Equity Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | ||
Food & Staples Retailing (1.4%) | |||
44,400 | Albertson’s, Inc. (c) | $ | 918,192 |
42,400 | Supervalu, Inc. | 1,382,664 | |
2,300,856 | |||
Food Products (1.8%) | |||
71,300 | Archer-Daniels-Midland Co. (c) | 1,524,394 | |
12,900 | Hershey Foods Corp. (c) | 801,090 | |
20,600 | Pilgrim’s Pride Corp. (c) | 703,078 | |
3,028,562 | |||
Gas Utilities (1.5%) | |||
37,100 | Questar Corp. | 2,444,890 | |
General Contractors (1.7%) | |||
3,500 | NVR, Inc. (a)(c) | 2,835,000 | |
Health Care Equipment & Supplies (2.5%) | |||
12,300 | Bausch & Lomb, Inc. (c) | 1,020,900 | |
19,200 | Becton, Dickinson & Co. | 1,007,424 | |
19,400 | C.R. Bard, Inc. | 1,290,294 | |
32,800 | Thermo Electron Corp. (a) | 881,336 | |
4,199,954 | |||
Health Care Providers & Services (5.5%) | |||
22,300 | Aetna, Inc. | 1,846,886 | |
14,700 | Cerner Corp. (a)(c) | 999,159 | |
27,800 | Coventry Health Care, Inc. (a) | 1,966,850 | |
16,100 | Humana, Inc. (a) | 639,814 | |
23,200 | Laboratory Corp Of America Holdings (a) | 1,157,680 | |
22,800 | McKesson Corp. (c) | 1,021,212 | |
5,650 | Renal Care Group, Inc. (a) | 260,465 | |
14,800 | Triad Hospitals, Inc. (a) | 808,672 | |
9,100 | Universal Health Services, Inc. | 565,838 | |
9,266,576 | |||
Hotels Restaurants & Leisure (2.4%) | |||
30,000 | Brinker International, Inc. (a) | 1,201,500 | |
14,100 | Choice Hotels International, Inc. (c) | 926,370 | |
57,000 | Darden Restaurants, Inc. | 1,879,860 | |
— | Harrah’s Entertainment, Inc. | 26 | |
4,007,756 | |||
Household Durables (1.9%) | |||
6,800 | The Black & Decker Corp. (c) | 610,980 | |
13,600 | Fortune Brands, Inc. | 1,207,680 | |
16,700 | MDC Holdings, Inc. | 1,373,575 | |
3,192,235 | |||
Household Products (0.7%) | |||
19,400 | Energizer Holdings, Inc. (a) | 1,206,098 |
The accompanying notes are an integral part of these financial statements.
9
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Equity Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Industrial Conglomerates (0.4%) | ||||
9,500 | Textron, Inc. | $ | 720,575 | |
Insurance (4.4%) | ||||
32,500 | Allmerica Financial Corp. (a) | 1,205,425 | ||
42,400 | American Financial Group Inc. | 1,421,248 | ||
26,600 | First American Corp. (c) | 1,067,724 | ||
39,100 | Genworth Financial, Inc. | 1,181,993 | ||
20,300 | Protective Life Corp. | 857,066 | ||
30,200 | Safeco Corp. (c) | 1,641,068 | ||
7,374,524 | ||||
Internet Software & Services (0.4%) | ||||
24,900 | VeriSign, Inc. (a)(c) | 716,124 | ||
IT Services (1.7%) | ||||
15,000 | CheckFree Corp. (a)(c) | 510,900 | ||
34,500 | Computer Sciences Corp. (a)(c) | 1,507,650 | ||
43,800 | Sabre Holdings Corp. (c) | 873,810 | ||
2,892,360 | ||||
Leisure Equipment & Products (1.5%) | ||||
18,200 | Brunswick Corp. | 788,424 | ||
21,000 | Eastman Kodak Co. (c) | 563,850 | ||
20,900 | Polaris Industries, Inc. (c) | 1,128,600 | ||
2,480,874 | ||||
Machinery (2.1%) | ||||
28,775 | Paccar, Inc. | 1,956,700 | ||
65,600 | Timken Co. (c) | 1,515,360 | ||
3,472,060 | ||||
Media (2.4%) | ||||
50,800 | Harte-Hanks, Inc. (c) | 1,510,284 | ||
13,300 | McClatchy Co. | 870,352 | ||
43,700 | Valassis Communications, Inc. (a)(c) | 1,619,085 | ||
3,999,721 | ||||
Metals & Mining (2.1%) | ||||
48,700 | Nucor Corp. (c) | 2,221,694 | ||
9,500 | Phelps Dodge Corp. (c) | 878,750 | ||
13,300 | United States Steel Corp. (c) | 457,121 | ||
3,557,565 | ||||
Multiline Retail (2.9%) | ||||
36,600 | Federated Department Stores (c) | 2,682,048 | ||
32,700 | JC Penney Co Inc Holding Co. | 1,719,366 | ||
3,456 | Sears Holdings Corp. (a)(c) | 517,951 | ||
4,919,365 |
The accompanying notes are an integral part of these financial statements.
10
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Equity Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Multi-Utilities & Unregulated Power (3.9%) | ||||
215,300 | CMS Energy Corp. (a)(c) | $ | 3,242,418 | |
99,400 | Oneok, Inc. (c) | 3,245,410 | ||
6,487,828 | ||||
Oil & Gas (5.6%) | ||||
11,900 | Amerada Hess Corp. (c) | 1,267,469 | ||
28,600 | EOG Resources, Inc. (c) | 1,624,480 | ||
31,400 | Newfield Exploration Co. (a) | 1,252,546 | ||
11,700 | Overseas Shipholding Group | 697,905 | ||
29,100 | Valero Energy Corp. (c) | 2,302,101 | ||
116,500 | The Williams Companies, Inc. (c) | 2,213,500 | ||
9,358,001 | ||||
Paper & Forest Products (0.4%) | ||||
27,500 | Louisiana-Pacific Corp. | 675,950 | ||
Pharmaceuticals (1.2%) | ||||
17,400 | Allergan, Inc. (c) | 1,483,176 | ||
9,700 | Barr Pharmaceuticals, Inc. (a) | 472,778 | ||
1,955,954 | ||||
Real Estate Investment Trusts (6.2%) | ||||
22,500 | AvalonBay Communities, Inc. (c) | 1,818,000 | ||
41,500 | CBL & Associates Properties, Inc. (c) | 1,787,405 | ||
166,200 | HRPT Properties Trust (c) | 2,065,866 | ||
31,600 | Kimco Realty Corp. | 1,861,556 | ||
61,700 | New Plan Excel Realty Trust (c) | 1,676,389 | ||
20,800 | Regency Centers Corp. (c) | 1,189,760 | ||
10,398,976 | ||||
Road & Rail (1.0%) | ||||
20,900 | CSX Corp. | 891,594 | ||
37,200 | JB Hunt Transport Services, Inc. (c) | 717,960 | ||
1,609,554 | ||||
Semiconductor & Semiconductor Equipment (3.4%) | ||||
24,200 | Cree, Inc. (a)(c) | 616,374 | ||
72,500 | Freescale Semiconductor, Inc. (a) | 1,535,550 | ||
42,600 | Intersil Corp. (c) | 799,602 | ||
70,100 | MEMC Electronic Materials, Inc. (a) | 1,105,477 | ||
73,700 | National Semiconductor Corp. | 1,623,611 | ||
5,680,614 | ||||
Software (2.1%) | ||||
53,900 | Adobe Systems, Inc. (c) | 1,542,618 | ||
29,200 | Autodesk, Inc. (c) | 1,003,604 | ||
50,900 | Sybase, Inc. (a) | 934,015 | ||
3,480,237 |
The accompanying notes are an integral part of these financial statements.
11
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Equity Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Specialty Retail (2.9%) | ||||
25,000 | Abercrombie & Fitch Co. - Class A | $ | 1,717,500 | |
59,500 | American Eagle Outfitters (c) | 1,823,675 | ||
71,400 | Circuit City Stores, Inc. | 1,234,506 | ||
4,775,681 | ||||
Textiles, Apparel & Luxury Goods (1.1%) | ||||
30,400 | Coach, Inc. (a) | 1,020,528 | ||
21,400 | Timberland Co. (a)(c) | 828,608 | ||
1,849,136 | ||||
Thrifts & Mortgage Finance (0.9%) | ||||
38,600 | IndyMac Bancorp, Inc. (c) | 1,572,178 | ||
Tobacco (0.5%) | ||||
9,500 | Reynolds American, Inc. (c) | 748,600 | ||
Wireless Telecommunication Services (0.8%) | ||||
32,500 | Western Wireless Corp. (a)(c) | 1,374,750 | ||
Total common stocks (cost $137,537,696) | 167,028,933 | |||
INVESTMENTS PURCHASED WITH CASH PROCEEDS FROM SECURITIES LENDING (31.3%) | ||||
$2,000,000 | Capital Auto Receivables Asset Trust, 3.280%, 07/15/2005 | $ | 2,001,060 | |
1,000,000 | First Franklin Mortgage, 3.414%, 07/25/2005 | 973,697 | ||
1,500,000 | Granite Master Issuer PLC, 3.300%, 07/20/2005 | 1,500,000 | ||
1,000,000 | Morgan Stanley ABS Capital, 3.404%, 07/25/2005 (b) | 962,945 | ||
1,700,000 | Permanent Financing PLC, 3.469%, 09/12/2005 (b) | 1,701,163 | ||
1,000,000 | Structured Asset Investment Loan Trust, 3.404%, 07/25/2005 (b) | 938,654 | ||
2,000,000 | Superior Wholesale Inventory Financing Trust, 3.320%, 07/15/2005 | 1,999,892 | ||
1,000,000 | Textron Financial Floorplan Master Note, 3.210%, 07/13/2005 | 1,000,000 | ||
2,000,000 | World Savings Bank FSB, 3.480%, 07/13/2005 | 1,999,300 | ||
14,282,000 | Bank of New York Institutional Cash Reserve Fund | 14,284,548 | ||
2,000,000 | Credit Suisse First Boston, 3.240%, 08/19/2005 | 1,999,504 | ||
2,000,000 | Suntrust Bank, 3.200%, 08/12/2005 | 2,000,707 | ||
2,000,000 | AIG Sunamerica Global Finance XXV Note, 3.470%, 09/12/2005 | 1,998,240 | ||
250,000 | AIG Sunamerica Global Finance XXXI Note, 3.284%, 08/23/2005 | 249,150 | ||
1,000,000 | Beta Finance Inc., 3.535%, 07/01/2005 | 999,990 | ||
1,000,000 | Beta Finance Inc., 3.538%, 07/01/2005 | 999,650 | ||
1,000,000 | Berkshire Hathaway Finance, 3.180%, 07/11/2005 | 1,000,500 | ||
1,000,000 | Berkshire Hathaway Finance, 3.330%, 08/16/2005 | 999,550 | ||
1,000,000 | CC USA Inc., 3.230%, 07/15/2005 | 999,870 | ||
1,500,000 | Dorada Finance Inc., 3.535%, 07/01/2005 | 1,499,790 | ||
500,000 | General Electric Capital Corp., 3.504%, 09/22/2005 | 500,535 | ||
1,800,000 | General Electric Capital Corp., 3.180%, 07/05/2005 | 1,801,062 | ||
2,000,000 | K2 USA LLC, 3.161%, 07/25/2005 | 1,999,580 | ||
1,000,000 | Links Finance LLC, 3.540%, 07/01/2005 | 999,910 | ||
2,000,000 | Protective Life Secured Trust, 3.220%, 07/14/2005 | 2,010,991 | ||
1,000,000 | Sigma Finance Inc., 3.145%, 07/20/2005 | 999,730 | ||
1,000,000 | Sigma Finance Inc., 3.220%, 07/15/2005 | 999,720 |
The accompanying notes are an integral part of these financial statements.
12
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Equity Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
INVESTMENTS PURCHASED WITH CASH PROCEEDS FROM SECURITIES LENDING (continued) | ||||
$1,000,000 | TIAA Global Markets, 3.290%, 07/13/2005 | $ | 1,000,720 | |
1,000,000 | Stanfield Victoria LLC, 3.180%, 07/15/2005 | 999,970 | ||
1,000,000 | White Pine Finance LLC, 3.260%, 07/20/2005 | . | 1,000,080 | |
Total investments purchased with cash proceeds from securities lending (cost $52,420,508) | 52,420,508 | |||
SHORT TERM INVESTMENTS (0.8%) | ||||
1,265,000 | AIM Liquid Asset Portfolio | 1,265,000 | ||
Total short term investments (cost $1,265,000) | 1,265,000 | |||
Total investments (cost $191,223,204) (132.0%) | 220,714,441 | |||
Liabilities in excess of other assets (32.0%) | (53,559,918) | |||
Total net assets (100.00%) | $167,154,523 |
_____________
(a) | Non-income producing security. | |
(b) | STEP - Bonds where the coupon increases or steps up at a predetermined rate. | |
(c) | Securities (partial/entire) out on loan. |
The accompanying notes are an integral part of these financial statements.
13
40|86 Series Trust | Semi-Annual Report |
Portfolio Managers’ Review (unaudited) | June 30, 2005 |
Balanced Portfolio
How did the Portfolio perform relative to its benchmark?
The 40|86 Series Trust Balanced Portfolio returned 1.88% for the six months ended June 30, 2005. The Portfolio’s benchmark, a 60% weighting of the S&P 500 Index and 40% weighting of the Lehman Brothers Aggregate Index, returned 0.55% for the same period.(1)
What factors contributed to the variance in performance between the Portfolio and its benchmark?
During the first three months of the year, where the equity portion of the Portfolio out-performed the benchmark, we saw each of the three broad factors in our model (Value, Quality and Earnings Expectations) add value. Low volatility and moderate economic and profit growth laid the foundation for a rational market. In such an environment, investors tend to focus on long-term fundamentals which bodes well for our disciplined philosophy and process.
In the fixed income market, 10-year and 30-year US Treasury bond yields lowered 30 basis points (bps - equivalent to 1/100th of 1%) and 63 bps, respectively. 2-year and 3-year US Treasury bond yields increased 56 bps and 42 bps, respectively. This reduction in longer-term yields and increase in shorter-term yields produced a flatter yield curve (a graphic representation of the yields of fixed income maturities). Since the prices of fixed income instruments move inversely to yields, the performance of the Portfolio was aided by our over-weight positions in longer-term maturities, where yields, in general, decreased and prices increased.
Which holdings most enhanced the Portfolio’s performance?
Stock selection in Consumer Discretionary, Financial and Technology sectors contributed the most for the equity portion of the Portfolio. The largest individual contributors were overweight positions in electricity generator and distributor TXU, health insurance provider Humana and oil refiner and gasoline retailer Valero Energy.
For the fixed income portion of the Portfolio, selling positions in the auto sector prior to downgrades enhanced the Portfolio’s performance. In addition, positions in cell phone service provider AT&T Wireless, marketing company News America and communications satellite company Intelsat Bermuda added to the Portfolio’s return.
Which holdings most negatively impacted the Portfolio’s performance?
Stock selection in the Industrial sector detracted the most from the Portfolio’s performance. The largest individual detractors were over-weight positions in diversified conglomerate Tyco International, industrial automation and information service provider Rockwell Automation and logistics and transportation company Ryder Systems.
Asset Allocation as a Percent of Total Investments (excluding Securities Lending)
(1) | Past performance does not guarantee future results. Your investment return and principal will fluctuate, and your shares may be worth more or less than their original cost. Total return is provided in accordance with SEC guidelines for comparative purposes and reflects certain contractual expense reimbursements through April 30, 2006. If the expense reimbursement were not in place, the portfolio’s return would have been lower. The total returns shown do not include separate account expenses or the deduction of taxes that a contractholder would pay on portfolio distributions or the redemption of portfolio shares. The S&P 500 Index is an unmanaged index considered to be representative of the U.S. stock market in general. The Lehman Brothers Aggregate index is an unmanaged broad-based market index that includes mortgage-backed securities. Investors cannot actually invest in an index. On January 1, 2005, the benchmark for the Balanced Portfolio was changed to a blended index of 60% S&P 500/40% Lehman Brothers Aggregate from two separate indices, the S&P 500 and the Lehman Brothers Government/Credit Index. The Lehman Brothers Aggregate Index is a broad-based marked index that includes mortgage-backed securities, which is consistent with the investment strategy of the fixed income portion of the Balanced Portfolio. The Lehman Brothers Government/Credit Index is an unmanaged index that includes U.S. Government Treasury and Agency securities, as well as, corporate and Yankee bonds. |
14
40|86 Series Trust | Semi-Annual Report |
Portfolio Managers’ Review (unaudited) | June 30, 2005 |
For the fixed income portion of the Portfolio, over-weight positions in high yield bonds and under-weight positions in US Treasuries detracted from the Portfolio’s performance. In addition, positions in Canadian lumber producer Ainsworth Lumber, lumber and paper producer Georgia-Pacific and steel producer International Steel Group detracted from the Portfolio’s return.
What is your outlook for the rest of the fiscal year?
For the equity portion of the Portfolio, we expect investors to continue to focus on companies that exhibit favorable long-term fundamentals. As economic and earnings growth continue to slow, a divergence between companies continues. In periods such as this, the market rewards those companies suited to withstand such downturns. These companies exhibit strong long-term fundamentals, such as favorable valuations, increasing earnings outlooks and stronger balance sheets. Our philosophy will not change based on short-term trends or conditions in the market. Our goal is to add value through security selection while attempting to neutralize other risk factors, such as market timing and sector rotation, for which there is not adequate compensation by the market.
For the fixed income portion of the Portfolio, although the yield curve has dramatically flattened so far this year, we believe it will flatten further. The Federal Reserve has indicated its intention to keep raising short-term interest rates at a measured pace. This will keep pushing up the front end of the yield curve. Longer-term yields, however, continue to be resilient in the face of continued monetary tightening. We believe rather modest inflationary pressures and very low interest rates worldwide contribute to the phenomena. We will continue to structure the Portfolio in anticipation of a flatter yield curve. In addition, we believe credit spreads (the difference between US Treasury yields and corporate yields) will drift modestly wider as the level of shareholder friendly/bondholder unfriendly activity increases at public companies. This widening will increase the risk of holding corporate bonds versus US Treasuries.
Michael J. Dunlop | Chicago Equity Partners, LLC |
Senior Vice President | |
40|86 Advisors, Inc. |
15
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Balanced Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
COMMON STOCKS (70.0%) | ||||
Aerospace & Defense (1.2%) | ||||
2,200 | General Dynamics Corp. | $ | 240,988 | |
5,200 | Northrop Grumman Corp. | 287,300 | ||
528,288 | ||||
Air Freight & Logistics (0.5%) | ||||
5,800 | Ryder System, Inc. (e) | 212,280 | ||
Auto Components (0.2%) | ||||
6,700 | Dana Corp. (e) | 100,567 | ||
Automobiles (0.1%) | ||||
6,600 | Ford Motor Co. (e) | 67,584 | ||
Beverages (1.3%) | ||||
6,300 | Constellation Brands, Inc. - Class A (a)(e) | 185,850 | ||
900 | Molson Coors Brewing Co. (e) | 55,800 | ||
6,360 | PepsiCo, Inc. | 342,995 | ||
584,645 | ||||
Biotechnology (1.3%) | ||||
4,500 | Amgen, Inc. (a) | 272,070 | ||
2,000 | Charles River Laboratories International, Inc. (a) | 96,500 | ||
4,900 | Gilead Sciences, Inc. (a) | 215,551 | ||
584,121 | ||||
Capital Markets (1.8%) | ||||
3,200 | The Bear Stearns Companies Inc. (e) | 332,608 | ||
1,100 | The Goldman Sachs Group, Inc. (e) | 112,222 | ||
6,700 | Merrill Lynch & Co, Inc. | 368,567 | ||
813,397 | ||||
Chemicals (1.2%) | ||||
1,400 | FMC Corp. (a) | 78,596 | ||
5,600 | PPG Industries, Inc. | 351,456 | ||
1,900 | Sigma-Aldrich Corp. (e) | 106,476 | ||
536,528 | ||||
Commercial Banks (5.2%) | ||||
21,800 | Bank of America Corp. | 994,298 | ||
3,100 | Comerica, Inc. | 179,180 | ||
6,300 | KeyCorp (e) | 208,845 | ||
1,800 | SunTrust Banks, Inc. (e) | 130,032 | ||
14,300 | Wachovia Corp. (e) | 709,280 | ||
1,600 | Zions Bancorporation | 117,648 | ||
2,339,283 |
The accompanying notes are an integral part of these financial statements.
16
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Balanced Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Commercial Services & Supplies (0.5%) | ||||
3,000 | Cendant Corp. | $ | 67,110 | |
2,800 | Copart, Inc. (a) | 66,640 | ||
3,200 | Equifax, Inc. | 114,272 | ||
248,022 | ||||
Communications Equipment (1.6%) | ||||
30,170 | Cisco Systems, Inc. (a) | 576,549 | ||
3,400 | Harris Corp. | 106,114 | ||
1,300 | Scientific-Atlanta, Inc. | 43,251 | ||
725,914 | ||||
Communications Services (1.1%) | ||||
16,000 | Sprint Corp. (e) | 401,440 | ||
3,500 | Verizon Communications, Inc. (e) | 120,925 | ||
522,365 | ||||
Computers & Peripherals (2.6%) | ||||
3,600 | Apple Computer, Inc. (a) | 132,516 | ||
13,200 | Dell, Inc. (a) | 521,532 | ||
13,388 | Hewlett-Packard Co. | 314,752 | ||
3,600 | NCR Corp. (a) | 126,432 | ||
1,900 | QLogic Corp. (a) | 58,653 | ||
1,153,885 | ||||
Diversified Financial Services (3.2%) | ||||
3,800 | CIT Group, Inc. | 163,286 | ||
6,632 | Citigroup, Inc. | 306,597 | ||
9,340 | J.P. Morgan Chase & Co. | 329,889 | ||
7,700 | Moody’s Corp. | 346,192 | ||
4,800 | Principal Financial Group, Inc. (e) | 201,120 | ||
6,500 | Providian Financial Corp. (a)(e) | 114,595 | ||
1,461,679 | ||||
Diversified Telecommunication Services (0.6%) | ||||
7,700 | CenturyTel, Inc. (e) | 266,651 | ||
Electric Utilities (2.3%) | ||||
17,200 | PG&E Corp. (e) | 645,688 | ||
4,900 | TXU Corp. | 407,141 | ||
1,052,829 | ||||
Electrical Equipment (0.4%) | ||||
3,800 | Rockwell Automation, Inc. | 185,098 | ||
Electronic Equipment & Instruments (0.7%) | ||||
1,100 | CDW Corp. (e) | 62,799 | ||
5,800 | Ingram Micro, Inc. (a) | 90,828 | ||
5,200 | Tyco International Ltd. (c)(e) | 151,840 | ||
305,467 |
The accompanying notes are an integral part of these financial statements.
17
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Balanced Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Energy Equipment & Services (0.5%) | ||||
7,600 | Patterson-UTI Energy, Inc. (e) | $ | 211,508 | |
Food & Staples Retailing (0.7%) | ||||
4,500 | CVS Corp. | 130,815 | ||
5,100 | Supervalu, Inc. (e) | 166,311 | ||
297,126 | ||||
Food Products (0.9%) | ||||
4,900 | Archer-Daniels-Midland Co. (e) | 104,762 | ||
3,700 | Hershey Foods Corp. (e) | 229,770 | ||
1,600 | Pilgrim’s Pride Corp. (e) | 54,608 | ||
389,140 | ||||
Gas Utilities (0.4%) | ||||
2,700 | Questar Corp. (e) | 177,930 | ||
General Contractors (0.9%) | ||||
170 | NVR, Inc. (a)(e) | 137,700 | ||
2,500 | Toll Brothers, Inc. (a)(e) | 253,875 | ||
391,575 | ||||
Health Care Equipment & Supplies (1.4%) | ||||
1,500 | Bausch & Lomb, Inc. (e) | 124,500 | ||
4,800 | Becton, Dickinson & Co. | 251,856 | ||
3,800 | C.R. Bard, Inc. | 252,738 | ||
629,094 | ||||
Health Care Providers & Services (2.4%) | ||||
3,350 | Coventry Health Care, Inc. (a) | 237,013 | ||
8,700 | Humana, Inc. (a)(e) | 345,738 | ||
4,100 | McKesson Corp. (e) | 183,639 | ||
1 | Medco Health Solutions, Inc. (a) | 53 | ||
2,200 | Triad Hospitals, Inc. (a) | 120,208 | ||
2,800 | Wellpoint, Inc. (a) | 194,992 | ||
1,081,643 | ||||
Hotels Restaurants & Leisure (1.0%) | ||||
6,600 | Darden Restaurants, Inc. | 217,668 | ||
8,200 | McDonald’s Corp. | 227,550 | ||
445,218 | ||||
Household Durables (0.5%) | ||||
2,400 | Fortune Brands, Inc. | 213,120 | ||
Household Products (0.1%) | ||||
1,100 | Energizer Holdings, Inc. (a) | 68,387 | ||
Industrial Conglomerates (2.5%) | ||||
13,700 | General Electric Co. | 474,705 | ||
9,000 | Textron, Inc. | 682,650 | ||
1,157,355 |
The accompanying notes are an integral part of these financial statements.
18
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Balanced Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Insurance (2.9%) | ||||
8,600 | The Allstate Corp. | $ | 513,850 | |
6,300 | Genworth Financial, Inc. | 190,449 | ||
5,100 | Metlife, Inc. (e) | 229,194 | ||
3,900 | Prudential Financial, Inc. | 256,074 | ||
2,200 | Safeco Corp. | 119,548 | ||
1,309,115 | ||||
IT Services (0.7%) | ||||
1,600 | CheckFree Corp. (a)(e) | 54,496 | ||
5,400 | Cognizant Technology Solutions Corp. (a)(e) | 254,502 | ||
308,998 | ||||
Leisure Equipment & Products (0.3%) | ||||
2,900 | Brunswick Corp. | 125,628 | ||
Machinery (0.8%) | ||||
4,600 | Graco, Inc. (e) | 156,722 | ||
3,000 | Paccar, Inc. | 204,000 | ||
360,722 | ||||
Media (2.9%) | ||||
2,400 | Harte-Hanks, Inc. (e) | 71,352 | ||
5,350 | The McGraw-Hill Companies, Inc. (e) | 236,738 | ||
29,830 | Time Warner, Inc. (a) | 498,459 | ||
4,000 | Viacom, Inc. - Class B (e) | 128,080 | ||
14,700 | The Walt Disney Co. | 370,146 | ||
1,304,775 | ||||
Metals & Mining (0.3%) | ||||
3,500 | Nucor Corp. (e) | 159,670 | ||
Multiline Retail (1.6%) | ||||
5,400 | Federated Department Stores (e) | 395,712 | ||
6,600 | JC Penney Co Inc Holding Co. | 347,028 | ||
742,740 | ||||
Oil & Gas (5.1%) | ||||
2,700 | Amerada Hess Corp. (e) | 287,577 | ||
18,340 | Exxon Mobil Corp. | 1,054,000 | ||
5,400 | Newfield Exploration Co. (a) | 215,406 | ||
4,500 | Occidental Petroleum Corp. | 346,185 | ||
5,200 | Valero Energy Corp. | 411,372 | ||
2,314,540 | ||||
Paper & Forest Products (0.6%) | ||||
11,600 | Louisiana-Pacific Corp. | 285,128 | ||
Personal Products (1.2%) | ||||
3,100 | Avon Products, Inc. | 117,335 | ||
8,200 | The Gillette Co. | 415,166 | ||
532,501 |
The accompanying notes are an integral part of these financial statements.
19
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Balanced Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Pharmaceuticals (4.5%) | ||||
15,280 | Johnson & Johnson | $ | 993,200 | |
6,500 | Merck & Co., Inc. | 200,200 | ||
27,340 | Pfizer, Inc. | 754,037 | ||
2,400 | Wyeth | 106,800 | ||
2,054,237 | ||||
Photographic Equipment And Supplies (0.1%) | ||||
1,700 | Eastman Kodak Co. (e) | 45,645 | ||
Real Estate Investment Trusts (1.3%) | ||||
1,900 | AvalonBay Communities, Inc. (e) | 153,520 | ||
3,400 | CBL & Associates Properties, Inc. | 146,438 | ||
2,300 | Kimco Realty Corp. (e) | 135,493 | ||
2,500 | Regency Centers Corp. (e) | 143,000 | ||
578,451 | ||||
Road & Rail (0.3%) | ||||
8,000 | JB Hunt Transport Services, Inc. (e) | 154,400 | ||
Semiconductor & Semiconductor Equipment (2.4%) | ||||
30,480 | Intel Corp. | 794,309 | ||
9,000 | MEMC Electronic Materials, Inc. (a)(e) | 141,930 | ||
6,500 | National Semiconductor Corp. | 143,195 | ||
1,079,434 | ||||
Software (2.9%) | ||||
12,900 | Adobe Systems, Inc. (e) | 369,198 | ||
23,240 | Microsoft Corp. | 577,281 | ||
27,900 | Oracle Corp. (a) | 368,280 | ||
1,314,759 | ||||
Specialty Retail (2.0%) | ||||
2,800 | Abercrombie & Fitch Co. - Class A (e) | 192,360 | ||
3,600 | American Eagle Outfitters (e) | 110,340 | ||
2,400 | Best Buy Co, Inc. (e) | 164,520 | ||
11,190 | Home Depot, Inc. | 435,291 | ||
902,511 | ||||
Textiles, Apparel & Luxury Goods (0.3%) | ||||
1,800 | Coach, Inc. (a) | 60,426 | ||
2,000 | Timberland Co. (a)(e) | 77,440 | ||
137,866 | ||||
Thrifts & Mortgage Finance (1.0%) | ||||
3,698 | Countrywide Financial Corp. (e) | 142,780 | ||
4,000 | Freddie Mac | 260,920 | ||
1,700 | IndyMac Bancorp, Inc. (e) | 69,241 | ||
472,941 |
The accompanying notes are an integral part of these financial statements.
20
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Balanced Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Tobacco (1.1%) | ||||
$ | 6,110 | Altria Group, Inc. (e) | $ | 395,072 |
1,300 | Reynolds American, Inc. (e) | 102,440 | ||
497,512 | ||||
Wireless Telecommunication Services (0.6%) | ||||
8,500 | Nextel Communications, Inc. (a)(e) | 274,635 | ||
Total common stocks (cost $27,004,936) | 31,706,907 | |||
PREFERRED STOCKS (0.7%) | ||||
Communications Services (0.5%) | ||||
145 | Centaur Funding Corp., 9.080%, 04/21/2020, (b) Cost - $171,062; Acquired 07/22/2003 (c) | 197,517 | ||
Men’s And Boy’s Clothing And Furnishings (0.2%) | ||||
4,000 | Tommy Hilfiger USA, 9.000%, 12/01/2031 | 102,840 | ||
Total preferred stocks (cost $273,002) | 300,357 | |||
CONVERTIBLE BONDS (0.4%) | ||||
Electronic Equipment & Instruments (0.4%) | ||||
$ | 280,000 | Celestica, Inc., 0.000%, 08/01/2020 (d) | 158,550 | |
Total convertible bonds (cost $140,969) | 158,550 | |||
CORPORATE BONDS (15.1%) | ||||
Aircraft (0.3%) | ||||
150,000 | Boeing Capital Corp., 4.750%, 08/25/2008 | 152,775 | ||
Chemicals (0.8%) | ||||
50,000 | Lubrizol Corp., 5.500%, 10/01/2014 (e) | 51,659 | ||
80,000 | Lyondell Chemical Co., 9.625%, 05/01/2007 | 85,800 | ||
190,000 | Terra Capital, Inc., 12.875%, 10/15/2008 | 225,150 | ||
362,609 | ||||
Commercial Services & Supplies (0.5%) | ||||
125,000 | Cendant Corp., 7.375%, 01/15/2013 | 143,330 | ||
80,000 | Corrections Corp of America, 6.250%, 03/15/2013 | 79,800 | ||
223,130 | ||||
Communications Services (2.0%) | ||||
180,000 | British Telecommunications PLC, 7.875%, 12/15/2005 (c) | 183,160 | ||
155,000 | Charter Communications, Inc., 8.000%, 04/30/2012, (b) Cost - $155,171; Acquired 04/21/2004 (e) | 155,000 | ||
61,000 | DirecTV Holdings LLC, 8.375%, 03/15/2013 | 67,863 | ||
100,000 | EchoStar DBS Corporation, 6.625%, 10/01/2014 | 99,250 | ||
65,000 | Intelsat Bermuda Ltd., 8.625%, 01/15/2015, (b) Cost - $65,000; Acquired 01/25/2005 (c)(e) | 68,900 | ||
125,000 | News America, Inc., 6.200%, 12/15/2034 (e) | 131,641 | ||
25,000 | Sprint Capital Corp., 8.375%, 03/15/2012 | 30,110 | ||
65,000 | Sprint Capital Corp., 8.750%, 03/15/2032 (e) | 90,705 | ||
84,000 | TELUS Corp., 8.000%, 06/01/2011 (c) | 98,356 | ||
924,985 |
The accompanying notes are an integral part of these financial statements.
21
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Balanced Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Containers & Packaging (0.9%) | ||||
$ | 375,000 | Owens-Brockway, 8.875%, 02/15/2009 | $ | 400,313 |
Electric Utilities (0.5%) | ||||
195,000 | Pacific Gas & Electric Co., 6.050%, 03/01/2034 | 215,674 | ||
Electronic Equipment & Instruments (0.8%) | ||||
35,000 | Jabil Circuit, Inc., 5.875%, 07/15/2010 | 36,288 | ||
70,000 | Nortel Networks Ltd., 6.125%, 02/15/2006 (c) | 70,787 | ||
100,000 | Tyco International Group S.A., 6.000%, 11/15/2013 (c)(e) | 108,929 | ||
135,000 | Tyco International Group S.A., 6.875%, 01/15/2029 (c)(e) | 161,650 | ||
377,654 | ||||
Equipment Rental And Leasing (0.1%) | ||||
50,000 | International Lease Finance Corp., 5.000%, 04/15/2010 (e) | 51,040 | ||
Farm Machinery And Equipment (0.1%) | ||||
55,000 | Case Corp., 7.250%, 01/15/2016 | 52,663 | ||
General Contractors (1.2%) | ||||
55,000 | Blount, Inc., 8.875%, 08/01/2012 (e) | 59,125 | ||
175,000 | KB Home, 5.750%, 02/01/2014 (e) | 174,317 | ||
240,000 | NVR, Inc., 5.000%, 06/15/2010 | 241,087 | ||
50,000 | William Lyon Homes, Inc., 7.625%, 12/15/2012 | 48,000 | ||
522,529 | ||||
Health Care Equipment & Supplies (0.8%) | ||||
105,000 | Guidant Corp., 6.150%, 02/15/2006 | 106,381 | ||
270,000 | Hillenbrand Industries, Inc., 4.500%, 06/15/2009 | 270,444 | ||
376,825 | ||||
Health Care Providers & Services (0.1%) | ||||
45,000 | AmerisourceBergen Corp., 7.250%, 11/15/2012 | 49,781 | ||
Hotels Restaurants & Leisure (1.0%) | ||||
150,000 | Caesars Entertainment, Inc., 8.125%, 05/15/2011 (e) | 173,250 | ||
75,000 | Carnival Corp., 6.150%, 04/15/2008 (c) | 78,776 | ||
155,000 | Hyatt Equities LLC, 6.875%, 06/15/2007, (b) Cost - $154,841; Acquired 06/12/2002 | 160,014 | ||
40,000 | Wynn Las Vegas LLC, 6.625%, 12/01/2014, (b) Cost - $39,154; Acquired 01/27/2005 (e) | 39,100 | ||
451,140 | ||||
Insurance (0.5%) | ||||
225,000 | RenaissanceRe Holdings Ltd., 7.000%, 07/15/2008 (c) | 240,431 | ||
Liquefied Petroleum Gas Dealers (0.2%) | ||||
78,945 | Ras Laffan Liquefied Natural Gas Co Ltd., 3.437%, 09/15/2009, (b) Cost - $77,825; Acquired 07/02/2004 (c) | 77,557 | ||
Loan Brokers (0.1%) | ||||
50,000 | American General Finance, 4.875%, 05/15/2010 | 50,539 | ||
Media (0.5%) | ||||
200,000 | Quebecor Media, Inc., 11.125%, 07/15/2011 (c) | 223,250 |
The accompanying notes are an integral part of these financial statements.
22
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Balanced Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Multiline Retail (0.2%) | ||||
$ | 75,000 | JC Penney Co Inc., 8.000%, 03/01/2010 | $ | 82,875 |
National Commercial Banks (0.1%) | ||||
40,000 | Union Planters Bank, N.A., 6.500%, 03/15/2018 | 42,270 | ||
Natural Gas Transmission (0.3%) | ||||
110,000 | Southern Natural Gas Co., 8.875%, 03/15/2010 (e) | 121,212 | ||
Paper & Forest Products (0.7%) | ||||
50,000 | Ainsworth Lumber Co. Ltd., 6.750%, 03/15/2014 (c) | 45,250 | ||
50,000 | Boise Cascade LLC, 7.125%, 10/15/2014, (b) Cost - $50,000; Acquired 10/15/2004 | 49,375 | ||
180,000 | Georgia-Pacific Corp., 7.375%, 12/01/2025 | . | 195,525 | |
290,150 | ||||
Personal Credit Institutions (0.5%) | ||||
200,000 | Household Finance Corp., 4.125%, 11/16/2009 | 198,034 | ||
Radiotelephone Communications (0.1%) | ||||
60,000 | Rogers Wireless, Inc., 7.500%, 03/15/2015 (c) | 65,550 | ||
Real Estate Investment Trusts (1.4%) | ||||
80,000 | Health Care REIT, Inc., 7.500%, 08/15/2007 | 84,515 | ||
215,000 | Hospitality Properties Trust, 6.750%, 02/15/2013 | 236,488 | ||
55,000 | iStar Financial, Inc., 8.750%, 08/15/2008 | 61,527 | ||
40,000 | iStar Financial, Inc., 5.150%, 03/01/2012 | . | 39,589 | |
200,000 | Senior Housing Properties Trust, 8.625%, 01/15/2012 | 224,500 | ||
646,619 | ||||
Special Purpose Entity (0.2%) | ||||
92,578 | PLC Trust, 2.709%, 03/31/2006, (b) Cost - $92,578; Acquired 12/12/2003 | 92,272 | ||
Steel Foundries (0.1%) | ||||
65,000 | International Steel Group, Inc., 6.500%, 04/15/2014 | 62,725 | ||
Wireless Telecommunication Services (1.1%) | ||||
155,000 | Cingular Wireless, 8.750%, 03/01/2031 (e) | 217,925 | ||
270,000 | Nextel Communications, Inc., 6.875%, 10/31/2013 | 289,913 | ||
507,838 | ||||
Total corporate bonds (cost $6,550,946) | . | 6,862,440 | ||
FOREIGN GOVERNMENT NOTES/BONDS (0.9%) | ||||
155,000 | Export-Import Bank Of Korea, 4.500%, 08/12/2009 (c) | 155,731 | ||
205,000 | United Mexican States, 9.875%, 02/01/2010 (c) | 248,460 | ||
Total foreign government notes/bonds (cost $407,324) | 404,191 | |||
MORTGAGE BACKED SECURITIES (0.1%) | ||||
65,713 | First Union National Bank Commercial Mortgage, Series #1999-C4 A1, 7.184%, 12/15/2031 | 68,195 | ||
Total mortgage backed securities (cost $65,984) | 68,195 |
The accompanying notes are an integral part of these financial statements.
23
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Balanced Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
MUNICIPAL BONDS (2.5%) | ||||
$ 165,000 | California County Tobacco Securitization Agency, 7.500%, 06/01/2019 | $ | 168,843 | |
260,000 | California Housing Financing Agency, 3.310%, 08/01/2036 (g) | 260,000 | ||
156,204 | Louisiana Tobacco Settlement Financing Corp., 6.360%, 05/15/2025 | 158,764 | ||
150,000 | Rhode Island Tobacco Settlement Financing Corp., 5.920%, 06/01/2012 | 149,122 | ||
270,000 | San Jose California Financing Authority, 3.180%, 03/01/2029 (g) | 270,000 | ||
135,870 | South Dakota Educational Enhancement Funding Corp., 6.720%, 06/01/2025 | 135,133 | ||
Total municipal bonds (cost $1,138,456) | 1,141,862 | |||
U.S. TREASURY OBLIGATIONS (2.3%) | ||||
35,662 | 1.625%, 01/15/2015 (e) | 35,543 | ||
50,000 | 3.875%, 05/15/2010 (e) | 50,301 | ||
680,000 | 4.125%, 05/15/2015 (e) | 690,147 | ||
235,000 | 5.375%, 02/15/2031 (e) | 277,374 | ||
Total U.S. treasury obligations (cost $1,036,754) | 1,053,365 | |||
INVESTMENTS PURCHASED WITH CASH PROCEEDS FROM SECURITIES LENDING (27.3%) | ||||
200,000 | AIG Sunamerica Global Finance XXV Note, 3.470%, 09/12/2005 | 199,824 | ||
250,000 | AIG Sunamerica Global Finance XXXI Note, 3.284%, 08/23/2005 | 249,150 | ||
4,366,000 | Bank of New York Institutional Cash Reserve Fund | 4,366,779 | ||
500,000 | Berkshire Hathaway Finance, 3.330%, 08/16/2005 | 499,775 | ||
500,000 | Beta Finance Inc., 3.538%, 07/01/2005 | 499,825 | ||
500,000 | Capital Auto Receivables Asset Trust, 3.280%, 07/15/2005 | 500,265 | ||
500,000 | Credit Suisse First Boston, 3.240%, 08/19/2005 | 499,876 | ||
500,000 | First Franklin Mortgage, 3.414%, 07/25/2005 (f) | 486,849 | ||
300,000 | General Electric Capital Corp., 3.180%, 07/05/2005 | 300,177 | ||
200,000 | General Electric Capital Corp., 3.320%, 08/19/2005 | 199,964 | ||
500,000 | Granite Master Issuer PLC, 3.300%, 07/20/2005 (f) | 500,000 | ||
400,000 | K2 USA LLC, 3.161%, 07/25/2005 | 399,916 | ||
250,000 | Links Finance LLC, 3.540%, 07/01/2005 | 249,977 | ||
500,000 | Morgan Stanley ABS Capital, 3.404%, 07/25/2005 (f) | 481,472 | ||
400,000 | Permanent Financing PLC, 3.469%, 09/12/2005 (f) | 400,274 | ||
400,000 | Sigma Finanace Inc., 3.220%, 07/15/2005 | 399,888 | ||
200,000 | Structured Asset Investment Loan Trust, 3.404%, 07/25/2005 (f) | 187,731 | ||
500,000 | Suntrust Bank, 3.200%, 08/12/2005 | 500,177 | ||
500,000 | Superior Wholesale Inventory Financing Trust, 3.320%, 07/15/2005 | 499,973 | ||
500,000 | Textron Financial Floorplan Master Note, 3.210%, 07/13/2005 | 500,000 | ||
400,000 | World Savings Bank FSB, 3.480%, 09/20/2005 | 399,860 | ||
Pooled Investments - | ||||
36,488 | Bank of New York, collateralized by various United States Government and Agency Issues, | |||
1.500% to 12.500%, 07/07/2005 to 06/15/2035 | 36,488 | |||
Total investments purchased with cash proceeds from securities lending (cost $12,358,240) | 12,358,240 |
The accompanying notes are an integral part of these financial statements.
24
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Balanced Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
SHORT TERM INVESTMENTS (5.3%) | ||||
$2,049,000 | AIM Liquid Asset Portfolio | $ | 2,049,000 | |
366,000 | Nations Treasury Reserve | 366,000 | ||
Total short term investments (cost $2,415,000) | 2,415,000 | |||
Total investments (cost $51,391,611) (124.6%) | 56,469,107 | |||
Other liabilities in excess of assets (24.6)% | (11,145,926) | |||
Total net assets 100.0% | $ | 45,323,181 |
____________
(a) | Non-income producing security. |
(b) | Restricted under rule 144A of the Securities Act of 1933. |
(c) | Foreign security or a U.S. security of a foreign company. |
(d) | Zero Coupon - Bonds that make no interest payment. |
(e) | Securities (partial/entire) out on loan. |
(f) | STEP - Bonds where the coupon increases or steps up at a predetermined rate. |
(g) | Variable Coupon Rate - The rate reported is the rate in effect as of June 30, 2005. |
The accompanying notes are an integral part of these financial statements.
25
40|86 Series Trust | Semi-Annual Report |
Portfolio Managers’ Review (unaudited) | June 30, 2005 |
High Yield Portfolio
How did the Portfolio perform relative to its Benchmark?
The High Yield Portfolio returned 0.48% for the six months ended June 30, 2005. The Portfolio’s benchmark, the Merrill Lynch High Yield Master II Index, returned 1.13% for the same period.(1)
What caused the variance in performance between the Portfolio and its benchmark?
While we out-performed our benchmark during the second quarter, we lagged in performance during the first quarter. The paper and forest product sector performed poorly because paper companies have been struggling with the inability to pass on rising raw material prices. We also failed to anticipate the return of higher oil prices during the period and had an under-weight position in the energy segment, which experienced strong returns for the period.
Which holdings most enhanced the Portfolio’s performance?
The Portfolio’s return was increased by its holdings in beneficial certificates in airline US Airways, telecommunication tower operator Crown Castle and leaf tobacco merchant Dimon International. The US Airways beneficial certificates returned 30% for the period, benefiting from a dramatic recovery in aircraft valuations due to the expansion of the international air carriers. Crown Castle, which returned 8.38% for the period, was aided by the positive dynamics in the telecommunications sector. These dynamics allowed the company to refinance all its high yield debt with real estate loans, which led to an above-market tender price for the bonds we held. Dimon’s return of 7.04% was due to its purchase of Standard Tobacco. Because of covenants in the existing bond deal, the company was required to tender for the bonds at above-market levels in order to complete the acquisition.
Which holdings detracted from performance?
The Portfolio’s main detractors were auto parts company Affinia Group, polymer-based membrane manufacturer Polypore and cosmetic and over-the-counter pharmaceutical maker Del Laboratories. Affinia Group, which was purchased from Dana Corporation in 2004, detracted from performance with a 10.82% decline. Affinia reported disappointing first quarter 2005 results due to its inability to pass on increasing raw material prices and the loss of a $75 million contract with AutoZone. Polypore’s 10% decline was due to increased competition in Asia and the loss of a major contract. The company subsequently cancelled a planned Initial Public Offering that would have reduced its leverage. Del Laboratories negatively impacted performance with a 4.43% decline. Poor operating performance led to a ratings downgrade by Moody’s and a change to negative outlook by Standard & Poor’s.
What is your outlook for the rest of the year?
We expect the Federal Reserve will continue to increase short-term interest rates at a measured pace into early 2006. We believe this policy will result in low inflation and slow but steady economic growth. These conditions should allow credit conditions to improve and default rates to remain low. Although we do not anticipate new inflows into fixed income or high yield, this back-
Asset Allocation as a Percent of Total Investments
(1) | Past performance does not guarantee future results. Your investment return and principal will fluctuate, and your shares may be worth more or less than their original cost. Total return is provided in accordance with SEC guidelines for comparative purposes and reflects certain contractual expense reimbursements through April 30, 2006. If the expense reimbursement were not in place, the portfolio’s return would have been lower. The total returns shown do not include separate account expenses or the deduction of taxes that a contractholder would pay on portfolio distributions or the redemption of portfolio shares. The S&P 500 Index is an unmanaged index considered to be representative of the U.S. stock market in general. The Merrill Lynch HighYield Master II Index is an unmanaged market capitalization weighted index of all domestic and Yankee high yield bonds. Investors cannot actually invest in an index. |
26
40|86 Series Trust | Semi-Annual Report |
Portfolio Managers’ Review (unaudited) | June 30, 2005 |
drop is well suited for high yield bonds to out-perform other fixed income segments, at least through mid-year 2006. During the second half of 2006, we expect economic growth will begin to slow to the point where credit spreads will widen and default rates will increase.
As a result, we expect credit markets will become increasingly concerned with credit quality. The core of the Portfolio remains in the middle tier (rated “B” by Standard and Poor’s) of the high yield market. Based on our reasonably strong economic outlook, the middle tier is positioned to show the most improvement in credit quality over the next year. We are under-weight the upper tier of the market for two reasons. First, the highest quality segment is the most sensitive to the anticipated increases in interest rates. Second, the highest quality segments have been the most vulnerable to event risk (unpredictable risk due to unforeseen events). This event risk can be seen in recent leveraged buyouts that have led to rating agency downgrades and subsequent under-performance. Software and IT service provider Sungard, upscale department store Neiman Marcus and retailer Toys R Us are examples of leveraged transactions that have had adverse affects on existing bondholders’ returns. Private equity firms have raised significant amounts of capital over the last year, and these dollars need to be invested. Companies that have reasonably strong balance sheets remain prime candidates for these pools of capital.
We are reducing positions in industry segments we believe will first show weakness when the economy begins to slow. Now that China has taken action to slow its economy, some of the sectors that have benefited most from China’s growth are likely to experience slowing growth. These industries include many of the commodity producers of metals, chemicals and paper along with some capital goods producers. We are also reducing positions in weaker companies that will need to refinance next year. These companies could be vulnerable if the financial markets become more selective.
We continue to select securities based on recommendations from our credit research team. We are concentrating on those companies that are positioned well within their respective industries, have manageable debt maturities and have strong management teams. These companies generally have enterprise values able to withstand more volatile financial markets. These companies include independent natural gas producer Chesapeake Energy, medical equipment and service provider Universal Hospital Corporation, hotel resort and casino Wynn Las Vegas and petroleum supply chain manager Transmontaigne.
Amy Gibson | Richard Matas |
Vice President | Senior Trader |
40|86 Advisors, Inc. | 40|86 Advisors, Inc. |
27
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
High Yield Bond Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
COMMON STOCKS (0.2%) | ||||
Chemicals (0.2%) | ||||
842 | Huntsman Corp. (a) | $ | 17,067 | |
Total common stocks (cost $5,972) | 17,067 | |||
PREFERRED STOCKS (0.8%) | ||||
Men’s And Boy’s Clothing And Furnishings (0.8%) | ||||
2,768 | Tommy Hilfiger USA, 9.000%, 12/01/2031 | 71,165 | ||
Total preferred stocks (cost $69,222) | 71,165 | |||
BENEFICIAL CERTIFICATES (0.3%) | ||||
989,065 | 1989 US Airways ETC, US Airways, Inc. (a)(d)(e) | 29,671 | ||
Total beneficial certificates (cost $58,414) | 29,671 | |||
CORPORATE BONDS (82.7%) | ||||
Aerospace & Defense (1.3%) | ||||
$ | 70,000 | DRS Technologies, Inc., 6.875%, 11/01/2013 | 72,800 | |
45,000 | Hexcel Corp, 6.750%, 02/01/2015 | 45,225 | ||
118,025 | ||||
Aluminum Foundries (1.0%) | ||||
85,000 | Novelis, Inc., 7.250%, 02/15/2015, (b) Cost — $85,150; Acquired — 01/28/2005 & 06/02/2005 (f) | 85,744 | ||
Canned Fruits, Vegetables, Preserves, Jams, And Jellies (1.2%) | ||||
100,000 | Del Monte Corp., 6.750%, 02/15/2015, (b) Cost — $99,882; Acquired — 05/24/2005 | 102,500 | ||
Chemicals (3.2%) | ||||
80,000 | Huntsman LLC, 7.375%, 01/01/2015, (b) Cost — $80,000; Acquired — 12/03/2004 | 79,400 | ||
75,000 | Lyondell Chemical Co., 9.625%, 05/01/2007 | 80,437 | ||
45,000 | Nalco Co., 8.875%, 11/15/2013 | 48,488 | ||
70,000 | Rockwood Specialties Group, Inc., 10.625%, 05/15/2011 | 77,525 | ||
285,850 | ||||
Commercial Services & Supplies (3.1%) | ||||
100,000 | Adesa, Inc., 7.625%, 06/15/2012 | 102,000 | ||
80,000 | Corrections Corp of America, 6.250%, 03/15/2013 | 79,800 | ||
90,000 | R.H. Donnelley Corp., 6.875%, 01/15/2013, (b) Cost — $90,000; Acquired — 01/11/2005 | 92,250 | ||
274,050 | ||||
Communications Services (6.3%) | ||||
105,000 | Charter Communications, 8.375%, 04/30/2014, (b) Cost — $106,575; Acquired — 11/05/2004 | 105,000 | ||
100,000 | Cincinnati Bell, Inc., 8.375%, 01/15/2014 | 103,000 | ||
105,000 | Innova S de RL, 9.375%, 09/19/2013 (f) | 118,912 | ||
110,000 | Qwest Communications International, Inc., 7.250%, 02/15/2011 | 106,975 | ||
45,000 | Superior Essex Communications, 9.000%, 04/15/2012 | 44,775 | ||
75,000 | Warner Music Group, 7.375%, 04/15/2014 | 76,125 | ||
554,787 |
The accompanying notes are an integral part of these financial statements.
28
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
High Yield Bond Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Construction Materials (1.6%) | ||||
$ | 25,000 | Texas Industries, Inc., 7.250%, 07/15/2013, (b) Cost — $25,000; Acquired — 06/29/2005 | $ | 25,750 |
120,000 | US Concrete, Inc., 8.375%, 04/01/2014 | 113,400 | ||
139,150 | ||||
Containers & Packaging (1.2%) | ||||
100,000 | Owens—Brockway, 8.250%, 05/15/2013 | 109,125 | ||
Diversified Financial Services (0.6%) | ||||
50,000 | General Motors Acceptance Corporation, 7.750%, 01/19/2010 | 48,923 | ||
Electric Services (2.7%) | ||||
75,000 | Midwest Generation LLC, 8.560%, 01/02/2016 | 82,734 | ||
100,000 | Texas Genco LLC, 6.875%, 12/15/2014, (b) Cost — $100,000 Acquired — 12/08/2004 | 105,750 | ||
50,000 | TXU Corp., 5.550%, 11/15/2014, (b) Cost — $47,970; Acquired — 06/15/2005 | 48,743 | ||
237,227 | ||||
Electronic Equipment & Instruments (3.3%) | ||||
75,000 | Celestica, Inc., 7.875%, 07/01/2011 (f) | 77,250 | ||
105,000 | Flextronics International Ltd., 6.250%, 11/15/2014 (f) | 104,737 | ||
100,000 | IPC Acquisition Corp., 11.500%, 12/15/2009 | 109,000 | ||
290,987 | ||||
General Contractors (2.9%) | ||||
100,000 | Beazer Homes USA, Inc., 6.875%, 07/15/2015, (b) Cost — $99,094; Acquired — 06/01/2005 | 99,500 | ||
60,000 | Blount, Inc., 8.875%, 08/01/2012 | 64,500 | ||
100,000 | William Lyon Homes, Inc., 7.625%, 12/15/2012 | 96,000 | ||
260,000 | ||||
Health Care Equipment & Supplies (2.4%) | ||||
205,000 | Universal Hospital Services, Inc., 10.125%, 11/01/2011 | 208,075 | ||
Health Care Providers & Services (3.2%) | ||||
110,000 | Davita, Inc., 7.250%, 03/15/2015, (b) Cost — $110,225; Acquired — 03/15/2005 | 113,575 | ||
50,000 | Healthsouth Corp., 7.375%, 10/01/2006 | 50,750 | ||
110,000 | Healthsouth Corp., 10.750%, 10/01/2008 | 114,950 | ||
279,275 | ||||
Hotels Restaurants & Leisure (6.4%) | ||||
30,000 | Host Marriott LP, 7.125%, 11/01/2013 | . | 31,425 | |
90,000 | Host Marriott LP, 6.375%, 03/15/2015, (b) Cost — $90,000; Acquired — 03/03/2005 | 89,550 | ||
120,000 | Las Vegas Sands Corp., 6.375%, 02/15/2015, (b) Cost — $119,056; Acquired — 02/03/2005 & 02/16/2005 | 117,900 | ||
105,000 | Pinnacle Entertainment, Inc., 8.250%, 03/15/2012 | 109,725 | ||
95,000 | Vail Resorts, Inc., 6.750%, 02/15/2014 | . | 96,900 | |
125,000 | Wynn Las Vegas LLC, 6.625%, 12/01/2014, (b) Cost — $124,301; Acquired — 12/17/2004 | 122,188 | ||
567,688 |
The accompanying notes are an integral part of these financial statements.
29
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
High Yield Bond Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Household Products (0.5%) | ||||
$ | 45,000 | Church & Dwight, Inc., 6.000%, 12/15/2012 | $ | 45,675 |
Leisure Equipment & Products (1.0%) | ||||
85,000 | K2, Inc., 7.375%, 07/01/2014 | 89,888 | ||
Machinery (2.1%) | ||||
130,000 | Case Corp., 7.250%, 01/15/2016 | 124,475 | ||
60,000 | Terex Corp., 7.375%, 01/15/2014 | 62,400 | ||
186,875 | ||||
Manufacturing Industries (0.4%) | ||||
35,000 | Polypore, Inc., 8.750%, 05/15/2012 | 32,900 | ||
Media (4.2%) | ||||
60,000 | Cablevision Systems Corp., 8.000%, 04/15/2012 | 59,100 | ||
105,000 | EchoStar DBS Corporation, 6.625%, 10/01/2014 | 104,212 | ||
67,000 | PanAmSat Corp., 9.000%, 08/15/2014 | 73,449 | ||
85,000 | Sinclair Broadcast Group, Inc., 8.000%, 03/15/2012 | 87,550 | ||
45,000 | Sun Media Corp., 7.625%, 02/15/2013 (f) | 47,869 | ||
372,180 | ||||
Miscellaneous Fabricated Products (0.7%) | ||||
55,000 | Fastentech, Inc., 11.500%, 05/01/2011 | 59,950 | ||
Motor Vehicle Supplies And New Parts (2.5%) | ||||
60,000 | Navistar International, 7.500%, 06/15/2011 | 61,500 | ||
45,000 | Tenneco Automotive, Inc., 8.625%, 11/15/2014 | 45,450 | ||
45,000 | TRW Automotive Acquisition, 9.375%, 02/15/2013 | 50,063 | ||
60,000 | United Components, Inc., 9.375%, 06/15/2013 | 60,750 | ||
217,763 | ||||
Oil & Gas (5.9%) | ||||
110,000 | Chesapeake Energy Corp., 6.250%, 01/15/2018, (b) Cost — $108,814; Acquired — 06/06/2005 | 108,900 | ||
40,000 | Dynegy Holdings, Inc. 10.125%, 07/15/2013, (b) Cost — $39,720; Acquired — 08/01/2003 | 45,400 | ||
115,000 | El Paso Production Holding Co., 7.750%, 06/01/2013 | 123,337 | ||
110,000 | Houston Exploration Co., 7.000%, 06/15/2013 | 114,125 | ||
125,000 | Transmontaigne, Inc., 9.125%, 06/01/2010 | 130,625 | ||
522,387 | ||||
Paper & Forest Products (5.1%) | ||||
95,000 | Ainsworth Lumber Co Ltd., 6.750%, 03/15/2014 (f) | 86,925 | ||
75,000 | Cenveo Corp., 9.625%, 03/15/2012 | 81,375 | ||
75,000 | Georgia—Pacific Corp., 7.375%, 12/01/2025 | 81,469 | ||
55,000 | Graphic Packaging International Corp., 9.500%, 08/15/2013 | 55,687 | ||
150,000 | Neenah Paper, Inc., 7.375%, 11/15/2014, (b) Cost — $150,250; Acquired — 11/18/2004, 02/11/2005 & 03/15/2005 | 146,250 | ||
451,706 |
The accompanying notes are an integral part of these financial statements.
30
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
High Yield Bond Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Personal Products (1.9%) | ||||
$ | 75,000 | Del Laboratories, Inc., 8.000%, 02/01/2012 | $ | 64,875 |
100,000 | Elizabeth Arden, Inc., 7.750%, 01/15/2014 | 104,750 | ||
169,625 | ||||
Plastics Products (2.2%) | ||||
125,000 | Graham Packaging Co., 8.500%, 10/15/2012, (b) Cost — $128,767; Acquired — 02/07/2005 & 09/29/2004 | 126,875 | ||
75,000 | Park Ohio Industries Inc., 8.375%, 11/15/2014, (b) Cost — $75,550; Acquired — 11/19/2004 | 67,313 | ||
194,188 | ||||
Radiotelephone Communications (3.3%) | ||||
32,000 | Alamosa Delaware, Inc., 11.000%, 07/31/2010 | 36,040 | ||
45,000 | Intelsat Bermuda Ltd., 8.695%, 01/15/2012, (b) Cost— $45,000; Acquired — 01/25/2005 (c) (f) | 46,012 | ||
25,000 | Intelsat Bermuda Ltd., 8.625%, 01/15/2015, (b) Cost — $25,000; Acquired — 01/25/2005 (f) | . | 26,500 | |
25,000 | New Skies Satellites NV, 9.125%, 11/01/2012, (b) Cost $25,000; Acquired — 10/22/2004 (f) | 24,938 | ||
50,000 | Rogers Wireless, Inc., 7.500%, 03/15/2015 (f) | 54,625 | ||
40,000 | Rogers Wireless, Inc., 9.625%, 05/01/2011 (f) | . | 47,150 | |
50,000 | Rural Cellular Corp., 8.250%, 03/15/2012 | 52,500 | ||
287,765 | ||||
Railroads, Line—haul Operating (1.2%) | ||||
100,000 | TFM SA de CV, 9.375%, 05/01/2012, (b) Cost — $101,181; Acquired — 04/13/2005 & 05/18/2005 (f). | 104,500 | ||
Real Estate Investment Trusts (1.1%) | ||||
85,000 | Senior Housing Properties Trust, 8.625%, 01/15/2012 | 95,413 | ||
Refrigerated Warehousing And Storage (0.6%) | ||||
50,000 | Reddy Ice Group, Inc., 8.875%, 08/01/2011 | 55,750 | ||
Refuse Systems (0.6%) | ||||
50,000 | Allied Waste North America, Inc., 7.250%, 03/15/2015, (b) Cost $50,000; Acquired — 03/03/2005, | .48,625 | ||
Semiconductor & Semiconductor Equipment (0.6%) | ||||
50,000 | Freescale Semiconductor, Inc., 7.125%, 07/15/2014 | 54,000 | ||
Sporting And Athletic Goods (1.4%) | ||||
125,000 | Riddell Bell Holdings, Inc., 8.375%, 10/01/2012 | 125,938 | ||
Textiles, Apparel & Luxury Goods (3.5%) | ||||
100,000 | Brown Shoe Inc., 8.750%, 05/01/2012, (b) Cost — $101,250; Acquired — 04/21/2005 | 104,750 | ||
75,000 | Phillips—Van Heusen, 7.250%, 02/15/2011 | 79,125 | ||
115,000 | Russell Corp., 9.250%, 05/01/2010 | 121,900 | ||
305,775 | ||||
Tobacco (0.5%) | ||||
40,000 | Alliance One International, Inc., 11.000%, 05/15/2012, (b) Cost — $40,000; Acquired — 05/10/2005 | 41,400 |
The accompanying notes are an integral part of these financial statements.
31
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
High Yield Bond Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Wireless Telecommunication Service (3.0%) | ||||
$ | 69,300 | AirGate PCS, Inc., 9.375%, 09/01/2009, (b) Cost — $60,843; Acquired — 02/13/2004 | $ | 73,112 |
110,000 | American Tower Corp., 7.125%, 10/15/2012 | 116,875 | ||
25,000 | Spectrasite, Inc., 8.250%, 05/15/2010 | 26,625 | ||
45,000 | Spectrasite, Inc., 8.250%, 05/15/2010, (b) Cost — $45,150; Acquired — 05/16/2003 & 05/19/2003 | 47,925 | ||
�� | 264,537 | |||
Total corporate bonds (cost $7,196,841) | 7,288,246 | |||
MUNICIPAL BONDS (0.7%) | ||||
60,000 | Academica Charter Schools, 8.100%, 08/15/2024, (b) Cost — $60,000; Acquired — 08/18/2004 | 64,408 | ||
Total municipal bonds (cost $60,000) | 64,408 | |||
SHORT TERM INVESTMENTS (9.1%) | ||||
401,000 | AIM Liquid Asset Portfolio | 401,000 | ||
401,000 | Nations Treasury Reserve | 401,000 | ||
Total short term investments (cost $802,000) | 802,000 | |||
Total investments (cost $8,192,449) (93.8%) | 8,272,557 | |||
Other assets in excess of liabilities (6.2%) | 544,895 | |||
TOTAL NET ASSETS (100.00%) | $ | 8,817,452 |
____________
(a) | Non—Income Producing. |
(b) | Restricted under Rule 144A of the Securities Act of 1933. |
(c) | Variable Rate. |
(d) | Security in default. |
(e) | Security is fair valued. |
(f) | Foreign Security or U.S. Security of a foreign company. |
The accompanying notes are an integral part of these financial statements.
32
40|86 Series Trust | Semi-Annual Report |
Portfolio Managers’ Review (unaudited) | June 30, 2005 |
Fixed Income Portfolio
How did the Portfolio perform relative to its benchmark?
The 40|86 Series Trust Fixed Income Portfolio returned 2.00% for the six months ended June 30, 2005. The Portfolio’s benchmark, the Lehman Brothers Aggregate Index, returned 2.51% for the same period.(1)
What factors contributed to the variance in performance between the Portfolio and its benchmark?
10-year and 30-year US Treasury bond yields lowered 30 basis points (bps - equivalent to 1/100th of 1%) and 63 bps, respectively. 2-year and 3-year US Treasury bond yields increased 56 bps and 42 bps, respectively. This reduction in longer-term yields and increase in shorter-term yields produced a flatter yield curve (a graphic representation of the yields of fixed income maturities). Since the prices of fixed income instruments move inversely to yields, the performance of the Portfolio was aided by our overweight positions in longer-term maturities, where yields, in general, decreased and prices increased. However, relative to the benchmark, we were underweight US Treasuries, which contributed to the under-performance versus the benchmark. Additionally, the high yield sector under-performed all investment grade sectors for the period. Our performance was hurt by an 11.58% allocation in the high yield sector. The Portfolio’s benchmark is comprised completely of investment grade securities.
Which holdings most enhanced the Portfolio’s performance?
Selling positions in the auto sector prior to downgrades enhanced the Portfolio’s performance. In addition, positions in diversified energy company First Energy, natural gas and electric utility provider Pacific Gas & Electric and communications satellite company Intelsat Bermuda added to the Portfolio’s return.
Which holdings most negatively impacted the Portfolio’s performance?
Our holdings in GMAC, a wholly-owned financial service subsidiary of GM, detracted from the Portfolio’s performance. GMAC declined with the auto sector downgrades. In addition, positions in Canadian lumber producer Ainsworth Lumber and steel producer International Steel Group detracted from the Portfolio’s return.
What is your outlook for the rest of the fiscal year?
Although the yield curve has dramatically flattened so far this year, we believe it will flatten further. The Federal Reserve has indicated its intention to keep raising short-term interest rates at a measured pace. This will keep pushing up the front end of the yield curve. Longer-term yields, however, continue to be resilient in the face of continued monetary tightening. We believe rather
Asset Allocation as a Percent of Total Investments (excluding Securities Lending)
(1) | Past performance does not guarantee future results. Your investment return and principal will fluctuate, and your shares may be worth more or less than their original cost. Total return is provided in accordance with SEC guidelines for comparative purposes and reflects certain contractual expense reimbursements through April 30, 2006. If the expense reimbursement were not in place, the portfolio’s return would have been lower. The total returns shown do not include separate account expenses or the deduction of taxes that a contractholder would pay on portfolio distributions or the redemption of portfolio shares. The Lehman Brothers Aggregate index is an unmanaged broad-based market index that includes mortgage-backed securities. Investors cannot actually invest in an index. |
On January 1, 2005, the benchmark for the Fixed Income Portfolio was changed to the Lehman Brothers Aggregate from the Lehman Brothers Government/Credit Index. The Lehman Brothers Aggregate Index is a broad-based marked index that includes mortgage-backed securities, which is consistent with the investment strategy of the Fixed Income Portfolio. The Lehman Brothers Government/Credit Index is an unmanaged index that includes U.S. Government Treasury and Agency securities, as well as, corporate and Yankee bonds. | |
33
40|86 Series Trust | Semi-Annual Report |
Portfolio Managers’ Review (unaudited) | June 30, 2005 |
modest inflationary pressures and very low interest rates worldwide contribute to the phenomena. We will continue to structure the Portfolio in anticipation of a flatter yield curve. In addition, we believe credit spreads (the difference between US Treasury yields and corporate yields) will drift modestly wider as the level of shareholder friendly/ bondholder unfriendly activity increases at public companies. This widening will increase the risk of holding corporate bonds versus US Treasuries.
Michael J. Dunlop | John Saf |
Senior Vice President | Vice President |
40|86 Advisors, Inc. | 40|86 Advisors, Inc. |
34
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Fixed Income Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
PREFERRED STOCKS (1.0%) | ||||
Communications Services (0.7%) | ||||
130 | Centaur Funding Corp., 9.080%, 04/21/2020, (a) Cost — $153,366; Acquired — 07/22/2003 (b) | $ | 177,084 | |
Men’s And Boy’s Clothing And Furnishings (0.3%) | ||||
3,500 | Tommy Hilfiger USA, 9.000%, 12/01/2031 | 89,985 | ||
Total preferred stocks (cost $242,563) | 267,069 | |||
ASSET BACKED SECURITIES (0.8%) | ||||
$ | 180,678 | Centex Home Equity, Series #2001—A A6, 6.250%, 04/25/2031 | 181,568 | |
9,260 | Equity One ABS, Inc., Series #2002—1 AF2, 5.523%, 08/25/2032 (e) | 9,278 | ||
7,904 | Residential Asset Mortgage Products, Inc., Series #2002—RZ3 A4, 4.730%, 12/25/2031 | 7,891 | ||
Total asset backed securities (cost $199,597) | 198,737 | |||
CORPORATE BONDS (52.1%) | ||||
Aircraft (0.4%) | ||||
95,000 | Boeing Capital Corp., 4.750%, 08/25/2008 | 96,758 | ||
Auto Components (0.4%) | ||||
100,000 | Lear Corp., 8.110%, 05/15/2009 | 103,489 | ||
Capital Markets (0.8%) | ||||
65,000 | Lehman Brothers Holdings, Inc., 3.600%, 03/13/2009 (d) | 63,556 | ||
145,000 | Merrill Lynch & Co, Inc., 6.000%, 07/15/2005 | 145,084 | ||
208,640 | ||||
Chemicals (1.1%) | ||||
100,000 | Lubrizol Corp., 5.500%, 10/01/2014 (d) | 103,318 | ||
75,000 | Lyondell Chemical Co., 9.625%, 05/01/2007 | 80,437 | ||
80,000 | Terra Capital, Inc., 12.875%, 10/15/2008 | 94,800 | ||
278,555 | ||||
Commercial Services & Supplies (1.0%) | ||||
75,000 | Cendant Corp., 7.375%, 01/15/2013 | 85,998 | ||
170,000 | Corrections Corp. America, 6.250%, 03/15/2013 | 169,575 | ||
255,573 | ||||
Communications Services (7.5%) | ||||
260,000 | British Telecommunications PLC, 7.875%, 12/15/2005 (b) | 264,565 | ||
100,000 | Charter Communications Operating LLC, 8.000%, 04/30/2012, (a) Cost — $100,110; Acquired — 04/21/2004 (d) | 100,000 | ||
60,000 | DirecTV Holdings LLC, 8.375%, 03/15/2013 | 66,750 | ||
100,000 | EchoStar DBS Corporation, 6.625%, 10/01/2014 | 99,250 | ||
135,000 | Intelsat Bermuda Ltd., 8.625%, 01/15/2015, (a) Cost — $135,000; Acquired — 01/25/2005 (b)(d) | 143,100 | ||
110,000 | News America Holdings, 7.700%, 10/30/2025 | 133,517 | ||
95,000 | News America, Inc., 6.200%, 12/15/2034 (d) | 100,047 | ||
50,000 | Sprint Capital Corp., 8.375%, 03/15/2012 | 60,220 | ||
130,000 | Sprint Capital Corp., 8.750%, 03/15/2032 (d) | 181,410 | ||
75,000 | Tele-Communications - TCI Group, 9.800%, 02/01/2012 | 95,649 |
The accompanying notes are an integral part of these financial statements.
35
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Fixed Income Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Communications Services (continued) | ||||
$ | 445,000 | TELUS Corp., 8.000%, 06/01/2011 (b) | $ | 521,054 |
180,000 | Verizon Wireless Capital LLC, 5.375%, 12/15/2006 | 183,505 | ||
1,949,067 | ||||
Computers & Peripherals (0.3%) | ||||
70,000 | NCR Corp., 7.125%, 06/15/2009 | 75,796 | ||
Diversified Financial Services (0.7%) | ||||
185,000 | HSBC Finance Corp., 4.125%, 11/16/2009 | 183,181 | ||
Electric Services (8.1%) | ||||
200,000 | AmerenEnergy Generating Co., 7.750%, 11/01/2005 | 202,534 | ||
135,000 | Cilcorp Inc., 8.700%, 10/15/2009 | 156,545 | ||
145,000 | Consolidated Edison, Inc., 3.625%, 08/01/2008 | 142,853 | ||
150,000 | Detroit Edison Co., 5.050%, 10/01/2005 | 150,413 | ||
65,000 | Entergy Gulf States, Inc., 6.770%, 08/01/2005 | 65,146 | ||
185,000 | FirstEnergy Corp., 7.375%, 11/15/2031 | 226,870 | ||
225,000 | Kansas City Power & Light Co., 7.125%, 12/15/2005 | 228,367 | ||
155,000 | Nisource Finance Corp., 7.875%, 11/15/2010 | 178,304 | ||
130,000 | Pacific Gas & Electric Co., 6.050%, 03/01/2034 | 143,782 | ||
330,000 | PSI Energy, Inc., 6.650%, 06/15/2006 | 338,177 | ||
265,000 | Southwestern Public Service Co., 5.125%, 11/01/2006 | 268,404 | ||
2,101,395 | ||||
Electrical Equipment (0.6%) | ||||
150,000 | Cooper Industries, Inc., 5.500%, 11/01/2009 | 156,446 | ||
Electronic Equipment & Instruments (0.9%) | ||||
80,000 | Jabil Circuit, Inc., 5.875%, 07/15/2010 | 82,944 | ||
50,000 | Nortel Networks Ltd., 6.125%, 02/15/2006 (b) | 50,563 | ||
75,000 | Tyco International Group S.A., 6.875%, 01/15/2029 (b)(d) | 89,805 | ||
223,312 | ||||
Equipment Rental And Leasing (0.4%) | ||||
95,000 | International Lease Finance Corp., 5.000%, 04/15/2010 (d) | 96,975 | ||
Farm Machinery And Equipment ( 0.4%) | ||||
105,000 | Case Corp., 7.250%, 01/15/2016 | 100,537 | ||
Food Products (0.5%) | ||||
125,000 | Corn Products International, Inc., 8.450%, 08/15/2009 | 140,852 | ||
General Contractors (2.6%) | ||||
115,000 | Blount, Inc., 8.875%, 08/01/2012 (d) | 123,625 | ||
110,000 | KB Home, 5.750%, 02/01/2014 (d) | 109,571 | ||
155,000 | NVR, Inc., 5.000%, 06/15/2010 | 155,702 | ||
175,000 | Ryland Group, Inc., 5.375%, 06/01/2008 | 179,005 | ||
105,000 | William Lyon Homes, Inc., 7.625%, 12/15/2012 | 100,800 | ||
668,703 | ||||
Health Care Equipment & Supplies (0.4%) | ||||
95,000 | Guidant Corp., 6.150%, 02/15/2006 | 96,250 |
The accompanying notes are an integral part of these financial statements.
36
40|86 Series Trust | Semi-Annual Report |
Schedule of Investments (unaudited) | June 30, 2005 |
Fixed Income Portfolio |
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Health Care Providers & Services (2.0%) | ||||
$ | 110,000 | AmerisourceBergen Corp., 7.250%, 11/15/2012 | $ | 121,687 |
185,000 | Medco Health Solutions, Inc., 7.250%, 08/15/2013 | 208,579 | ||
165,000 | Service Corp International, 7.700%, 04/15/2009 | 177,375 | ||
507,641 | ||||
Hotels Restaurants & Leisure (1.6%) | ||||
100,000 | Caesars Entertainment, Inc., 8.125%, 05/15/2011 | 115,500 | ||
80,000 | Carnival Corp., 6.150%, 04/15/2008 (b) | 84,028 | ||
135,000 | Hyatt Equities LLC, 6.875%, 06/15/2007, (a) Cost — $134,861; Acquired — 06/12/2002 | 139,367 | ||
80,000 | Wynn Las Vegas LLC, 6.625%, 12/01/2014, (a) Cost — $78,308; Acquired — 01/27/2005 (d) | 78,200 | ||
417,095 | ||||
Household Durables (0.2%) | ||||
55,000 | Newell Rubbermaid, Inc., 4.625%, 12/15/2009 | 55,174 | ||
Insurance (4.5%) | ||||
30,000 | Citizens Property Insurance Corp., 6.850%, 08/25/2007, (a) Cost — $30,516; Acquired — 06/22/2001 | 31,502 | ||
220,000 | Monumental Global Funding II, 4.625%, 03/15/2010, (a) Cost — $219,991; Acquired — 03/09/2005 | 224,227 | ||
505,000 | Protective Life US Funding Trust, 5.875%, 08/15/2006, (a) Cost — $505,361; Acquired — 08/06/2001 & 08/26/2001 | 512,372 | ||
325,000 | RenaissanceRe Holdings Ltd., 7.000%, 07/15/2008 (b) | 347,289 | ||
35,000 | Transamerica Corp., 6.750%, 11/15/2006 | 35,938 | ||
1,151,328 | ||||
Liquefied Petroleum Gas Dealers (0.5%) | ||||
120,495 | Ras Laffan Liquefied Natural Gas Co. Ltd., 3.437%, 09/15/2009, (a) Cost — $120,495; Acquired — 03/02/2004 (b) | 118,376 | ||
Loan Brokers (0.4%) | ||||
95,000 | American General Finance, 4.875%, 05/15/2010 | 96,024 | ||
Machinery (0.4%) | ||||
80,000 | Kennametal, Inc., 7.200%, 06/15/2012 | 89,620 | ||
Media (3.0%) | ||||
90,000 | AOL Time Warner, Inc., 7.700%, 05/01/2032 | 114,219 | ||
90,000 | Clear Channel Communications, Inc., 6.625%, 06/15/2008 | 93,545 | ||
185,000 | Clear Channel Communications, Inc., 8.000%, 11/01/2008 | 199,051 | ||
175,000 | Comcast Corp., 7.050%, 03/15/2033 (d) | 207,300 | ||
145,000 | Quebecor Media, Inc., 11.125%, 07/15/2011 (b) | 161,856 | ||
775,971 | ||||
Miscellaneous Business Credit Institutions (0.2%) | ||||
50,000 | Bunge Ltd. Finance Corp., 4.375%, 12/15/2008 | 50,047 | ||
Multiline Retail (0.2%) | ||||
65,000 | The May Department Stores Co., 6.875%, 11/01/2005 | 65,575 |
The accompanying notes are an integral part of these financial statements.
37
40|86 Series Trust | Semi-Annual Report | |
Schedule of Investments (unaudited) | June 30, 2005 |
Fixed Income Portfolio
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
National Commercial Banks (2.0%) | ||||
$170,000 | Citicorp, 6.750%, 08/15/2005 | $ | 170,598 | |
145,000 | Huntington National Bank, 3.125%, 05/15/2008 | 140,440 | ||
185,000 | Union Planters Bank NA, 6.500%, 03/15/2018 | 195,501 | ||
506,548 | ||||
Natural Gas Transmission (0.4%) | ||||
100,000 | Southern Natural Gas Co., 8.875%, 03/15/2010 (d) | 110,193 | ||
Paper & Forest Products (1.5%) | ||||
160,000 | Ainsworth Lumber, 6.750%, 03/15/2014 (b) | 144,800 | ||
100,000 | Boise Cascade LLC, 7.125%, 10/15/2014, (a) Cost — $100,000; Acquired — 10/15/2004 | 98,750 | ||
135,000 | Georgia-Pacific Corp., 7.375%, 12/01/2025 | 146,644 | ||
390,194 | ||||
Personal Credit Institutions (0.6%) | ||||
165,000 | Ford Motor Credit Co., 5.700%, 01/15/2010 (d) | 152,334 | ||
Pharmaceuticals (0.2%) | ||||
60,000 | Wyeth, 5.500%, 03/15/2013 | 63,246 | ||
Radiotelephone Communications (1.0%) | ||||
50,000 | Rogers Wireless, Inc., 7.500%, 03/15/2015 (b) | 54,625 | ||
186,000 | TeleCorp PCS, Inc., 10.625%, 07/15/2010 | 196,780 | ||
251,405 | ||||
Real Estate Investment Trusts (4.1%) | ||||
85,000 | Developers Diversified Realty Corp., 3.875%, 01/30/2009 | 82,630 | ||
170,000 | Duke Realty LP, 3.500%, 11/01/2007 | 166,880 | ||
160,000 | Equity One, Inc., 3.875%, 04/15/2009 | 155,066 | ||
62,000 | Health Care REIT, Inc., 7.500%, 08/15/2007 | 65,499 | ||
175,000 | Hospitality Properties Trust, 6.750%, 02/15/2013 | 192,490 | ||
70,000 | iStar Financial, Inc., 5.150%, 03/01/2012 | 69,280 | ||
65,000 | iStar Financial, Inc., 8.750%, 08/15/2008 | 72,714 | ||
150,000 | Senior Housing Properties Trust, 8.625%, 01/15/2012 | 168,375 | ||
90,000 | United Dominion Realty Trust, Inc., 6.500%, 06/15/2009 | 96,578 | ||
1,069,512 | ||||
Refined Petroleum Pipelines (0.4%) | ||||
115,000 | TGT Pipeline LLC, 5.200%, 06/01/2018 | 112,824 | ||
Special Purpose Entity (0.3%) | ||||
67,653 | PLC Trust, 2.709%, 03/31/2006, (a) Cost — $67,653; Acquired 12/12/2003 | 67,430 | ||
Steel Foundries (0.5%) | ||||
145,000 | International Steel Group, Inc., 6.500%, 04/15/2014 | 139,925 | ||
Textiles, Apparel & Luxury Goods (0.2%) | ||||
50,000 | Brown Shoe Inc., 8.750%, 05/01/2012, (a) Cost — $50,000; Acquired — 04/19/2005 | 52,375 | ||
Tobacco (0.7%) | ||||
185,000 | Universal Corp., 5.200%, 10/15/2013 | 184,079 |
The accompanying notes are an integral part of these financial statements.
38
40|86 Series Trust | Semi-Annual Report | |
Schedule of Investments (unaudited) | June 30, 2005 |
Fixed Income Portfolio
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
Wireless Telecommunication Services (1.1%) | ||||
$115,000 | Cingular Wireless, 8.750%, 03/01/2031 | $ | 161,686 | |
125,000 | Nextel Communications, Inc., 6.875%, 10/31/2013 | 134,219 | ||
295,905 | ||||
Total corporate bonds (cost $13,003,848) | 13,458,350 | |||
FOREIGN GOVERNMENT NOTE/BONDS (1.5%) | ||||
215,000 | Export-Import Bank Of Korea, 4.500%, 08/12/2009 (b) | 216,014 | ||
140,000 | United Mexican States, 9.875%, 02/01/2010 (b) | 169,680 | ||
Total foreign government note/bonds (cost $386,644) | 385,694 | |||
MORTGAGE BACKED SECURITIES (13.7%) | ||||
106,257 | Bank of America Mortgage Securities, Series #2004-7 6A1, 4.500%, 08/25/2019 | 103,968 | ||
221,336 | Bank of America Mortgage Securities, Series #2004-7 5A10, 5.250%, 08/25/2034 | 221,820 | ||
83,252 | Bear Stearns Commercial Mortgage Securities, Series #1999-C1 A1, 5.910%, 02/14/2031 | 85,308 | ||
250,000 | Bear Stearns Commercial Mortgage Securities, Series #2002-TOP6 A2, 6.460%, 10/15/2036 | 278,225 | ||
53,751 | Commercial Mortgage Asset Trust, 1999-C1 A1, 6.250%, 01/17/2032 | 54,040 | ||
107,080 | CS First Boston Mortgage Securities Corp., Series #2001-CKN5 A3, 5.107%, 09/15/2034 | 109,184 | ||
243,188 | Deutsche Mortgage and Asset Receiving Corp., Series #1998-C1 A2, 6.538%, 06/15/2031 | 255,082 | ||
19,537 | DLJ Commercial Mortgage Corp., Series #1999-CG3 A1A, 7.120%, 10/10/2032 | 20,357 | ||
68,538 | Federal Home Loan Mortgage Corp., Series #2407BJ, 6.500%, 01/15/2032 | 71,668 | ||
165,000 | Federal Home Loan Mortgage Corp., Series #2517VH, 6.000%, 03/15/2019 | 171,618 | ||
120,900 | Federal Home Loan Mortgage Corp., Series #2614CH, 3.500%, 12/15/2010 | 120,612 | ||
135,000 | Federal Home Loan Mortgage Corp., Series #2614TD, 3.500%, 05/15/2016 | 131,415 | ||
90,391 | Federal Home Loan Mortgage Corp., Series #2638NA, 3.000%, 02/15/2015 | 90,039 | ||
3,124 | Federal Home Loan Mortgage Corp., Gold Pool #C00712, 6.500%, 02/01/2029 | 3,247 | ||
36,957 | Federal Home Loan Mortgage Corp., Gold Pool #C50964, 6.500%, 05/01/2031 | 38,350 | ||
21,054 | Federal Home Loan Mortgage Corp., Gold Pool #C60697, 6.000%, 11/01/2031 | 21,631 | ||
22,805 | Federal Home Loan Mortgage Corp., Gold Pool #G00479, 9.000%, 04/01/2025 | 25,166 | ||
35,607 | Federal Home Loan Mortgage Corp., Gold Pool #G00943, 6.000%, 07/01/2028 | 36,630 | ||
3,769 | Federal National Mortgage Assn., Pool #062289, 3.900%, 03/01/2028 | 3,812 | ||
5,966 | Federal National Mortgage Assn., Pool #349410, 7.000%, 08/01/2026 | 6,314 | ||
93,967 | Federal National Mortgage Assn., Pool #545449, 6.500%, 02/01/2017 | 97,887 | ||
150,000 | Federal National Mortgage Assn., Series #200180, 6.000%, 07/25/2029 | 155,883 | ||
220,000 | Federal National Mortgage Assn., Series #200336, 4.500%, 07/25/2022 | 220,108 | ||
165,000 | Federal National Mortgage Assn., Series #200357, 4.500%, 12/25/2012 | 165,600 | ||
8,481 | First Union — Chase Commercial Mortgage, Series #1999-C2 A1, 6.363%, 06/15/2031 | 8,568 | ||
60,996 | GMAC Commercial Mortgage Securities, Inc., Series #1999-C1 A1, 5.830%, 05/15/2033 | 61,546 | ||
9,681 | GMAC Commercial Mortgage Securities, Inc., Series #1999-C2 A1, 6.570%, 09/15/2033 | 9,737 | ||
462 | Government National Mortgage Assn., Pool #051699, 15.000%, 07/15/2011 | 536 | ||
2,125 | Government National Mortgage Assn., Pool #354859, 9.000%, 07/15/2024 | 2,348 | ||
460,000 | JP Morgan Chase Commercial Mortgage Securities Corp., Series #2001-CIB3 A2, 6.044%, 11/15/2035 | 482,596 | ||
465,000 | Salomon Brothers Mortgage Securities VII, Series #2001-C2, 6.168%, 11/13/2036 | 489,591 | ||
Total mortgage backed securities (cost $3,577,598) | 3,542,886 |
The accompanying notes are an integral part of these financial statements.
39
40|86 Series Trust | Semi-Annual Report | |
Schedule of Investments (unaudited) | June 30, 2005 |
Fixed Income Portfolio
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
MUNICIPAL BONDS (10.4%) | ||||
$ 110,000 | Academica Charter Schools, 8.100%, 08/15/2024, (a) Cost — $110,000; Acquired — 08/18/2004 | $ | 118,082 | |
95,000 | Bay Area Government Assn. California Revenue Tax Allocation Note, 4.290%, 09/01/2009 | 95,823 | ||
140,000 | California County TOB Securitization Agency, 7.500%, 06/01/2019 | 143,261 | ||
535,000 | California Housing Financing Agency, 3.310%, 08/01/2036 (c) | 535,000 | ||
130,000 | Decatur Hospital Authority, 7.750%, 09/01/2009 | 141,873 | ||
70,000 | Harrisburg PA Rescue & Recovery Revenue Notes, 3.090%, 11/01/2022 | 69,346 | ||
60,000 | Heart of Texas Education Finance Corp., 5.000%, 02/15/2013 | 59,959 | ||
90,000 | Indiana Development Finance Authority, 5.500%, 01/01/2033 | 96,106 | ||
140,000 | Indianapolis IN Refunding Bonds, 3.000%, 10/15/2005 | 139,903 | ||
35,000 | Los Banos California Redevelopment Agency, 7.500%, 09/01/2029 | 35,779 | ||
121,492 | Louisiana Tobacco Settlement Financing Corp., 6.360%, 05/15/2025 | 123,483 | ||
100,000 | New Jersey Economic Development Authority, 3.250%, 09/15/2006 | 99,373 | ||
505,000 | North Carolina Eastern Municipal Power Agency, 7.050%, 01/01/2007 | 521,180 | ||
155,000 | Rhode Island Tobacco Settlement Financing Corp., 5.920%, 06/01/2012 | 154,093 | ||
240,000 | San Jose California Financing Authority, 3.180%, 03/01/2029 (c) | 240,000 | ||
113,956 | South Dakota Educational Enhancement Funding Corp., 6.720%, 06/01/2025 | 113,337 | ||
Total municipal bonds (cost $2,632,297) | 2,686,598 | |||
U.S. GOVERNMENT AGENCY ISSUES (2.9%) | ||||
275,000 | Federal Home Loan Mortgage Corp., 2.850%, 01/05/2007 | 271,297 | ||
275,000 | Fedreal National Mortgage Assn., 2.750%, 08/11/2006 (d) | 271,993 | ||
215,000 | Federal National Mortgage Assn., 3.000%, 12/15/2006 | 212,637 | ||
Total U.S. government agency issues (cost $765,000) | 755,927 | |||
U.S. TREASURY OBLIGATIONS (6.7%) | ||||
76,418 | 1.625%, 01/15/2015 (d) | 76,165 | ||
200,059 | 2.000%, 01/15/2014 (d) | 206,131 | ||
370,000 | 4.125%, 05/15/2015 (d) | 375,521 | ||
920,000 | 5.375%, 02/15/2031 (d) | 1,085,888 | ||
Total U.S. treasury obligations (cost $1,723,846) | 1,743,705 | |||
INVESTMENTS PURCHASED WITH CASH PROCEEDS FROM SECURITIES LENDING (14.7%) | ||||
100,000 | AIG Sunamerica Global Finance XXV Note, 3.470%, 09/12/2005 | 99,912 | ||
3,301,000 | Bank of New York Institutional Cash Reserve Fund | 3,301,589 | ||
100,000 | Granite Master Issuer PLC, 3.300%, 07/20/2005 | 100,000 | ||
Pooled Investments - | ||||
291,352 | Bank of New York, collateralized by various United States Government and Agency Issues, | |||
1.500% to 12.500%, 07/07/2005 to 08/15/2044 | 291,352 | |||
Total investments purchased with cash proceeds from securities lending (cost $3,792,853) | 3,792,853 |
The accompanying notes are an integral part of these financial statements.
40
40|86 Series Trust | Semi-Annual Report | |
Schedule of Investments (unaudited) | June 30, 2005 |
Fixed Income Portfolio
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
SHORT TERM INVESTMENTS (9.1%) | ||||
$1,174,000 | AIM Liquid Asset Portfolio | $ | 1,174,000 | |
1,174,000 | Nations Treasury Reserve | 1,174,000 | ||
Total short term investments (cost $2,348,000) | 2,348,000 | |||
Total investments (cost $28,672,246) (112.9%) | 29,179,819 | |||
Other liabilities in excess of assets (12.9%) | (3,323,997) | |||
Total net assets (100.0%) | $ | 25,855,822 |
________
(a) | Restricted under Rule 144A of the Securities Act of 1933. |
(b) | Foreign Security or a U.S. security of a foreign company. |
(c) | Variable-Coupon Rate — The rate reported is the rate in effect as of June 30, 2005. |
(d) | Securities (partial/entire) out on loan. |
(e) | STEP — Bonds where the coupon increases or steps up at a predetermined rate. |
The accompanying notes are an integral part of these financial statements.
41
40|86 Series Trust | Semi-Annual Report |
Portfolio Managers' Review (unaudited) | June 30, 2005 |
Government Securities Portfolio
How did the Portfolio perform relative to its benchmark?
The 40|86 Series Trust Government Securities Portfolio returned 2.20% for the six months ended June 30, 2005. The Portfolio’s benchmarks, the Lehman Brothers Government Index and the Lehman Brothers Mortgage-Backed Securities Index, returned 2.93% and 2.15%, respectively, for the same period.
What caused the variance in performance between the Portfolio and its benchmark?
The Portfolio trailed the Lehman Brothers Government Index due to its lower allocation to long-term US Treasury bonds. Longer-term interest rates have fallen despite the Federal Reserve’s increases to short-term rates. In addition the Portfolio had greater exposure to higher coupon Mortgage-backed Securities, which lagged lower coupons in price appreciation.
The Portfolio’s allocation to Commercial Mortgage-backed Securities and Asset-backed Securities mitigated the under-performance of the Lehman Brothers Government Index and helped the Portfolio out-perform the Lehman Brother Mortgage-Backed Securities Index. These sectors have performed well over the first half of the year, and we expect that to continue.
Which Portfolio holdings enhanced the Portfolio’s performance?
The Portfolio’s performance was enhanced by an Asset-backed Security issued by Atlantic City Electric Transition Funding LLC, 30-year US Treasury bonds and a Commercial Mortgage-backed Security with a 5% coupon rate.
Which holdings detracted from the Portfolio’s performance?
Mortgage-backed Securities with higher coupon rates detracted from performance for the first half of the year. Specifically, those holdings with coupon rates above 5.5% hurt the Portfolio’s performance. As interest rates fell during the first six months, these positions lagged with respect to price appreciation.
What is your outlook for the next fiscal year?
The Federal Reserve has indicated it will continue raising short-term interest rates. Toward the second half of the next fiscal year, we anticipate investors becoming concerned over non-US Treasury bonds, which are trading at historically low risk premiums, as measured by the spread between corporate yields and US Treasury yields. As such, investors may reallocate funds from non-US Treasury bonds to US Treasury bonds. This move would result in greater yield spreads and under-performance of the non-US Treasury sectors.
Michael J. Dunlop | Willie Brown |
Senior Vice President | Structured Securities Analyst |
40|86 Advisors, Inc. | 40|86 Advisors, Inc. |
Asset Allocation as a Percent of Total Investments (excluding Securities Lending)
(1) | Past performance does not guarantee future results. Your investment return and principal will fluctuate, and your shares may be worth more or less than their original cost. Total return is provided in accordance with SEC guidelines for comparative purposes and reflects certain contractual expense reimbursements through April 30, 2006. If the expense reimbursement were not in place, the portfolio’s return would have been lower. The total returns shown do not include separate account expenses or the deduction of taxes that a contractholder would pay on portfolio distributions or the redemption of portfolio shares. The Lehman Brothers Government Index is an unmanaged index considered to be representative of bonds issued by the U.S. government or its agencies. The Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index composed of all fixed securities mortgage pools by GNMA, FNMA and the FHLCM, including GHMA Graduated Payment Mortgages. Investors cannot actually invest in an index. |
42
40|86 Series Trust | Semi-Annual Report | |
Schedule of Investments (unaudited) | June 30, 2005 |
Government Securities Portfolio
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
ASSET BACKED SECURITIES (6.5%) | ||||
$75,000 | Atlantic City Electric Transition Funding LLC, Series #2002-1 A4, 5.550%, 10/20/2023 | $ | 82,151 | |
8,749 | Centex Home Equity, Series #2001-A A4, 6.470%, 07/25/2029 | 8,801 | ||
5,000 | Citibank Credit Card Issuance Trust, Series #2003-C4 C4, 5.000%, 06/10/2015 | 5,096 | ||
91,839 | Countrywide Asset-Backed Certificates, Series #200 -S1 A5, 5.960%, 11/25/2016 (b) | 91,687 | ||
70,000 | MBNA Credit Card Master Note Trust, Series #2002-C1 C1, 6.800%, 07/15/2014 | 78,171 | ||
276,550 | The Money Store Home Equity Trust, Series #1998-B AF9, 6.335%, 08/15/2039 | 280,211 | ||
7,072 | Residential Asset Mortgage Products, Inc., Series #2002-RZ3 A4, 4.730%, 12/25/2031 | 7,060 | ||
141,725 | Residential Asset Securities Corp., Series #1999-KS2 AI9, 7.150%, 07/25/2030 | 142,314 | ||
194,827 | Residential Asset Securities Corp., Series #2000-KS3 AI6, 7.810%, 07/25/2031 | 197,899 | ||
Total asset backed securities (cost $902,752) | 893,390 | |||
CORPORATE BONDS (0.7%) | ||||
Insurance (0.7%) | ||||
95,000 | MGIC Investment Corp., 6.000%, 03/15/2007 | 97,885 | ||
Total corporate bonds (cost $94,998) | 97,885 | |||
MORTGAGE BACKED SECURITIES (19.8%) | ||||
20,812 | Bear Stearns Commercial Mortgage Securities, Series #1999-C A1, 5.910%, 02/14/2031 | 21,326 | ||
57,335 | Commercial Mortgage Asset Trust, Series #1999-C1 A1, 6.250%, 01/17/2032 | 57,642 | ||
53,726 | DLJ Commercial Mortgage Corp., Series #1999-CG3, 7.120%, 10/10/2032 | 55,983 | ||
623,074 | Federal Home Loan Mortgage Corp., Pool #2407 BJ, 6.500%, 01/15/2032 | 651,530 | ||
24,012 | Federal Home Loan Mortgage Corp. Gold, Pool #C01131, 6.500%, 01/01/2031 | 24,932 | ||
25,794 | Federal Home Loan Mortgage Corp. Gold, Pool #C01148, 6.500%, 02/01/2031 | 26,782 | ||
78,230 | Federal Home Loan Mortgage Corp. Gold, Pool #C01184, 6.500%, 06/01/2031 | 81,179 | ||
75,893 | Federal Home Loan Mortgage Corp. Gold, Pool #C01186, 6.000%, 06/01/2031 | 77,972 | ||
34,842 | Federal Home Loan Mortgage Corp. Gold, Pool #C28063, 6.500%, 07/01/2029 | 36,201 | ||
14,571 | Federal Home Loan Mortgage Corp. Gold, Pool #C29168, 6.500%, 07/01/2029 | 15,139 | ||
5,854 | Federal Home Loan Mortgage Corp. Gold, Pool #D66012, 7.000%, 11/01/2025 | 6,187 | ||
4,578 | Federal Home Loan Mortgage Corp. Gold, Pool #E00441, 7.500%, 07/01/2011 | 4,840 | ||
249,465 | Federal Home Loan Mortgage Corp. Gold, Pool #G01805, 4.500%, 04/01/2035 | 243,951 | ||
100,000 | Federal National Mortgage Assn., Pool #2001-80 PE, 6.000%, 07/25/2029 | 103,922 | ||
456,222 | Federal National Mortgage Assn., Pool #2004-91 AH, 4.500%, 05/25/2029 | 455,447 | ||
198,686 | Federal National Mortgage Assn., Pool #253845, 6.000%, 06/01/2016 | 205,556 | ||
32,112 | Federal National Mortgage Assn., Pool #254091, 6.000%, 12/01/2031 | 32,973 | ||
5,094 | Federal National Mortgage Assn., Pool #303780, 7.000%, 03/01/2026 | 5,393 | ||
28,727 | Federal National Mortgage Assn., Pool #320582, 6.500%, 01/01/2011 | 29,917 | ||
68,015 | Federal National Mortgage Assn., Pool #336290, 6.500%, 04/01/2011 | 70,828 | ||
32,181 | Federal National Mortgage Assn., Pool #535837, 6.000%, 04/01/2031 | 33,044 | ||
118,130 | Federal National Mortgage Assn., Pool #545449, 6.500%, 02/01/2017 | 123,058 | ||
7,225 | Federal National Mortgage Assn., Pool #609583, 6.000%, 11/01/2031 | 7,418 | ||
204,364 | Federal National Mortgage Assn., Pool #645649, 6.000%, 06/01/2017 | 211,437 | ||
29,317 | Federal National Mortgage Assn. Grantor Trust, Series #1999-T2 A1, 7.500%, 01/19/2039 | 31,352 | ||
75,000 | First Union National Bank Commercial Mortgage, Series #1999-C4 A2, 7.390%, 12/15/2031 | 83,759 | ||
10,372 | GMAC Commercial Mortgage Securities, Inc., Series #1999-C2 A1, 6.570%, 09/15/2033 | 10,432 | ||
3,686 | Government National Mortgage Assn., Pool #119896, 13.000%, 11/15/2014 | 4,210 | ||
28,182 | Government National Mortgage Assn., Pool #408675, 7.500%, 01/15/2026 | 30,281 | ||
Total mortgage backed securities (cost $2,723,683) | 2,742,691 |
The accompanying notes are an integral part of these financial statements.
43
40|86 Series Trust | Semi-Annual Report | |
Schedule of Investments (unaudited) | June 30, 2005 |
Government Securities Portfolio
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
MUNICIPAL BONDS (1.5%) | ||||
$ 100,000 | Alaska Industrial Development & Export Auth., 6.625%, 05/01/2006 | $ | 101,537 | |
105,000 | Tobacco Settlement Financing Corp., 5.920%, 06/01/2012 | 104,386 | ||
Total municipal bonds (cost $204,630) | 205,923 | |||
U.S. GOVERNMENT AGENCY ISSUES (16.0%) | ||||
400,000 | Federal Home Loan Mortgage Corp., 6.250%, 03/05/2012 | 414,506 | ||
750,000 | Federal Home Loan Mortgage Corp. Gold TBA, 5.000%, 07/15/2035 | 750,234 | ||
1,000,000 | Federal National Mortgage Assn., 5.250%, 08/01/2012 | 1,055,606 | ||
Total U.S. government agency issues (cost $2,187,800) | 2,220,346 | |||
U.S. TREASURY OBLIGATIONS (49.3%) | ||||
700,000 | 2.375%, 08/31/2006 (a) | 690,704 | ||
1,500,000 | 3.875%, 05/15/2009 | 1,509,141 | ||
650,000 | 4.000%, 02/15/2014 (a) | 654,114 | ||
250,000 | 5.375%, 02/15/2031 (a) | 295,078 | ||
500,000 | 5.500%, 02/15/2008 (a) | 523,301 | ||
2,000,000 | 11.250%, 02/15/2015 (a) | 3,157,736 | ||
Total U.S. treasury obligations (cost $6,648,816) | 6,830,074 | |||
INVESTMENTS PURCHASED WITH CASH PROCEEDS FROM SECURITIES LENDING (22.1%) | ||||
2,996,000 | Bank of New York Institutional Cash Reserve Fund | 2,996,535 | ||
Pooled Investments - | ||||
67,974 | Bank of New York, collateralized by various United States Government and Agency Issues, | |||
3.250% to 7.500%, 11/15/2005 to 08/15/2044 | 67,974 | |||
Total investments purchased with cash proceeds from securities lending (cost $3,064,509) | 3,064,509 | |||
SHORT TERM INVESTMENTS (10.4%) | ||||
97,000 | AIM Liquid Asset Portfolio | 97,000 | ||
250,000 | Federal Home Loan Mortgage Corp. Discount Note, 3.020%, 07/05/2005 | 249,916 | ||
350,000 | Federal Home Loan Mortgage Corp. Discount Note, 3.440%, 12/09/2005 | 344,615 | ||
750,000 | Federal National Mortgage Assn. Discount Note, 2.990%, 07/11/2005 | 749,377 | ||
Total short term investments (cost $1,440,908) | 1,440,908 | |||
Total investments (cost $17,268,096) 126.3% | 17,495,726 | |||
Liabilities in excess of other assets (26.3)% | (3,714,572) | |||
Total net assets 100.0% | $13,781,154 |
_________
(a) | Securities (entire/partial) out on loan. |
(b) | STEP — Bonds where the coupon increases or steps up at a predetermined rate. |
The accompanying notes are an integral part of these financial statements.
44
40|86 Series Trust | Semi-Annual Report |
Portfolio Manager’s Review (unaudited) | June 30, 2005 |
Money Market Portfolio
The Federal Reserve continued to raise short-term interest rates throughout the first half of 2005. Real Gross Domestic Product declined to 3.8% and inflation remained low, allowing yields on longer-term issues to remain low. The rise in short-term interest rates and stability in longer-term rates has produced a dramatic flattening of the yield curve (a graphic representation of the yields of fixed income maturities) in the first half of 2005. Money market yields, as measured by LIBOR (the rate offered by London banks to other banks for overnight deposits), rose throughout the first half of the year. Although the entire yield curve rose, the 1-month rate rose more than the 1-year rate, resulting in a curve flattened by 16 basis points (equivalent to 1/100th of 1%).
As rates rose, we maintained the weighted-average maturity of the Portfolio at well under one month. Approximately 96% of the Portfolio was invested in securities with maturities of less than 20 days. We invested significantly in Variable Rate Demand Notes (VRDNs), which have floating rate coupons that reset weekly. In a rising interest rate environment, coupons of VRDNs reset to higher rates weekly as rates increase. In addition, VRDNs are highly liquid and offer higher yields than 1-week Tier-1 Non-Asset-Backed securities.
The Federal Reserve has signaled its intention to continue raising short-term rates at a measured pace. We will maintain the short duration of the Portfolio and add yield by investing in VRDNs and cheap short-term corporate offerings. Once we believe interest rates have risen to levels more consistent with the current economic environment, we will start lengthening the Portfolio duration to take advantage of higher yields.
Michael J. Dunlop
Senior Vice President
40|86 Advisors, Inc.
Asset Allocation as a Percent of Total Investments
45
40|86 Series Trust | Semi-Annual Report | |
Schedule of Investments (unaudited) | June 30, 2005 |
Money Market Portfolio
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
CORPORATE BONDS (13.6%) | ||||
Non-Depository Credit Institutions (5.0%) | ||||
$1,000,000 | Corporate Finance Managers, Inc., 3.170%, 07/07/2005 (a)(b) | $ | 1,000,000 | |
500,000 | Westgate Investment Fund, 3.170%, 07/07/2005 (a)(b) | 500,000 | ||
1,500,000 | ||||
Insurance (1.9%) | ||||
560,000 | ASIF Global Financing XX, 2.650%, 01/17/2006, (c) Cost — $556,454; Acquired — 05/04/2005 | 556,454 | ||
Real Estate (1.6%) | ||||
490,000 | Kuehn Enterprises LLC, 3.250%, 07/07/2005 (a)(b) | 490,000 | ||
Diversified Financial Services (3.3%) | ||||
1,000,000 | CIT Group Inc, 3.620%, 07/29/2005 (a) | 1,000,280 | ||
Trusts, Except Educational, Religious, And Charitable (1.8%) | ||||
545,000 | Cunat Capital Corp., 3.580%, 07/30/2005 (a)(b) | 545,000 | ||
Total corporate bonds (cost $4,091,734) | 4,091,734 | |||
MUNICIPAL BONDS (54.0%) | ||||
100,000 | ABAG Financial Authorities for Nonprofit Corps, 3.400%, 07/07/2005 (a)(b) (CS: Federal National Mortgage Assn.) | 100,000 | ||
1,000,000 | Arlington County Virginia Industrial Development Authority, 3.140%, 07/07/2005 (a)(b) (LOC: Bank of America) | 1,000,000 | ||
1,300,000 | California Housing Finance Agency, 3.140%, 07/07/2005 (a)(b) | 1,300,000 | ||
100,000 | Colorado Housing & Finance Authority, 3.120%, 07/07/2005 (a)(b) (CS: Federal National Mortgage Assn.) | 100,000 | ||
1,000,000 | Colorado Housing & Finance Authority, 3.140%, 07/07/2005 (a)(b) (SPA: Dexia Credit Local) | 1,000,000 | ||
1,000,000 | Florida Housing & Finance Authority, 3.200%, 07/07/2005 (a)(b) | 1,000,000 | ||
1,000,000 | Fulton County Georgia Development Authority, 3.250%, 07/07/2005 (a)(b) (LOC: Regions Bank) | 1,000,000 | ||
1,000,000 | Los Angeles County California Transport Authority, 1.910%, 07/01/2005 (CS: Ambac Financial Group) | 1,000,000 | ||
900,000 | Louisiana Public Facilities Authority, 3.700%, 07/07/2005 (a)(b) | 900,000 | ||
580,000 | Michigan State Housing Development Authority, 3.080%, 07/07/2005 (a)(b) (CS: MBIA, Inc.) | 580,000 | ||
1,000,000 | North Texas Education Authority, 3.200%, 07/07/2005 (a)(b) (CS:Ambac Financial Group) | 1,000,000 | ||
1,395,000 | Philadelphia Authority For Industrial Development, 3.200%, 07/07/2005 (a)(b) | 1,395,000 | ||
700,000 | Portland Maine Pension, 3.200%, 07/07/2005 (a)(b) (SPA: Bayerische Landesbank) | 700,000 | ||
600,000 | Sacramento County California Pension, 3.130%, 07/07/2005 (a)(b) (LOC: Bayerische Landesbank) | 600,000 | ||
805,000 | St. Francis Healthcare Foundation Hawaii, 3.830%, 07/07/2005 (a)(b) (LOC: First Hawaiian Bank) | 805,000 | ||
1,000,000 | St. John’s County Florida Industrial Development Authority, 3.300%, 07/07/2005 (a)(b) (LOC: Allied Irish Bank PLC) | 1,000,000 | ||
450,000 | San Jose California Financing Authority, 3.180%, 07/07/2005 (a)(b) | 450,000 | ||
885,000 | University of Minnesota, 3.140%, 07/07/2005 (a)(b) | 885,000 | ||
900,000 | Utah Housing Finance Agency, 3.140%, 07/07/2005 (a)(b) (SPA: Bayerische Landesbank) | 900,000 | ||
500,000 | Westminster Colorado Economic Development Authority, 3.350%, 07/07/2005 (a)(b) (LOC: HSH Nordbank) | 500,000 | ||
Total municipal bonds (cost $16,215,000) | 16,215,000 |
The accompanying notes are an integral part of these financial statements.
46
40|86 Series Trust | Semi-Annual Report | |
Schedule of Investments (unaudited) | June 30, 2005 |
Money Market Portfolio
SHARES OR PRINCIPAL AMOUNT | VALUE | |||
COMMERCIAL PAPER (26.7%) | ||||
Household Durables (6.7%) | ||||
$2,000,000 | Fortune Brands, Inc., 3.400%, 07/01/2005 | $ | 2,000,000 | |
Automobiles (3.3%) | ||||
1,000,000 | BMW U.S. Capital, 3.350%, 07/01/2005 | 1,000,000 | ||
Oil & Gas (6.7%) | ||||
2,000,000 | Total Capital SA, 3.370%, 07/01/2005 | 2,000,000 | ||
Banks (6.7%) | ||||
2,000,000 | UBS Financial Services Inc., 3.390%, 07/01/2005 | 2,000,000 | ||
Communication Services (3.3%) | ||||
1,000,000 | Verizon Global Funding Corp., 3.180%, 07/11/2005 | 999,117 | ||
Total commercial paper (cost $7,999,117) | 7,999,117 | |||
SHORT TERM INVESTMENTS (6.0%) | ||||
1,358,000 | AIM Liquid Asset Portfolio | 1,358,000 | ||
433,000 | NationsTreasury Reserve | 433,000 | ||
Total short term investments (cost $1,791,000) | 1,791,000 | |||
Total investments (cost $30,096,851) (100.3%) | 30,096,851 | |||
Liabilities in excess of other assets (0.3%) | (87,801) | |||
Total net assets 100.00% | $ | 30,009,050 |
________
(a) | Variable Coupon Rate — The rate reported is the rate in effect as of June 30, 2005. | |
(b) | Maturity date represents first available put date. | |
(c) | Restricted under Rule 144A of the Securities Act of 1933. | |
CS — Credit Support. | ||
LOC — Letter of Credit. | ||
SPA — Standby Purchase Agreement. |
The accompanying notes are an integral part of these financial statements.
47
40|86 Series Trust | Semi-Annual Report |
Financial Highlights |
For a share outstanding during the six months ended June 30, 2005 (unaudited) and through the year or period ended December 31,
EQUITY PORTFOLIO | |||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||
Net asset value per share, beginning of period | $ | 24.53 | $ | 20.42 | $ | 14.92 | $ | 17.30 | $ | 19.43 | $ | 23.18 | |||||||
Income from investment operations: | |||||||||||||||||||
Net investment income | 0.05 | 0.08 | 0.06 | 0.06 | 0.07 | 0.00 | (c) | ||||||||||||
Net realized gain (loss) and change in unrealized appreciation (depreciation) on investments | 0.97 | 4.20 | 5.49 | (2.38 | ) | (2.07 | ) | 0.63 | |||||||||||
Total income (loss) from investment operations | 1.02 | 4.28 | 5.55 | (2.32 | ) | (2.00 | ) | 0.63 | |||||||||||
Distributions: | |||||||||||||||||||
Dividends from net investment income | — | (0.08 | ) | (0.05 | ) | (0.06 | ) | (0.07 | ) | (0.00 | )(c) | ||||||||
Distributions of net realized gain | — | (0.09 | ) | — | — | (0.06 | ) | (4.38 | ) | ||||||||||
Total distributions | — | (0.17 | ) | (0.05 | ) | (0.06 | ) | (0.13 | ) | (4.38 | ) | ||||||||
Net asset value per share, end of period | $ | 25.55 | $ | 24.53 | $ | 20.42 | $ | 14.92 | $ | 17.30 | $ | 19.43 | |||||||
Total return (a)(b)(d) | 4.16 | % | 20.94 | % | 37.17 | % | (13.42 | %) | (10.30 | %) | 2.71 | % | |||||||
Ratios/supplemental data: | |||||||||||||||||||
Net assets (dollars in thousands), end of period | $ | 167,155 | $ | 168,901 | $ | 165,798 | $ | 148,881 | $ | 233,983 | $ | 309,201 | |||||||
Ratio of expenses to average net assets (b)(e): | |||||||||||||||||||
Before expense reimbursement and recoveries | 1.17 | % | 1.13 | % | 1.14 | % | 1.15 | % | 1.02 | % | 0.81 | % | |||||||
After expense reimbursement and recoveries | 1.10 | % | 1.10 | % | 1.10 | % | 1.10 | % | 1.02 | % | 0.78 | % | |||||||
Ratio of net investment income | |||||||||||||||||||
to average net assets (b)(e) | 0.43 | % | 0.38 | % | 0.28 | % | 0.32 | % | 0.38 | % | (0.02 | %) | |||||||
Portfolio turnover rate (d) | 46 | % | 89 | % | 107 | % | 102 | % | 133 | % | 431 | % |
_________
(a) | Total return represents performance of the Portfolio only and does not include mortality and expense deductions in separate accounts. |
(b) | The Adviser and Administrator have contractually agreed to reimburse Portfolio expenses to the extent that the ratio of expenses to average net assets exceeds, on an annual basis, the net expenses defined in Note 3. These contractual limits may be discontinued at any time after April 30, 2006. |
(c) | Amount calculated is less than $0.005 per share. |
(d) | Not annualized for periods of less than one full year. |
(e) | Annualized for periods of less than one year. |
The accompanying notes are an integral part of these financial statements.
48
40|86 Series Trust | Semi-Annual Report |
Financial Highlights |
For a share outstanding during the six months ended June 30, 2005 (unaudited) and through the year or period ended December 31,
BALANCED PORTFOLIO | ||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||
Net asset value per share, beginning of period | $ | 13.42 | $ | 12.35 | $ | 10.25 | $ | 12.16 | $ | 13.45 | $ | 14.65 | ||||||
Income from investment operations: | ||||||||||||||||||
Net investment income | 0.11 | 0.26 | 0.27 | 0.36 | 0.40 | 0.43 | ||||||||||||
Net realized gain (loss) and change in unrealized appreciation (depreciation) on investments | 0.14 | 1.07 | 2.09 | (1.91 | ) | (1.29 | ) | 0.67 | ||||||||||
Total income (loss) from investment operations | 0.25 | 1.33 | 2.36 | (1.55 | ) | (0.89 | ) | 1.10 | ||||||||||
Distributions: | ||||||||||||||||||
Dividends from net investment income | (0.11 | ) | (0.26 | ) | (0.26 | ) | (0.36 | ) | (0.40 | ) | (0.43 | ) | ||||||
Distributions of net realized gain | — | — | — | — | (0.00) (c | ) | (1.87 | ) | ||||||||||
Total distributions | (0.11 | ) | (0.26 | ) | (0.26 | ) | (0.36 | ) | (0.40 | ) | (2.30 | ) | ||||||
Net asset value per share, end of period | $ | 13.56 | $ | 13.42 | $ | 12.35 | $ | 10.25 | $ | 12.16 | $ | 13.45 | ||||||
Total return (a)(b)(d) | 1.88 | % | 10.84 | % | 23.29 | % | (12.87 | %) | (6.60 | %) | 7.29 | % | ||||||
Ratios/supplemental data: | ||||||||||||||||||
Net assets (dollars in thousands), end of period | $ | 45,323 | $ | 47,056 | $ | 48,282 | $ | 44,455 | $ | 71,635 | $ | 75,355 | ||||||
Ratio of expenses to average net assets (b)(e): | ||||||||||||||||||
Before expense reimbursement and recoveries | 1.18 | % | 1.14 | % | 1.15 | % | 1.18 | % | 1.04 | % | 0.83 | % | ||||||
After expense reimbursement and recoveries | 1.10 | % | 1.10 | % | 1.10 | % | 1.10 | % | 1.04 | % | 0.78 | % | ||||||
Ratio of net investment income to average net assets (b)(e) | 1.73 | % | 2.03 | % | 2.27 | % | 3.11 | % | 3.16 | % | 2.77 | % | ||||||
Portfolio turnover rate (d) | 42 | % | 97 | % | 100 | % | 180 | % | 239 | % | 334 | % |
_________
(a) | Total return represents performance of the Portfolio only and does not include mortality and expense deductions in separate accounts. |
(b) | The Adviser and Administrator have contractually agreed to reimburse Portfolio expenses to the extent that the ratio of expenses to average net assets exceeds, on an annual basis, the net expenses defined in Note 3. These contractual limits may be discontinued at any time after April 30, 2006. |
(c) | Amount calculated is less than $0.005 per share. |
(d) | Not annualized for period of less than one full year. |
(e) | Annualized for periods of less than one year. |
The accompanying notes are an integral part of these financial statements.
49
40|86 Series Trust | Semi-Annual Report |
Financial Highlights |
For a share outstanding during the six months ended June 30, 2005 (unaudited) and through the year or period ended December 31,
HIGH YIELD PORTFOLIO | |||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | 2000 | (c) | |||||||||||||
Net asset value per share, beginning of period | $ | 10.40 | $ | 10.53 | $ | 8.86 | $ | 9.28 | $ | 10.07 | $ | 10.00 | |||||||
Income from investment operations: | |||||||||||||||||||
Net investment income | 0.31 | 0.71 | 0.67 | 0.86 | 1.10 | 0.24 | |||||||||||||
Net realized gain (loss) and change in unrealized appreciation (depreciation) on investments | (0.26 | ) | 0.37 | 1.68 | (0.42 | ) | (0.78 | ) | 0.07 | ||||||||||
Total income from investment operations | 0.05 | 1.08 | 2.35 | 0.44 | 0.32 | 0.31 | |||||||||||||
Distributions: | |||||||||||||||||||
Dividends from net investment income | (0.32 | ) | (0.70 | ) | (0.68 | ) | (0.86 | ) | (1.11 | ) | (0.24 | ) | |||||||
Distributions of net realized gain | — | (0.51 | ) | — | — | — | — | ||||||||||||
Total distributions | (0.32 | ) | (1.21 | ) | (0.68 | ) | (0.86 | ) | (1.11 | ) | (0.24 | ) | |||||||
Net asset value per share, end of period | $ | 10.13 | $ | 10.40 | $ | 10.53 | $ | 8.86 | $ | 9.28 | $ | 10.07 | |||||||
Total return (a)(b)(d) | 0.48 | % | 10.69 | % | 27.38 | % | 5.47 | % | 3.17 | % | 3.20 | % | |||||||
Ratios/supplemental data: | |||||||||||||||||||
Net assets (dollars in thousands), end of period | $ | 8,817 | $ | 8,876 | $ | 10,941 | $ | 9,202 | $ | 7,091 | $ | 4,040 | |||||||
Ratio of expenses to average net assets (b)(e): | |||||||||||||||||||
Before expense reimbursement | 1.28 | % | 1.24 | % | 1.25 | % | 1.47 | % | 1.11 | % | 0.90 | % | |||||||
After expense reimbursement | 1.15 | % | 1.15 | % | 1.15 | % | 1.15 | % | 1.11 | % | 0.90 | % | |||||||
Ratio of net investment income (loss) | |||||||||||||||||||
to average net assets (b)(e) | 6.38 | % | 6.53 | % | 6.53 | % | 8.95 | % | 11.12 | % | 3.31 | % | |||||||
Portfolio turnover rate (d) | 74 | % | 177 | % | 126 | % | 258 | % | 232 | % | 1 | % |
_________
(a) | Total return represents performance of the Portfolio only and does not include mortality and expense deductions in separate accounts. |
(b) | The Adviser and Administrator have contractually agreed to reimburse Portfolio expenses to the extent that the ratio of expenses to average net assets exceeds, on an annual basis, the net expenses defined in Note 3. These contractual limits may be discontinued at any time after April 30, 2006. |
(c) | For the period from June 13, 2000 (commencement of operations) through December 31, 2000. |
(d) | Not annualized for periods of less than one full year. |
(e) | Annualized for periods of less than one full year. |
The accompanying notes are an integral part of these financial statements.
50
40|86 Series Trust | Semi-Annual Report |
Financial Highlights |
For a share outstanding during the six months ended June 30, 2005 (unaudited) and through the year or period ended December 31,
FIXED INCOME PORTFOLIO | ||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||
Net asset value per share, beginning of period | $ | 10.10 | $ | 10.08 | $ | 9.66 | $ | 9.88 | $ | 9.63 | $ | 9.39 | ||||||
Income from investment operations: | ||||||||||||||||||
Net investment income | 0.22 | 0.44 | 0.46 | 0.58 | 0.59 | 0.65 | ||||||||||||
Net realized gain (loss) and change in unrealized appreciation (depreciation) on investments | (0.02 | ) | 0.02 | 0.42 | (0.13 | ) | 0.25 | 0.24 | ||||||||||
Total income from investment operations | 0.20 | 0.46 | 0.88 | 0.45 | 0.84 | 0.89 | ||||||||||||
Distributions: | ||||||||||||||||||
Dividends from net investment income | (0.22 | ) | (0.44 | ) | (0.46 | ) | (0.58 | ) | (0.59 | ) | (0.65 | ) | ||||||
Distributions of net realized gain | — | — | — | (0.09 | ) | — | — | |||||||||||
Total distributions | (0.22 | ) | (0.44 | ) | (0.46 | ) | (0.67 | ) | (0.59 | ) | (0.65 | ) | ||||||
Net asset value per share, end of period | $ | 10.08 | $ | 10.10 | $ | 10.08 | $ | 9.66 | $ | 9.88 | $ | 9.63 | ||||||
Total return (a)(b)(c) | 2.00 | % | 4.74 | % | 9.33 | % | 4.68 | % | 8.84 | % | 9.87 | % | ||||||
Ratios/supplemental data: | ||||||||||||||||||
Net assets (dollars in thousands), end of period | $ | 25,856 | $ | 27,448 | $ | 35,068 | $ | 41,957 | $ | 60,649 | $ | 37,433 | ||||||
Ratio of expenses to average net assets (b)(d): | ||||||||||||||||||
Before expense reimbursement and recoveries | 1.03 | % | 0.98 | % | 1.00 | % | 1.02 | % | 0.91 | % | 0.67 | % | ||||||
After expense reimbursement and recoveries | 0.95 | % | 0.95 | % | 0.95 | % | 0.95 | % | 0.91 | % | 0.67 | % | ||||||
Ratio of net investment income to average net assets (b)(d) | 4.48 | % | 4.40 | % | 4.61 | % | 5.86 | % | 5.96 | % | 6.87 | % | ||||||
Portfolio turnover rate (c) | 102 | % | 226 | % | 307 | % | 371 | % | 515 | % | 281 | % |
_________
(a) | Total return represents performance of the Portfolio only and does not include mortality and expense deductions in separate accounts. |
(b) | The Adviser and Administrator have contractually agreed to reimburse Portfolio expenses to the extent that the ratio of expenses to average net assets exceeds, on an annual basis, the net expenses defined in Note 3. These contractual limits may be discontinued at any time after April 30, 2006. |
(c) | Not annualized for periods of less than one full year. |
(d) | Annualized for periods of less than one year. |
The accompanying notes are an integral part of these financial statements.
51
40|86 Series Trust | Semi-Annual Report |
Financial Highlights |
For a share outstanding during the six months ended June 30, 2005 (unaudited) and through the year or period ended December 31,
GOVERNMENT SECURITIES PORTFOLIO | ||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||
Net asset value per share, beginning of period | $ | 11.59 | $ | 11.70 | $ | 12.04 | $ | 11.70 | $ | 11.54 | $ | 10.96 | ||||||
Income from investment operations: | ||||||||||||||||||
Net investment income | 0.21 | 0.40 | 0.42 | 0.47 | 0.54 | 0.66 | ||||||||||||
Net realized gain (loss) and change in unrealized appreciation (depreciation) on investments | 0.04 | (0.11 | ) | (0.25 | ) | 0.60 | 0.16 | 0.58 | ||||||||||
Total income from investment operations | 0.25 | 0.29 | 0.17 | 1.07 | 0.70 | 1.24 | ||||||||||||
Distributions: | ||||||||||||||||||
Dividends from net investment income | (0.21 | ) | (0.40 | ) | (0.42 | ) | (0.47 | ) | (0.54 | ) | (0.66 | ) | ||||||
Distributions of net realized gain | — | — | (0.09 | ) | (0.26 | ) | — | — | ||||||||||
Total distributions | (0.21 | ) | (0.40 | ) | (0.51 | ) | (0.73 | ) | (0.54 | ) | (0.66 | ) | ||||||
Net asset value per share, end of period | $ | 11.63 | $ | 11.59 | $ | 11.70 | $ | 12.04 | $ | 11.70 | $ | 11.54 | ||||||
Total return (a)(b)(c) | 2.20 | % | 2.48 | % | 1.36 | % | 9.33 | % | 6.13 | % | 11.71 | % | ||||||
Ratios/supplemental data: | ||||||||||||||||||
Net assets (dollars in thousands), end of period | $ | 13,781 | $ | 14,565 | $ | 22,791 | $ | 41,676 | $ | 31,267 | $ | 18,833 | ||||||
Ratio of expenses to average net assets (b)(d): | ||||||||||||||||||
Before expense reimbursement and recoveries | 0.99 | % | 0.94 | % | 1.04 | % | 0.99 | % | 0.91 | % | 0.66 | % | ||||||
After expense reimbursement and recoveries | 0.95 | % | 0.95 | % | 0.95 | % | 0.95 | % | 0.91 | % | 0.66 | % | ||||||
Ratio of net investment income to average net assets (b)(d) | 3.75 | % | 3.29 | % | 3.32 | % | 3.78 | % | 4.60 | % | 5.89 | % | ||||||
Portfolio turnover rate (c) | 134 | % | 250 | % | 175 | % | 174 | % | 199 | % | 69 | % |
_________
(a) | Total return represents performance of the Portfolio only and does not include mortality and expense deductions in separate accounts. |
(b) | The Adviser and Administrator have contractually agreed to reimburse Portfolio expenses to the extent that the ratio of expenses to average net assets exceeds, on an annual basis, the net expenses defined in Note 3. These contractual limits may be discontinued at any time after April 30, 2006. |
(c) | Not annualized for periods of less than one full year. |
(d) | Annualized for periods of less than one year. |
The accompanying notes are an integral part of these financial statements.
52
40|86 Series Trust | Semi-Annual Report |
Financial Highlights |
For a share outstanding during the six months ended June 30, 2005 (unaudited) and through the year or period ended December 31,
MONEY MARKET PORTFOLIO | ||||||||||||||||||
2005 | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||
Net asset value per share, beginning of period | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | ||||||
Income from investment operations: | ||||||||||||||||||
Net investment income | 0.01 | 0.01 | 0.01 | 0.01 | 0.04 | 0.06 | ||||||||||||
Net realized gain (loss) and change in unrealized appreciation (depreciation) on investments | 0.00 | (c) | 0.00 | (c) | — | (0.00) | (c) | 0.00 | (c) | — | ||||||||
Total income from investment operations | 0.01 | 0.01 | 0.01 | 0.01 | 0.04 | 0.06 | ||||||||||||
Distributions: | ||||||||||||||||||
Dividends from net investment income | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.04 | ) | (0.06 | ) | ||||||
Distributions of net realized gain | — | — | — | (0.00) (c | ) | — | — | |||||||||||
Total distributions | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.04 | ) | (0.06 | ) | ||||||
Net asset value per share, end of period | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | $ | 1.00 | ||||||
Total return (a)(b)(d) | 1.17 | % | 0.93 | % | 0.63 | % | 1.24 | % | 3.97 | % | 6.08 | % | ||||||
Ratios/supplemental data: | ||||||||||||||||||
Net assets (dollars in thousands), end of period | $ | 30,009 | $ | 33,755 | $ | 41,965 | $ | 95,767 | $ | 129,530 | $ | 96,616 | ||||||
Ratio of expenses to average net assets (b)(e): | ||||||||||||||||||
Before expense reimbursement and recoveries | 0.80 | % | 0.71 | % | 0.76 | % | 0.73 | % | 0.72 | % | 0.66 | % | ||||||
After expense reimbursement and recoveries | 0.45 | % | 0.45 | % | 0.45 | % | 0.45 | % | 0.43 | % | 0.41 | % | ||||||
Ratio of net investment income to average net assets (b)(e) | 2.70 | % | 1.16 | % | 0.64 | % | 1.23 | % | 3.74 | % | 5.98 | % |
_________
(a) | Total return represents performance of the Portfolio only and does not include mortality and expense deductions in separate accounts. |
(b) | The Adviser and Administrator have contractually agreed to reimburse Portfolio expenses to the extent that the ratio of expenses to average net assets exceeds, on an annual basis, the net expenses defined in Note 3. These contractual limits may be discontinued at any time after April 30, 2006. |
(c) | Amount calculated is less than $0.005 per share. |
(d) | Not annualized for periods of less than one year. |
(e) | Annualized for periods of less than one year. |
The accompanying notes are an integral part of these financial statements.
53
40|86 Series Trust | Semi-Annual Report |
Notes to Financial Statements (unaudited) | June 30, 2005 |
1. GENERAL
40|86 Series Trust (the “Trust”) is an open-end management investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the “Act”), and was organized as a Massachusetts Trust effective November 15, 1982. The Trust is a “series” type of mutual fund which issues separate series of shares, each of which currently represents a separate portfolio of investments. The Trust consists of six series (“Portfolios”) each with its own investment objective and investment policies. The Portfolios are the Equity, Balanced, High Yield, Fixed Income, Government Securities and Money Market. Effective May 31, 2005, the Focus 20 Portfolio was terminated. The Trust offers shares to affiliated and unaffiliated life insurance company separate accounts (registered as unit investment trusts under the Act) to fund the benefits under variable annuity and variable life contracts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION, TRANSACTIONS AND RELATED INVESTMENT INCOME
The investments in each Portfolio are valued at the close of regular trading on the New York Stock Exchange on each business day. Investment transactions are accounted for on trade date (the date the order to buy or sell is executed). Dividend income is recorded on the ex-dividend date and interest income is accrued daily. The cost of investments sold is determined on the specific identification basis. The following summarizes the investments, which carry certain restrictions as to resale from the Trust to certain qualified buyers:
Portfolio | Cost | Value | % of Net Assets |
Balanced Portfolio — | |||
bonds | $805,631 | $839,735 | 1.85% |
High Yield Portfolio — | |||
bonds | 2,292,192 | 2,294,429 | 26.02% |
Fixed Income Portfolio — | |||
bonds | 1,805,661 | 1,860,865 | 7.20% |
Money Market Portfolio — | |||
bonds | 556,454 | 556,454 | 1.85% |
These securities are eligible for resale to qualified institutional buyers in transactions exempt from registration under Rule 144A of the Securities Act of 1933. In addition, 40|86 Advisors, Inc. (the “Adviser”), a wholly-owned subsidiary of Conseco, Inc. (“Conseco”), which serves as investment adviser to the Portfolios, has determined that the securities are liquid securities through a procedure approved by the Board of Trustees of the Trust (the “Trustees”).
The Trustees determined that the Money Market Portfolio will value investments at amortized cost, which is conditioned on the Trust’s compliance with certain conditions contained in Rule 2a-7 of the Act. The Adviser continuously reviews this method of valuation and recommends changes to the Trustees, if necessary, to ensure that the Money Market Portfolio investments are valued at fair value (as determined by the Trustees in good faith).
In all Portfolios of the Trust, except for the Money Market Portfolio, securities that are traded on stock exchanges, excluding the NASDAQ national market system, are valued at the last sale price as of the close of business on the day the securities are being valued, or lacking any sales, at the mean between the closing bid and asked prices. Securities that are principally traded on the NASDAQ national market system are generally valued at the NASDAQ Official Closing Price (“NOCP”). Securities traded in the over-the-counter market are valued at the mean between the bid and asked prices obtained from a pricing service or brokers. Prices for fixed income securities may be obtained from an independent pricing source that uses information provided by market makers or estimates of market value obtained from yield data relating to investments or securities with similar characteristics. Portfolio securities that are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market, and it is expected that for debt securities this ordinarily will be the over-the-counter market. Debt securities with maturities of sixty (60) days or less are valued at amortized cost that approximates value.
Under the direction of the Trustees, the Adviser may use a practice known as fair value pricing under certain circumstances. These may include, but are not limited to, securities and assets for which market quotations are not readily available, situations where events occur after an exchange closes are likely to affect the value of the security or the Adviser deems that the market price is not reflective of a security’s appropriate price. The Adviser may consider many factors when determining fair values, including but not limited to, the type of security, the financial statements of the issuer, the cost at date of purchase, the size of holdings and information as to any transactions or offers with respect to the security, existence of merger proposals or tender offers with respect to the security. These general and specific factors listed do not provide all the criteria, which may be considered when using the fair value method. When using the fair value method, the Adviser will take into consideration all indications of value available to them in determining the “fair value” assigned to a particular security.
If an investment owned by a Portfolio experiences a default and has accrued interest from purchase or has recorded accrued interest during the period it is owned, the Portfolio’s policy is to cease interest accruals from the time the investments are traded as “flat” in the market. The Portfolio evaluates the collectibility of purchased accrued interest and previously recorded interest on an investment-by-investment basis.
FEDERAL INCOME TAXES
Each Portfolio is treated as a separate taxable entity for federal income tax purposes and intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code. The Trust intends to distribute substantially all taxable income and net realized gains to shareholders annually, and otherwise comply with the requirements for regulated investment companies. Therefore, no provision has been made for federal income taxes.
Net investment income and net realized gains (losses) may differ for financial statement and tax purposes because of temporary
54
40|86 Series Trust | Semi-Annual Report |
Notes to Financial Statements (unaudited) | June 30, 2005 |
or permanent book/tax differences. To the extent these differences are permanent, reclassifications are made to the appropriate equity accounts in the period the difference arises.
DIVIDENDS TO SHAREHOLDERS
Dividends are declared and reinvested from net investment income on a daily basis in the Money Market Portfolio, on a monthly basis in the Government Securities, Fixed Income and High Yield Portfolios, on a quarterly basis in the Balanced Portfolio and on an annual basis in the Equity Portfolio. Distributions of net short-term capital gains and losses are declared and reinvested on an annual basis as a component of net realized gains (losses).
Dividends to shareholders from net investment income are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. Permanent book and tax differences relating to dividends to shareholders may result in reclassifications to paid-in capital and may effect per-share allocation between net investment income and realized and unrealized gains (losses). Any taxable income or gain of the Trust remaining at fiscal year end will be declared and distributed in the following year to the shareholders of the Portfolio or Portfolios to which such gains are attributable.
SECURITIES LENDING
The Portfolios have entered into a Securities Lending Agreement (the “Agreement”) with the Bank of New York. Under terms of the Agreement, the Portfolios may lend portfolio securities to qualified institutional borrowers in order to earn additional income. The Agreement requires that loans are collateralized at all times in an amount equal to at least 102% of the market value of any loaned securities, plus accrued interest. Cash collateral is invested in short-term securities or variable rate bonds and Certificates of Deposit that are included in the respective Portfolio’s Schedule of Investments.
At June 30, 2005, the Equity, Balanced, Fixed Income and Government Securities Portfolios had securities with a market value of $50,987,067, $12,014,065, $3,729,051 and $3,009,121, respectively, on loan (included within Investments in securities in the Statements of Assets and Liabilities) and had received $52,420,508, $12,358,240, $3,792,853 and $3,064,509, respectively, in collateral. Amounts earned as interest on investments of cash collateral, net of rebates and other securities lending expenses, are included in Securities Lending income in the Statements of Operations. For the six months ended June 30, 2005, the securities lending income totaled $19,822, $7,707, $3,001 and $3,141, respectively.
The primary risk associated with securities lending is if the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons. The Portfolios could experience delays and costs in recovering securities loaned or in gaining access to the collateral.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results may differ from these estimates.
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AGREEMENT
The Adviser provides investment advice and, in general, supervises the Trust’s management and investment program, furnishes office space, prepares Portfolio reports for the Trust, monitors Portfolio compliance by the Trust in its investment activities and pays compensation of officers and Trustees of the Trust who are affiliated persons of the Adviser. The Trust pays all other expenses incurred in the operation of the Trust, including fees and expenses of unaffiliated Trustees of the Trust.
Under the Investment Advisory Agreement, the Adviser receives an investment advisory fee based on the daily net asset value at an annual rate of 0.70 percent for the High Yield Portfolio, 0.65 percent for the Equity and Balanced Portfolios, and 0.50 percent for the Fixed Income, Government Securities, and Money Market Portfolios. The Adviser has voluntarily reduced its advisory fee to 0.25 percent of the average daily net assets of the Money Market Portfolio. The total fees incurred for such services were $890,100 for the six months ended June 30, 2005.
The Adviser has entered into Subadvisory Agreements for the management of the investments in the Equity Portfolio and the equity portion of the Balanced Portfolio. The Adviser is solely responsible for the payment of all fees to the Subadviser. The Subadviser for the Equity Portfolio and the equity portion of the Balanced Portfolio is Chicago Equity Partners, LLC.
The Adviser has contractually agreed to waive its investment advisory fee and/or reimburse the Portfolios through April 30, 2006 to the extent that the ratio of expenses to net assets on an annual basis exceed the following:
Portfolio | |
Equity | 1.10% |
Balanced | 1.10% |
High Yield | 1.15% |
Fixed Income | 0.95% |
Government Securities | 0.95% |
Money Market | 0.45% |
The Adviser may discontinue these contractual limits at any time after April 30, 2006. After this date the Adviser may elect to continue, modify or terminate the limitation on Portfolio operating expenses. Further, under the terms of this agreement, any Portfolio expenses waived or reimbursed may be recouped by the Adviser from the Portfolio to the extent actual operating expenses for a period are less than the expense limitation caps. The Adviser may only be entitled to recoup such amounts for a period of three years from the fiscal year that they were waived or reimbursed. Reimbursed/absorbed expenses subject to potential recovery by year of expiration are as follows:
55
40|86 Series Trust | Semi-Annual Report |
Notes to Financial Statements (unaudited) | June 30, 2005 |
Year of Expiration | ||||||
December 31, | ||||||
2005 | 2006 | 2007 | ||||
Equity | $ 98,019 | $ 64,540 | $ 42,025 | |||
Balanced | 49,725 | 21,956 | 18,765 | |||
High Yield | 22,304 | 8,570 | 8,536 | |||
Fixed Income | 36,301 | 20,431 | 8,208 | |||
Government Securities | 10,671 | 31,927 | — | |||
Money Market | 335,352 | 237,653 | 103,777 |
ADMINISTRATIVE AGREEMENT
Conseco Services, LLC (the “Administrator”), a wholly-owned subsidiary of Conseco, supervises the preparation and filing of regulatory documents required for compliance by the Portfolios with applicable laws and regulations, supervises the maintenance of books and records of the Portfolios and provides other general and administrative services. Effective May 1, 2001, the Administrator receives an annual fee, for providing these services, equal to 0.15 percent for the first $200 million of average daily net assets of the Trust; 0.10 percent of the next $300 million of average daily net assets of the Trust; and 0.08 percent of the average daily net assets in excess of $500 million of the Trust. The total fees under this Agreement for the six months ended June 30, 2005 were $190,878. The Administrator has contractually agreed to waive its administration fee and/or reimburse the Portfolios through April 30, 2006 to the extent that the ratio of expenses to net assets on an annual basis exceeds the expense limitations as stated above for the Investment Advisory Agreement. The Administrator may discontinue these contractual limits at any time after April 30, 2006.
DISTRIBUTION AGREEMENT
Conseco Equity Sales, Inc. (the “Distributor”), a wholly-owned subsidiary of Conseco, serves as the principal underwriter for each Portfolio pursuant to a Principal Underwriting Agreement, approved by the Trustees. The Distributor is a registered broker-dealer and a member of the National Association of Securities Dealers, Inc. (“NASD”). Shares of each Portfolio will be continuously offered to life insurance company separate accounts to fund the benefits under variable annuity and variable life contracts. The Distributor bears all the expenses of providing services pursuant to the Principal Underwriting Agreement including the payment of the expenses relating to the distribution of prospectuses for sales purposes, as well as, any advertising or sales literature.
The Trust adopted a Distribution and Service Plan pursuant to Rule 12b-1 (the “Plan”), dated May 1, 2001, for the Equity, Balanced, High Yield, Fixed Income and Government Securities Portfolios in accordance with the requirements of Rule 12b-1 under the 1940 Act and the requirements of the applicable rules of the NASD regarding asset based sales charges. Pursuant to the Plan, a Portfolio may compensate the Distributor for its expenditures in financing any activity primarily intended to result in the sale of shares of the Portfolio and for account maintenance provided to shareholders. The Plan authorizes payments to the Distributor at 0.25 percent annually of each Portfolio’s average daily net assets. The Plan provides for periodic payments by the Distributor to financial intermediaries for providing shareholder services to accounts that hold shares and for promotional and other sales related costs. The total fees incurred by the Trust for such services for the six months ended June 30, 2005, were $322,462.
4. INVESTMENT TRANSACTIONS
The aggregate cost of purchases and the aggregate proceeds from sales of investments for six months ended June 30, 2005 are shown below:
EQUITY PORTFOLIO | BALANCED PORTFOLIO | HIGH YIELD PORTFOLIO | FIXED INCOME PORTFOLIO | GOVERNMENT SECURITIES PORTFOLIO | ||||||
Purchases: | ||||||||||
U.S. Government | $ | — | $ | 4,790,362 | $ | — | $ | 9,056,352 | $ | 6,933,724 |
Other | 76,538,629 | 13,469,470 | 5,819,272 | 15,872,741 | 10,902,647 | |||||
Sales: | ||||||||||
U.S. Government | $ | — | $ | 5,288,548 | $ | — | $ | 7,925,526 | $ | 5,809,061 |
Other | 84,319,882 | 16,970,930 | 6,836,514 | 20,007,678 | 11,629,796 |
5. FEDERAL INCOME TAXES
The following information for the Portfolios is presented on an income tax basis as of December 31, 2004:
EQUITY PORTFOLIO | BALANCED PORTFOLIO | HIGH YIELD PORTFOLIO | FIXED INCOME PORTFOLIO | GOVERNMENT SECURITIES PORTFOLIO | ||||||
Cost of investments (a) | $ | 169,008,020 | $ | 47,570,642 | $ | 8,290,633 | $ | 28,018,993 | $ | 17,588,786 |
Gross unrealized appreciation | $ | 38,412,742 | $ | 6,744,657 | $ | 465,693 | $ | 1,104,954 | $ | 235,880 |
Gross unrealized depreciation | (532,846) | (584,934) | (43,956) | (123,133) | (85,478) | |||||
Net unrealized appreciation on investments | $ | 37,879,896 | $ | 6,159,723 | $ | 421,737 | $ | 981,821 | $ | 150,402 |
(a) Represents cost for federal income tax purposes and differs from the cost for financial reporting purposes by the amount of losses recognized for the financial reporting purposes in excess of federal income tax purposes.
56
40|86 Series Trust | Semi-Annual Report |
Notes to Financial Statements (unaudited) | June 30, 2005 |
As of December 31, 2004, the components of accumulated earnings (deficit) on a tax basis were:
EQUITY PORTFOLIO | BALANCED PORTFOLIO | HIGH YIELD PORTFOLIO | FIXED INCOME PORTFOLIO | GOVERNMENT SECURITIES PORTFOLIO | MONEY MARKET PORTFOLIO | |||||||
Distributable ordinary income | $ | — | $ | — | $ | 131,312 | $ | — | $ | 1,275 | $ | 9,296 |
Distributable long-term gains | 15,930,340 | — | 323,316 | — | — | — | ||||||
Accumulated earnings | 15,930,340 | — | 454,628 | — | 1,275 | 9,296 | ||||||
Accumulated capital and post-October losses | (28,393,992) | (13,845,300) | (530,199) | (869,533) | (216,567) | (9,296) | ||||||
Unrealized appreciation | 37,879,896 | 6,159,723 | 421,737 | 981,821 | 150,402 | — | ||||||
Total accumulated earnings (deficit) | $ | 25,416,244 | $ | (7,685,577) | $ | 346,166 | $ | 112,288 | $ | (64,890) | $ | — |
The tax character of dividends paid during the years ended December 31, 2004 and December 31, 2003 were as follows:
EQUITY PORTFOLIO | BALANCED PORTFOLIO | HIGH YIELD PORTFOLIO | FIXED INCOME PORTFOLIO | GOVERNMENT SECURITIES PORTFOLIO | MONEY MARKET PORTFOLIO | |||||||
Ordinary Income dividends | ||||||||||||
December 31, 2004 | $ | 546,828 | $ | 919,319 | $ | 888,049 | $ | 1,327,299 | $ | 630,280 | $ | 362,228 |
December 31, 2003 | 371,095 | 1,040,088 | 565,486 | 1,849,081 | 1,190,887 | 491,400 | ||||||
Long-term capital gain distributions | ||||||||||||
December 31, 2004 | $ | 590,150 | $ | — | $ | 140,663 | $ | — | $ | — | $ | — |
December 31, 2003 | — | — | — | — | 172,058 | — |
As of December 31, 2004, the following Portfolios have capital loss carryforwards available to offset capital gains in the future, if any:
AMOUNT | EXPIRES | ||
Balanced Portfolio | $ | 1,887,956 | 2010 |
Balanced Portfolio | 1,556,918 | 2011 | |
Fixed Income Portfolio | 435,737 | 2010 | |
Government Securities Portfolio | 200,502 | 2012 | |
Money Market Portfolio | 4,462 | 2010 | |
Money Market Portfolio | 80 | 2011 | |
Money Market Portfolio | 4,754 | 2012 |
As of the tax year end December 31, 2004, the following Portfolios had additional net capital loss carryforwards, subject to certain limitations on availability, to offset future net capital gains, if any. To the extent that these carryovers are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders:
AMOUNT | EXPIRES | ||
Equity Portfolio | $ | 22,371,666 | 2009 |
Equity Portfolio | 6,022,326 | 2010 | |
Balanced Portfolio | 2,444,046 | 2009 | |
Balanced Portfolio | 7,956,380 | 2010 | |
High Yield Portfolio | 71,041 | 2009 | |
High Yield Portfolio | 420,330 | 2010 | |
High Yield Portfolio | 38,828 | 2011 | |
Fixed Income Portfolio | 433,796 | 2010 |
Net realized gains or losses may differ from Federal income tax purposes primarily as a result of wash sales and post-October losses which may not be recognized for tax purposes until the first of the following fiscal year. Such amounts may be used to offset future capital gains.
The Government Securities Portfolio deferred $15,644 of post-October losses for the year ended December 31, 2004. The other Portfolios deferred no post-October losses.
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40|86 Series Trust | Semi-Annual Report |
Notes to Financial Statements (unaudited) | June 30, 2005 |
6. INDEMNIFICATIONS
Under the Trust’s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business, the Trust enters into contacts with its vendors and others that may provide for general indemnifications. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims be made against the Trust. However, based on experience, the Trust expects the risk of loss to be remote.
Expense Example
June 30, 2005 (unaudited)
As a shareholder of the 40|86 Series Trust (the “Trust”), you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, reinvested dividends, or other distributions; redemption fees; and exchange fees; and (2) ongoing costs, including management fees; distribution and/or service fees; and other Trust expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Trust and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (01/01/05 - 6/30/05).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. The example below includes, but is not limited to, management fees, shareholder servicing fees, fund accounting, custody and transfer agent fees. However, the example below does not include portfolio trading commissions and related expenses, and other extraordinary expenses as determined under generally accepted accounting principles. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Trust’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Trust’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Trust and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Equity Portfolio | Beginning Account Value 01/01/05 | Ending Account Value 06/30/05 | Expenses Paid During Period 01/01/05 - 06/30/05(1) |
Actual | $1,000.00 | $1,041.60 | $5.57 |
Hypothetical (5% return before expenses) | 1,000.00 | 1,019.34 | 5.51 |
(1) Expenses are equal to the Fund’s annualized expense ratio of 1.10% multiplied by the average account value over the period multiplied by 181/365 (to reflect the one-half year period).
The accompanying notes are an integral part of these financial statements.
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40|86 Series Trust | Semi-Annual Report | |
Expense Example | ||
June 30, 2005 (unaudited) |
Balanced Portfolio | Beginning Account Value 01/01/05 | Ending Account Value 06/30/05 | Expenses Paid During Period 01/01/05 - 06/30/05(2) |
Actual | $1,000.00 | $1,018.00 | $5.50 |
Hypothetical (5% return before expenses) | 1,000.00 | 1,019.34 | 5.51 |
(2) | Expenses are equal to the Fund’s annualized expense ratio of 1.10% multiplied by the average account value over the period multiplied by 181/365 (to reflect the one-half year period). |
High Yield Portfolio | Beginning Account Value 01/01/05 | Ending Account Value 06/30/05 | Expenses Paid During Period 01/01/05 - 06/30/05(3) |
Actual | $1,000.00 | $1,004.80 | $5.72 |
Hypothetical (5% returnbefore expenses) | 1,000.00 | 1,019.09 | 5.76 |
(3) | Expenses are equal to the Fund’s annualized expense ratio of 1.15% multiplied by the average account value over the period multiplied by 181/365 (to reflect the one-half year period). |
Fixed Income Portfolio | Beginning Account Value 01/01/05 | Ending Account Value 06/30/05 | Expenses Paid During Period 01/01/05 - 06/30/05(4) |
Actual | $1,000.00 | $1,020.00 | $4.76 |
Hypothetical (5% return before expenses) | 1,000.00 | 1,020.08 | 4.76 |
(4) | Expenses are equal to the Fund’s annualized expense ratio of 0.95% multiplied by the average account value over the period multiplied by 181/365 (to reflect the one-half year period). |
Government Securities Portfolio | Beginning Account Value 01/01/05 | Ending Account Value 06/30/05 | Expenses Paid During Period 01/01/05 - 06/30/05(5) |
Actual | $1,000.00 | $1,022.00 | $4.76 |
Hypothetical (5% return before expenses) | 1,000.00 | 1,020.08 | 4.76 |
(5) | Expenses are equal to the Fund’s annualized expense ratio of 0.95% multiplied by the average account value over the period multiplied by 181/365 (to reflect the one-half year period). |
Money Market Portfolio | Beginning Account Value 01/01/05 | Ending Account Value 06/30/05 | Expenses Paid During Period 01/01/05 - 06/30/05(6) |
Actual | $1,000.00 | $1,011.70 | $2.24 |
Hypothetical (5% return before expenses) | 1,000.00 | 1,022.56 | 2.26 |
(6) | Expenses are equal to the Fund’s annualized expense ratio of 0.45% multiplied by the average account value over the period multiplied by 181/365 (to reflect the one-half year period). |
The accompanying notes are an integral part of these financial statements.
59
40|86 Series Trust | Semi-Annual Report |
Board of Trustees Approval of Investment Management Conract |
Members of the Board of Trustees (the “Board” or “Trustees”) of 40|86 Series Trust (the “Trust”) were advised by, and met in executive session with, independent legal counsel to consider the Trust’s investment management contract with 40|86 Advisors, Inc. (the “Adviser”) for the Equity, Balanced, High Yield, Fixed Income, Government Securities and Money Market Portfolios (the “Portfolios”). Based upon the evaluation of the information provided, the Board, at a meeting held February 17, 2005, approved the continuation of the investment advisory contract of the Trust for a period through March 29, 2006.
The Board based its decision upon its most recent evaluation of the Adviser’s investment staff, portfolio process and performance. The Trustees considered the factors discussed below, among others. No single factor determined whether the Board approved the arrangement. Rather, it was the totality of the circumstances that drove the Trustees’ decision.
Nature and Quality of Services Provided by the Adviser and Sub-advisers
The Trustees noted that the Adviser, subject to the Board’s control, administers the Trust's business and other affairs. The Adviser (or the sub-adviser, as the case may be) manages the investment of the assets of each Portfolio, including making purchases and sales of portfolio securities consistent with each Portfolio's investment objective and policies. The Adviser also provides the Trust with such office space, administrative and other services and executive and other personnel as are necessary for the Fund's operations. The Adviser pays all of the compensation of Trustees who are affiliated persons of the Adviser and of the officers of the Trust.
The Trustees considered the scope and quality of services provided by the Adviser under the Investment Management Agreement and noted that the scope of services provided had expanded over time as a result of regulatory and other developments. The Trustees noted that, for example, the Adviser is responsible for maintaining and monitoring its own and, to varying degrees, the Trust's compliance programs, and these compliance programs have recently been refined and enhanced in light of new regulatory requirements. The Trustees considered the quality of the investment capabilities of the Adviser and the other resources it has dedicated to performing services for the Trust. The quality of administrative and other services, including the Adviser's role in coordinating the activities of the Trust's other service providers, were also considered.
The Trustees concluded that, overall, they were satisfied with the nature, extent and quality of services provided to the Trust under the Investment Management Agreement.
Fund Performance
In addition to the information reviewed by the Trustees in connection with the meeting, the Trustees had received performance information for each Portfolio at each regular Board meeting during the year. At the meeting, the Trustees received oral presentations from the Adviser on the current and historical performance of each Portfolio. The Trustees noted that the current and historical performance for each Portfolio exceeded the peer group median in nearly every instance, except for the Focus 20 Portfolio. The Trustees noted that the Adviser had recommended the closure and liquidation of the Focus 20 Portfolio.
Based on their review and their discussion of each Portfolio's investment performance with the Adviser, the Trustees expressed confidence in the Adviser's ability to continue to manage the various portfolios of the Trust and concluded that the Fund's investment performance was acceptable. The Board informed the Adviser that they planned to closely monitor the Trust's continued investment performance.
Management Fee and Total Operating Expenses
The Trustees compared the management fee payable to the Adviser for each Portfolio, as well as the management fee payable after waivers, with the comparative management fee information for other funds. The Board recognized that it is difficult to make comparisons of management fees because there are variations in the services that are included in the fees paid by other funds. The Trustees noted that while the management fee for some comparative funds was lower than for the respective Portfolios, the management fee for each of the Portfolios was within the median and average for the presented peer group. The Trustees concluded that each Portfolio’s management fee was satisfactory.
The Board also compared the total operating expenses, after expense limitations, for each of the Portfolios with the total operating expenses charged by other funds of similar asset size, that serve as an underlying investment option for variable insurance products considering contractual or voluntary expense limitations. The Trustees recognized that the total operating expense information reflects upon the Adviser's overall provision of services, as the Adviser is responsible for coordinating services provided to the Trust by others. The Trustees noted that while the total operating expenses for some comparative funds was lower than the respective Portfolios, the total operating expense for each of the Portfolios was within the median and average for the presented peer group. The Trustees concluded that each Portfolio’s total operating expenses were satisfactory.
Profitability
The Board reviewed a schedule of the revenues, expenses and related notes indicating the profitability of the Trust to the Adviser for 2004. The Board reviewed the assumptions and methods of allocation used by the Adviser in preparing Portfolio-specific profitability data. It was noted that the Adviser believed that the methods of allocation used in preparing the profitability information were reasonable and appropriate and that there is no generally accepted allocation methodology for information of this type.
60
40|86 Series Trust | Semi-Annual Report |
Board of Trustees Approval of Investment Management Conract |
The Trustees recognized that comparative profitability information is not generally publicly available and is affected by numerous factors, including the structure of the particular adviser, the types of funds it manages, its business mix, numerous assumptions regarding allocations and the adviser's capital structure and cost of capital. The Board also considered that the Distributor, a wholly-owned subsidiary of Conseco, Inc. (also, the Adviser’s parent company), receives 12b-1 fees from the Trust and receives compensation for distributing shares of the Portfolios.
The Board recognized that the Adviser is entitled to earn a reasonable level of profits for the services it provides to the Trust and, based upon their review, concluded that the Adviser's profitability from its relationship with the Trust was not excessive.
Economies of Scale
The Trustees determined, based upon their discussions and the materials provided to them by the Adviser, that the benefits derived by the Adviser through economies of scale relative to the Trust were not excessive.
After full consideration of the above factors, as well as, other factors, the Board concluded that the approval of the Trust’s agreement was in the best interest of the Trust and its shareholders.
61
40|86 Series Trust | Semi-Annual Report |
May 9, 2005 Special Meeting of Shareholders |
PROPOSAL ONE: LIQUIDATE FOCUS 20 PORTFOLIO
For the Focus 20 Portfolio, approve or disapprove a Plan of Liquidation to liquidate the assets of the Focus 20 Portfolio and distribute the liquidation proceeds to the Focus 20 Portfolio’s shareholders.
Focus 20 Portfolio | No. of Shares | % of Outstanding Shares | % of Shares Voted |
Affirmative | 377,657.931 | 96.661% | 96.661% |
Withhold | 3,544.371 | 0.907% | 0.907% |
Abstain | 9,502.758 | 2.432% | 2.432% |
Total | 390,705.060 | 100.000% | 100.000% |
PROPOSAL TWO: ELECT TRUSTEES
Elect six trustees to the Board of Trustees.
Diana H. Hamilton | No. of Shares | % of Outstanding Shares | % of Shares Voted |
Affirmative | 49,009,076.574 | 98.774% | 99.055% |
Withhold | 467,669.744 | 0.943% | 0.945% |
Total | 49,476,746.318 | 99.717% | 100.000% |
R. Matthew Neff | |||
Affirmative | 48,967,631.056 | 98.691% | 98.971% |
Withhold | 509,115.262 | 1.026% | 1.029% |
Total | 49,476,746.318 | 99.717% | 100.000% |
David N. Walthall | |||
Affirmative | 48,925,487.089 | 98.606% | 98.886% |
Withhold | 551,259.229 | 1.111% | 1.114% |
Total | 49,476,746.318 | 99.717% | 100.000% |
Harold W. Hartley | |||
Affirmative | 48,770,797.251 | 98.294% | 98.573% |
Withhold | 705,949.067 | 1.423% | 1.427% |
Total | 49,476,746.318 | 99.717% | 100.000% |
R. Jan LeCroy | |||
Affirmative | 48,727,785.376 | 98.208% | 98.486% |
Withhold | 748,960.942 | 1.509% | 1.514% |
Total | 49,476,746.318 | 99.717% | 100.000% |
Gregory J. Hahn | |||
Affirmative | 49,010,164.926 | 98.777% | 99.057% |
Withhold | 466,581.392 | 0.940% | 0.943% |
Total | 49,476,746.318 | 99.717% | 100.000% |
62
40|86 Series Trust | Semi-Annual Report |
May 9, 2005 Special Meeting of Shareholders |
PROPOSAL THREE: AMEND DECLARATION OF TRUST
Amend the Trust’s Declaration of Trust to permit the Trustees to authorize the liquidation of one or more of the Portfolios without obtaining shareholder approval if shareholder approval is not otherwise required by applicable law.
Focus 20 Portfolio | No. of Shares | % of Outstanding Shares | % of Shares Voted |
Affirmative | 318,909.406 | 81.624% | 81.624% |
Withhold | 49,706.925 | 12.722% | 12.722% |
Abstain | 22,088.729 | 5.654% | 5.654% |
Total | 390,705.060 | 100.000% | 100.000% |
Equity Portfolio | |||
Affirmative | 4,791,516.015 | 71.143% | 71.143% |
Withhold | 1,655,548.473 | 24.582% | 24.582% |
Abstain | 287,951.242 | 4.275% | 4.275% |
Total | 6,735,015.730 | 100.000% | 100.000% |
Balanced Portfolio | |||
Affirmative | 2,600,857.580 | 76.422% | 78.203% |
Withhold | 515,592.592 | 15.149% | 15.503% |
Abstain | 209,313.558 | 6.151% | 6.294% |
Total | 3,325,763.730 | 97.722% | 100.000% |
High Yield Portfolio | |||
Affirmative | 618,736.980 | 81.687% | 81.687% |
Withhold | 122,309.736 | 16.148% | 16.148% |
Abstain | 16,398.414 | 2.165% | 2.165% |
Total | 757,445.130 | 100.000% | 100.000% |
Fixed Income Portfolio | |||
Affirmative | 1,951,655.414 | 75.826% | 75.826% |
Withhold | 405,901.702 | 15.770% | 15.770% |
Abstain | 216,316.232 | 8.404% | 8.404% |
Total | 2,573,873.348 | 100.000% | 100.000% |
Government Securities Portfolio | |||
Affirmative | 702,328.887 | 61.005% | 61.005% |
Withhold | 336,535.480 | 29.232% | 29.232% |
Abstain | 112,394.163 | 9.763% | 9.763% |
Total | 1,151,258.530 | 100.000% | 100.000% |
Money Market Portfolio | |||
Affirmative | 26,570,971.318 | 76.782% | 76.922% |
Withhold | 3,499,314.765 | 10.112% | 10.131% |
Abstain | 4,472,398.707 | 12.924% | 12.947% |
Total | 34,542,684.790 | 99.818% | 100.000% |
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40|86 Series Trust | Semi-Annual Report |
Board of Trustees and Officers (unaudited) |
Name (Age) Address | Position Held With Trust | Principal Occupation(s) During Past 5 Years |
David N. Walthall (59) 11815 N. Pennsylvania St. Carmel, IN 46032 | Chairman of the Board Since March 2004 and Trustee Since December 1998 | Principal, Walthall Asset Management. Director, Da-Lite Screen Company, Former President, Chief Executive Officer and Director of Lyrick Corporation. Formerly, President and CEO, Heritage Media Corporation. Formerly, Director, Eagle National Bank. Chairman of the Board and Trustee of one other mutual fund managed by the Adviser. |
Audrey L. Kurzawa* (38) 11815 N. Pennsylvania St. Carmel, IN 46032 | President and Trustee Since June 2005 and Formerly Treasurer Since October 2002 | Certified Public Accountant. Controller, Adviser. President and Trustee of one other mutual fund managed by the Adviser. |
Harold W. Hartley (81) 11815 N. Pennsylvania St. Carmel, IN 46032 | Trustee Since July 1998 | Chartered Financial Analyst. Director, Ennis, Inc. Retired, Executive Vice President, Tenneco Financial Services, Inc. Trustee of one other mutual fund managed by the Adviser. |
Dr. R. Jan LeCroy (73) 11815 N. Pennsylvania St. Carmel, IN 46032 | Trustee Since July 1998 | Director, SWS Group, Inc. Retired, President, Dallas Citizens Council. Trustee of one other mutual fund managed by the Adviser. |
Diana H. Hamilton (48) 11815 N. Pennsylvania St. Carmel, IN 46032 | Trustee Since December 2004 | President, Sycamore Advisors, LLC, a municipal finance advisory firm; Formerly, State of Indiana Director of Public Finance. Trustee of one other mutual fund managed by the Adviser. |
R. Matthew Neff (49) 11815 N. Pennsylvania St. Carmel, IN 46032 | Trustee Since December 2004 | Chairman and Co-Chief Executive Officer of Senex Financial Corp., a financial services company engaged in the healthcare finance field. Trustee of one other mutual fund managed by the Adviser. |
William T. Devanney (49) 11815 N. Pennsylvania St. Carmel, IN 46032 | Vice President Since July 1998 | Senior Vice President, Corporate Taxes of Conseco Services, LLC and various affiliates. Vice President of one other mutual fund managed by the Adviser. |
Daniel Murphy (49) 11815 N. Pennsylvania St. Carmel, IN 46032 | Treasurer Since June 2005 | Senior Vice President and Treasurer, Conseco, Inc. Treasurer of one other mutual fund managed by the Adviser. |
Jeffrey M. Stautz (47) 11815 N. Pennsylvania St. Carmel, IN 46032 | Chief Legal Officer and Secretary Since May 2005 | Vice President, General Counsel, Secretary and Chief Compliance Officer, Adviser. Chief Legal Officer and Secretary of one other mutual fund managed by the Adviser. |
Sarah L. Bertrand (37) 11815 N. Pennsylvania St. Carmel, IN 46032 | Chief Compliance Officer and Assistant Secretary Since December 2004 | Assistant Vice President, Legal and Compliance, Adviser. Chief Compliance Officer and Assistant Secretary of one other mutual fund managed by the Adviser. |
* | The Trustee so indicated is an ”interested person,” as defined in the 1940 Act, of the Trust due to the positions indicated with the Adviser and its affiliates. Each Trustee serves until the expiration of the term of his designated class and until his successor is elected and qualified, or until his death or resignation, or removal as provided in the Fund’s by—laws or charter or statute. All Trustees oversee the 7 portfolios that make up the total fund complex including 40|86 Strategic Income Fund (1) and 40|86 Series Trust (6). |
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40|86 Series Trust | Semi-Annual Report |
INVESTMENT ADVISER | LEGAL COUNSEL |
40|86 Advisors, Inc. | Kirkpatrick & Lockhart |
Carmel, IN | Nicholson Graham LLP |
Washington, D.C. | |
CUSTODIAN | |
The Bank of New York | INVESTMENT SUB-ADVISERS |
New York, NY | Chicago Equity Partners, LLC |
Chicago, IL | |
INDEPENDENT REGISTERED | |
PUBLIC ACCOUNTING FIRM | |
PricewaterhouseCoopers LLP | |
Indianapolis, IN |
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Portfolios use to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling (866) 299-4086. Furthermore, you can obtain the description on the SEC’s website at http://www.sec.gov.
PROXY VOTING RECORDS FOR THE 12-MONTH PERIOD ENDED JUNE 30, 2005
Information regarding how the Portfolios voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge, upon request, by calling (866) 299-4086. Furthermore, you can obtain the Portfolio’s proxy voting records on the SEC’s website at http://www.sec.gov.
AVAILABILITY OF QUARTERLY PORTFOLIO SCHEDULE
The Portfolios file complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The filing for the most recent quarter is available without charge, upon request, by calling (866) 299-4086. Furthermore, you can obtain the Portfolio’s quarterly portfolio schedule on the SEC’s website at http://www.sec.gov. The Portfolio’s Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room in Washington, DC, and information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330.
65
40|86 Series Trust is a registered investment company managed by
40|86 Advisors, Inc., a leading fixed-income investment advisor.
40|86 Series Trust
11815 North Pennsylvania Street
Carmel, Indiana 46032
Principal Underwriter:
Conseco Equity Sales, Inc.
11815 North Pennsylvania Street
Carmel, Indiana 46032
Item 2. | Code of Ethics. |
Not applicable for semi-annual reports. | |
Item 3. | Audit Committee Financial Expert. |
Not applicable for semi-annual reports. | |
Item 4. | Principal Accountant Fees and Services. |
Not applicable for semi-annual reports. | |
Item 5. | Audit Committee of Listed Registrants. |
Not applicable to open-end investment companies. | |
Item 6. | Schedule of Investments. |
Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. | |
Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
Not applicable to open-end investment companies. | |
Item 8. | Portfolio Managers of Closed-End Management Investment Companies |
Not applicable to open-end investment companies. | |
Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
Not applicable to open-end investment companies. | |
Item 10. | Submission of Matters to a Vote of Security Holders. |
No material changes. | |
Item 11. | Controls and Procedures. |
(a) | The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Exchange Act (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
(b) | There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's last fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. |
Item 12. | Exhibits. |
(a)(1) | Any code of ethics or amendment thereto. Not applicable for semi-annual reports. |
(a)(2) | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
(a)(3) | Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable to open-end investment companies. |
(b) | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) | 40|86 Series Trust |
By (Signature and Title) | /s/ Audrey L. Kurzawa |
Audrey L. Kurzawa, President | |
(principal executive officer) | |
Date | 8/26/05 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | |
By (Signature and Title) | /s/ Audrey L. Kurzawa |
Audrey L. Kurzawa, President | |
(principal executive officer) | |
Date | 8/26/05 |
By (Signature and Title) | /s/ Daniel J. Murphy |
Daniel J. Murphy, Treasurer | |
(principal financial officer) | |
Date | 8/29/05 |
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