SECURITIES AND EXCHANGE COMMISSION
(Address of principal executive offices) (Zip code)
c/o MetLife, Inc.
One MetLife Plaza
27-01 Queens Plaza North
Long Island City, NY 11101
(Name and address of agent for service)
Date of reporting period: June 30, 2005
The Travelers Series Trust: | |
Equity Income Portfolio | |
Large Cap Portfolio |
The Travelers Insurance Company
Semi-Annual Report for The Travelers Series Trust
WHAT’S INSIDE
Letter from the Chairman | 1 | ||
Fund at a Glance: | |||
Equity Income Portfolio | 4 | ||
Fund at a Glance: | |||
Large Cap Portfolio | 5 | ||
Fund Expenses | 6 | ||
Schedules of Investments | 8 | ||
Statements of Assets and Liabilities | 21 | ||
Statements of Operations | 22 | ||
Statements of Changes in Net Assets | 23 | ||
Financial Highlights | 25 | ||
Notes to Financial Statements | 27 | ||
Factors Considered by the Independent Trustees in Approving the Investment Advisory, the Subadvisory Agreements and the Sub Subadvisory Agreements | 32 | ||
Combined Special Shareholder Meeting | 35 |
Dear Shareholder, The U.S. economy overcame a number of obstacles and continued to expand during the six-month reporting period. Rising interest rates, record high oil prices, and geopolitical issues threatened to send the economy into a “soft patch.” However, when all was said and done, first quarter 2005 gross domestic product (“GDP”)i growth was 3.8%, mirroring the solid gain that occurred during the fourth quarter of 2004. Given the overall strength of the economy, the Federal Reserve Board (“Fed”)ii continued to raise interest rates over the period in an attempt to ward off inflation. Following five rate hikes from June 2004 through December 2004, the Fed again increased its target for the federal funds rateiii in 0.25% increments four additional times during the reporting period. All told, the Fed’s nine rate hikes brought the target for the federal funds rate from 1.00% to 3.25%. During the six months covered by this report, the U.S. stock market was relatively flat, with the S&P 500 Indexiv returning -0.81%. Stocks were weak early in the reporting period, as the issues discussed above caused investors to remain on the sidelines. Equities then rallied in the second quarter of 2005, as the economy appeared to be on solid footing and inflation was largely under control. Looking at the reporting period as a whole, mid-cap stocks generated superior returns, with the Russell Midcap,v Russell 1000,vi and Russell 2000vii Indexes returning 3.92%, 0.11%, and -1.25%, respectively. From a market style perspective, value-oriented stocks outperformed their growth counterparts. | R. JAY GERKEN, CFA Chairman, President and Chief Executive Officer* |
Within this environment, the Funds performed as follows:1
PERFORMANCE SNAPSHOT
6 Months | ||||
Equity Income Portfolio | -1.73% | |||
Russell 1000 Value Index | 1.76% | |||
Russell 3000 Value Index | 1.69% | |||
Lipper Variable Equity Income Funds Category Average | 0.72% | |||
Large Cap Portfolio | -0.22% | |||
S&P 500 Index | -0.81% | |||
Lipper Variable Large-Cap Core Funds Category Average | -0.76% |
The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown above. Principal value and investment returns will fluctuate and investors’ shares, when redeemed, may be worth more or less than their original cost.
Fund returns assume the reinvestment of all distributions at net asset value and the deduction of all Fund expenses.
Lipper, Inc. is a major independent mutual-fund tracking organization. Returns are based on the six-month period ended June 30, 2005 and include the reinvestment of dividends and capital gains distributions, if any. Returns were calculated among the 63 funds in the variable equity income funds category. Returns were calculated among the 223 funds in the variable large-cap core funds category.
(1) | The Funds are underlying investment options of various variable annuity and variable life products. The Funds’ performance returns do not reflect the deduction of sales charges and expenses imposed in connection with investing in variable annuity and variable life contracts, such as administrative fees, account charges and surrender charges which, if reflected, would reduce the performance of the Funds. Past performance is no guarantee of future results. |
1
Equity Income Portfolio2
For the six months ended June 30, 2005, the Equity Income Portfolio, excluding sales charges, returned -1.73%. The Fund underperformed the Lipper Variable Equity Income Funds Category Average3 which increased 0.72% for the same time frame. The Fund’s unmanaged benchmarks, the Russell 1000 Value Indexviii and the Russell 3000 Value Index,ix returned 1.76% and 1.69%, respectively, for the same period.
Large Cap Portfolio2
For the six months ended June 30, 2005, the Large Cap Portfolio, returned -0.22%. The Fund outperformed its unmanaged benchmark, the S&P 500 Index, which returned -0.81% for the same period. It also outperformed its Lipper Variable Large-Cap Core Funds Category Average4 which decreased 0.76% for the same time frame.
Special Shareholder Notice
On January 31, 2005, Citigroup Inc. (“Citigroup”) announced that it had agreed to sell The Travelers Insurance Company and certain other domestic and international insurance businesses to MetLife, Inc. (“MetLife”) pursuant to an acquisition agreement (“Metlife Transaction”). The sale included Travelers Asset Management International Company LLC (“TAMIC”), which serves as the investment advisor for the Funds. During the spring/ summer 2005, the shareholders of the Funds approved the change in control of TAMIC from Citigroup to Metlife, as well as the new advisory agreements with TAMIC. The Metlife Transaction closed on July 1, 2005.
Information About Your Funds
As you may be aware, several issues in the mutual fund and variable annuity product industry have recently come under the scrutiny of federal and state regulators. The Travelers Insurance Company and some of its affiliates have received requests for information from various government regulators regarding market timing, late trading, fees, revenue sharing, producer compensation and other mutual fund and variable annuity product issues in connection with various inquiries and or investigations. The Travelers Insurance Company and its affiliates are responding to those information requests, but are not in a position to predict the outcome of these requests and investigations.
Important information concerning the Funds and the sub-administration with regards to recent regulatory development is contained in the “Additional Information” note in the Notes to Financial Statements included in this report.
As always, thank you for your continued confidence in our stewardship of your assets. We look forward to helping you continue to meet your financial goals.
Sincerely,
R. Jay Gerken, CFA
July 18, 2005
* | Mr. Gerken resigned as Chairman, President and Chief Executive Officer of the Funds when the MetLife Transaction closed on July 1, 2005. |
2 | The Fund is an underlying investment option of various variable annuity and variable life products. The Fund’s performance returns do not reflect the deduction of sales charges and expenses imposed in connection with investing in variable annuity and variable life contracts, such as administrative fees, account charges and surrender charges which, if reflected, would reduce the performance of the Fund. Past performance is no guarantee of future results. |
3 | Lipper, Inc. is a major independent mutual-fund tracking organization. Returns are based on the 6-month period ended June 30, 2005, including the reinvestment of dividends and capital gains distributions, if any, calculated among the 63 funds in the Fund’s Lipper category, and excluding sales charges. |
4 | Lipper, Inc. is a major independent mutual-fund tracking organization. Returns are based on the 6-month period ended June 30, 2005, including the reinvestment of dividends and capital gains distributions, if any, calculated among the 223 funds in the Fund’s Lipper category, and excluding sales charges. |
2
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.
Portfolio holdings and breakdowns are as of June 30, 2005 and are subject to change. Please refer to pages 8 through 20 for a list and percentage breakdown of the Funds’ holdings.
All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
i | Gross domestic product is a market value of goods and services produced by labor and property in a given country. |
ii | The Federal Reserve Board is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. |
iii | The federal funds rate is the interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. |
iv | The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. |
v | The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index whose average market capitalization was approximately $4.7 billion as of 6/24/05. |
vi | The Russell 1000 Index measures the performance of the 1000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. |
vii | The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. |
viii | The Russell 1000 Value Index measures the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values. |
ix | The Russell 3000 Value Index measures the performance of those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth values. (A price-to-book ratio is the price of a stock compared to the difference between a company’s assets and liabilities.) |
3
4
5
Example
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
This example is based on an investment of $1,000 invested on January 1, 2005 and held for the six months ended June 30, 2005.
Actual Expenses
The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period.”
Based on Actual Total Return(1)
Beginning | Ending | Annualized | Expenses | ||||||||||||||||||
Actual Total | Account | Account | Expense | Paid During | |||||||||||||||||
Return(2) | Value | Value | Ratio | the Period(3) | |||||||||||||||||
Equity Income Portfolio | (1.73 | )% | $ | 1,000.00 | $ | 982.70 | 0.84 | % | $ | 4.13 | |||||||||||
Large Cap Portfolio | (0.22 | ) | 1,000.00 | 997.80 | 0.86 | 4.26 | |||||||||||||||
(1) | For the six months ended June 30, 2005. |
(2) | Assumes reinvestment of dividends and capital gains distributions, if any, at net asset value. Total return is not annualized, as it may not be representative of the total return for the year. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns. Performance figures may reflect fee waivers and/or expense reimbursements. Past performance is no guarantee of future results. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. |
(3) | Expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 365. |
6
Hypothetical Example for Comparison Purposes
The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund’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 the information provided in this table to compare the ongoing costs of investing in the Fund and other funds. To do so, compare the 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, 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 transaction costs were included, your costs would have been higher.
Based on Hypothetical Total Return(1)
Hypothetical | |||||||||||||||||||||
Annualized | Beginning | Ending | Annualized | Expenses | |||||||||||||||||
Total | Account | Account | Expense | Paid During | |||||||||||||||||
Return | Value | Value | Ratio | the Period(2) | |||||||||||||||||
Equity Income Portfolio | 5.00 | % | $ | 1,000.00 | $ | 1,020.63 | 0.84 | % | $ | 4.21 | |||||||||||
Large Cap Portfolio | 5.00 | 1,000.00 | 1,020.53 | 0.86 | 4.31 | ||||||||||||||||
(1) | For the six months ended June 30, 2005. |
(2) | Expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 365. |
7
Schedules of Investments (unaudited) | June 30, 2005 |
SHARES | SECURITY | VALUE | ||||||||||
COMMON STOCK — 99.7% | ||||||||||||
CONSUMER DISCRETIONARY — 10.8% | ||||||||||||
Auto Components — 0.2% | ||||||||||||
23,900 | Dana Corp. | $ | 358,739 | |||||||||
5,300 | Lear Corp. | 192,814 | ||||||||||
551,553 | ||||||||||||
Automobiles — 0.3% | ||||||||||||
19,800 | Monaco Coach Corp. | 340,362 | ||||||||||
3,900 | Thor Industries, Inc. | 122,577 | ||||||||||
21,200 | Winnebago Industries, Inc. | 694,300 | ||||||||||
1,157,239 | ||||||||||||
Household Durables — 0.0% | ||||||||||||
7,900 | Tempur-Pedic International, Inc.* | 175,222 | ||||||||||
Media — 7.6% | ||||||||||||
63,223 | Comcast Corp., Special Class A Shares* | 1,893,529 | ||||||||||
8,000 | E.W. Scripps Co., Class A Shares | 390,400 | ||||||||||
51,100 | Gannett Co., Inc. | 3,634,743 | ||||||||||
121,900 | New York Times Co., Class A Shares | 3,797,185 | ||||||||||
612,400 | News Corp., Class B Shares | 10,325,064 | ||||||||||
6,500 | Omnicom Group, Inc. | 519,090 | ||||||||||
201,600 | Time Warner, Inc.* | 3,368,736 | ||||||||||
22,400 | Univision Communications, Inc., Class A Shares* | 617,120 | ||||||||||
57,800 | Walt Disney Co. | 1,455,404 | ||||||||||
39,046 | XM Satellite Radio Holdings, Inc., Class A Shares* | 1,314,288 | ||||||||||
27,315,559 | ||||||||||||
Multiline Retail — 2.5% | ||||||||||||
76,700 | Dollar General Corp. | 1,561,612 | ||||||||||
43,300 | Federated Department Stores, Inc. | 3,173,024 | ||||||||||
65,500 | J.C. Penney Co., Inc. | 3,443,990 | ||||||||||
15,900 | Kohl’s Corp.* | 888,969 | ||||||||||
9,067,595 | ||||||||||||
Specialty Retail — 0.2% | ||||||||||||
19,900 | Home Depot, Inc. | 774,110 | ||||||||||
TOTAL CONSUMER DISCRETIONARY | 39,041,278 | |||||||||||
8
Schedules of Investments (unaudited) (continued) | June 30, 2005 |
SHARES | SECURITY | VALUE | ||||||||||
CONSUMER STAPLES — 9.4% | ||||||||||||
Beverages — 2.5% | ||||||||||||
15,900 | Anheuser-Busch Cos., Inc. | $ | 727,425 | |||||||||
172,100 | Coca-Cola Co. | 7,185,175 | ||||||||||
23,800 | Coca-Cola Enterprises, Inc. | 523,838 | ||||||||||
9,300 | Diageo PLC, Sponsored ADR | 551,490 | ||||||||||
8,987,928 | ||||||||||||
Food & Staples Retailing — 4.0% | ||||||||||||
89,400 | CVS Corp. | 2,598,858 | ||||||||||
242,900 | Wal-Mart Stores, Inc. | 11,707,780 | ||||||||||
14,306,638 | ||||||||||||
Food Products — 0.4% | ||||||||||||
35,600 | Campbell Soup Co. | 1,095,412 | ||||||||||
8,600 | J.M. Smucker Co. | 403,684 | ||||||||||
1,499,096 | ||||||||||||
Household Products — 1.1% | ||||||||||||
13,400 | Colgate-Palmolive Co. | 668,794 | ||||||||||
65,700 | Procter & Gamble Co. | 3,465,675 | ||||||||||
4,134,469 | ||||||||||||
Tobacco — 1.4% | ||||||||||||
75,400 | Altria Group, Inc. | 4,875,364 | ||||||||||
TOTAL CONSUMER STAPLES | 33,803,495 | |||||||||||
ENERGY — 10.4% | ||||||||||||
Energy Equipment & Services — 2.6% | ||||||||||||
9,300 | Baker Hughes, Inc. | 475,788 | ||||||||||
114,100 | Halliburton Co. | 5,456,262 | ||||||||||
47,800 | Schlumberger Ltd. | 3,629,932 | ||||||||||
9,561,982 | ||||||||||||
Oil, Gas & Consumable Fuels — 7.8% | ||||||||||||
43,700 | BP PLC, Sponsored ADR | 2,726,006 | ||||||||||
104,700 | El Paso Corp. | 1,206,144 | ||||||||||
341,110 | Exxon Mobil Corp. | 19,603,592 | ||||||||||
38,400 | Total SA, Sponsored ADR | 4,487,040 | ||||||||||
28,022,782 | ||||||||||||
TOTAL ENERGY | 37,584,764 | |||||||||||
9
Schedules of Investments (unaudited) (continued) | June 30, 2005 |
SHARES | SECURITY | VALUE | ||||||||||
FINANCIALS — 32.0% | ||||||||||||
Commercial Banks — 12.1% | ||||||||||||
226,100 | Bank of America Corp. | $ | 10,312,421 | |||||||||
5,200 | Bank of Hawaii Corp. | 263,900 | ||||||||||
5,300 | BB&T Corp. | 211,841 | ||||||||||
27,800 | Cathay General Bancorp | 937,138 | ||||||||||
78,326 | East West Bancorp., Inc. | 2,630,970 | ||||||||||
173,100 | Hudson City Bancorp, Inc. | 1,975,071 | ||||||||||
5,200 | Marshall & Ilsley Corp. | 231,140 | ||||||||||
24,500 | Mellon Financial Corp. | 702,905 | ||||||||||
55,300 | North Fork Bancorporation | 1,553,377 | ||||||||||
89,500 | Northern Trust Corp. | 4,080,305 | ||||||||||
50,600 | SunTrust Banks, Inc. | 3,655,344 | ||||||||||
5,200 | Synovus Financial Corp. | 149,084 | ||||||||||
50,100 | U.S. Bancorp | 1,462,920 | ||||||||||
75,529 | UCBH Holdings, Inc. | 1,226,591 | ||||||||||
11,900 | UnionBanCal Corp. | 796,348 | ||||||||||
115,248 | Wachovia Corp. | 5,716,301 | ||||||||||
125,450 | Wells Fargo & Co. | 7,725,211 | ||||||||||
43,630,867 | ||||||||||||
Diversified Financial Services — 10.1% | ||||||||||||
38,500 | American Capital Strategies Ltd. | 1,390,235 | ||||||||||
72,900 | American Express Co. | 3,880,467 | ||||||||||
21,200 | Freddie Mac | 1,382,876 | ||||||||||
42,430 | Genworth Financial, Inc., Class A Shares | 1,282,659 | ||||||||||
8,000 | Goldman Sachs Group, Inc. | 816,160 | ||||||||||
82,000 | Janus Capital Group, Inc. | 1,233,280 | ||||||||||
243,828 | JPMorgan Chase & Co. | 8,612,005 | ||||||||||
10,675 | Legg Mason, Inc. | 1,111,374 | ||||||||||
19,700 | Lehman Brothers Holdings, Inc. | 1,955,816 | ||||||||||
80,100 | Merrill Lynch & Co., Inc. | 4,406,301 | ||||||||||
35,800 | Nuveen Investments, Class A Shares | 1,346,796 | ||||||||||
134,200 | SLM Corp. | 6,817,360 | ||||||||||
41,100 | State Street Corp. | 1,983,075 | ||||||||||
36,218,404 | ||||||||||||
Insurance — 3.9% | ||||||||||||
31,800 | Allstate Corp. | 1,900,050 | ||||||||||
146,600 | American International Group, Inc. | 8,517,460 | ||||||||||
36,800 | Hartford Financial Services Group, Inc. | 2,751,904 | ||||||||||
11,900 | Prudential Financial, Inc. | 781,354 | ||||||||||
13,950,768 | ||||||||||||
10
Schedules of Investments (unaudited) (continued) | June 30, 2005 |
SHARES | SECURITY | VALUE | ||||||||||
Real Estate — 4.9% | ||||||||||||
24,900 | CenterPoint Properties Trust | $ | 1,053,270 | |||||||||
8,500 | Equity Lifestyle Properties, Inc. | 337,960 | ||||||||||
156,500 | Equity Office Properties Trust | 5,180,150 | ||||||||||
230,404 | General Growth Properties, Inc. | 9,467,301 | ||||||||||
35,600 | ProLogis | 1,432,544 | ||||||||||
5,900 | United Dominion Realty Trust, Inc. | 141,895 | ||||||||||
17,613,120 | ||||||||||||
Thrifts & Mortgages — 1.0% | ||||||||||||
10,600 | Countrywide Financial Corp. | 409,266 | ||||||||||
51,700 | Golden West Financial Corp. | 3,328,446 | ||||||||||
3,737,712 | ||||||||||||
TOTAL FINANCIALS | 115,150,871 | |||||||||||
HEALTH CARE — 6.9% | ||||||||||||
Biotechnology — 0.3% | ||||||||||||
21,000 | Amgen, Inc.* | 1,269,660 | ||||||||||
Health Care Equipment & Supplies — 0.4% | ||||||||||||
13,300 | Medtronic, Inc. | 688,807 | ||||||||||
21,400 | Varian, Inc.* | 808,706 | ||||||||||
1,497,513 | ||||||||||||
Health Care Providers & Services — 1.0% | ||||||||||||
8,000 | Aetna, Inc. | 662,560 | ||||||||||
37,100 | Health Net, Inc.* | 1,415,736 | ||||||||||
26,800 | UnitedHealth Group, Inc. | 1,397,352 | ||||||||||
3,475,648 | ||||||||||||
Pharmaceuticals — 5.2% | ||||||||||||
51,700 | Abbott Laboratories | 2,533,817 | ||||||||||
31,800 | Amylin Pharmaceuticals, Inc.* | 665,574 | ||||||||||
42,500 | Hospira, Inc.* | 1,657,500 | ||||||||||
39,700 | Merck & Co., Inc. | 1,222,760 | ||||||||||
26,500 | Mylan Laboratories, Inc. | 509,860 | ||||||||||
255,630 | Pfizer, Inc. | 7,050,275 | ||||||||||
30,200 | Roche Holding AG, Sponsored ADR | 1,911,811 | ||||||||||
25,200 | Schering-Plough Corp. | 480,312 | ||||||||||
61,400 | Wyeth | 2,732,300 | ||||||||||
18,764,209 | ||||||||||||
TOTAL HEALTH CARE | 25,007,030 | |||||||||||
11
Schedules of Investments (unaudited) (continued) | June 30, 2005 |
SHARES | SECURITY | VALUE | ||||||||||
INDUSTRIALS — 7.4% | ||||||||||||
Aerospace & Defense — 1.4% | ||||||||||||
7,900 | Boeing Co. | $ | 521,400 | |||||||||
43,900 | Hexcel Corp.* | 742,788 | ||||||||||
33,200 | Honeywell International, Inc. | 1,216,116 | ||||||||||
11,955 | Lockheed Martin Corp. | 775,521 | ||||||||||
15,800 | Northrop Grumman Corp. | 872,950 | ||||||||||
11,900 | Precision Castparts Corp. | 927,010 | ||||||||||
5,055,785 | ||||||||||||
Air Freight & Logistics — 0.1% | ||||||||||||
5,300 | FedEx Corp. | 429,353 | ||||||||||
Commercial Services & Supplies — 0.2% | ||||||||||||
30,500 | Waste Management, Inc. | 864,370 | ||||||||||
Electrical Equipment — 0.1% | ||||||||||||
19,741 | American Power Conversion Corp. | 465,690 | ||||||||||
Industrial Conglomerates — 2.8% | ||||||||||||
285,700 | General Electric Co. | 9,899,505 | ||||||||||
Machinery — 1.2% | ||||||||||||
9,300 | Caterpillar, Inc. | 886,383 | ||||||||||
23,800 | Danaher Corp. | 1,245,692 | ||||||||||
60,000 | Dover Corp. | 2,182,800 | ||||||||||
4,314,875 | ||||||||||||
Road & Rail — 1.6% | ||||||||||||
28,100 | Burlington Northern Santa Fe Corp. | 1,322,948 | ||||||||||
59,600 | Laidlaw International, Inc.* | 1,436,360 | ||||||||||
93,580 | Norfolk Southern Corp. | 2,897,237 | ||||||||||
5,656,545 | ||||||||||||
TOTAL INDUSTRIALS | 26,686,123 | |||||||||||
INFORMATION TECHNOLOGY — 13.2% | ||||||||||||
Communications Equipment — 1.3% | ||||||||||||
145,900 | Cisco Systems, Inc.* | 2,788,149 | ||||||||||
31,500 | Corning, Inc.* | 523,530 | ||||||||||
64,800 | Motorola, Inc. | 1,183,248 | ||||||||||
4,494,927 | ||||||||||||
Computers & Peripherals — 0.4% | ||||||||||||
9,300 | Apple Computer, Inc.* | 342,333 | ||||||||||
9,200 | International Business Machines Corp. | 682,640 | ||||||||||
15,900 | NCR Corp.* | 558,408 | ||||||||||
1,583,381 | ||||||||||||
12
Schedules of Investments (unaudited) (continued) | June 30, 2005 |
SHARES | SECURITY | VALUE | ||||||||||
Electronic Equipment & Instruments — 0.6% | ||||||||||||
33,200 | Arrow Electronics, Inc.* | $ | 901,712 | |||||||||
50,800 | Avnet, Inc.* | 1,144,524 | ||||||||||
2,046,236 | ||||||||||||
Internet Software & Services — 0.2% | ||||||||||||
18,400 | Yahoo!, Inc.* | 637,560 | ||||||||||
Semiconductors & Semiconductor Equipment — 8.7% | ||||||||||||
101,840 | Analog Devices, Inc. | 3,799,650 | ||||||||||
162,900 | Applied Materials, Inc. | 2,635,722 | ||||||||||
115,721 | Axcelis Technologies, Inc.* | 793,846 | ||||||||||
6,900 | FormFactor, Inc.* | 182,298 | ||||||||||
94,800 | Freescale Semiconductor, Inc., Class B Shares* | 2,007,864 | ||||||||||
231,300 | Intel Corp. | 6,027,678 | ||||||||||
103,300 | KLA-Tencor Corp. | 4,514,210 | ||||||||||
85,400 | Lam Research Corp.* | 2,471,476 | ||||||||||
82,800 | MKS Instruments, Inc.* | 1,398,492 | ||||||||||
208,700 | National Semiconductor Corp. | 4,597,661 | ||||||||||
59,100 | Novellus Systems, Inc.* | 1,460,361 | ||||||||||
40,700 | Varian Semiconductor Equipment Associates, Inc.* | 1,505,900 | ||||||||||
31,395,158 | ||||||||||||
Software — 2.0% | ||||||||||||
8 | Computer Associates International, Inc. | 220 | ||||||||||
289,600 | Microsoft Corp. | 7,193,664 | ||||||||||
7,193,884 | ||||||||||||
TOTAL INFORMATION TECHNOLOGY | 47,351,146 | |||||||||||
MATERIALS — 3.2% | ||||||||||||
Chemicals — 3.1% | ||||||||||||
88,300 | Eastman Chemical Co. | 4,869,745 | ||||||||||
52,700 | FMC Corp.* | 2,958,578 | ||||||||||
12,900 | H.B. Fuller Co. | 439,374 | ||||||||||
49,200 | Lubrizol Corp. | 2,066,892 | ||||||||||
17,000 | Praxair, Inc. | 792,200 | ||||||||||
11,126,789 | ||||||||||||
Metals & Mining — 0.1% | ||||||||||||
8,000 | Newmont Mining Corp. | 312,240 | ||||||||||
TOTAL MATERIALS | 11,439,029 | |||||||||||
13
Schedules of Investments (unaudited) (continued) | June 30, 2005 |
SHARES | SECURITY | VALUE | ||||||||||
TELECOMMUNICATION SERVICES — 3.6% | ||||||||||||
Diversified Telecommunication Services — 3.6% | ||||||||||||
54,300 | ALLTEL Corp. | $ | 3,381,804 | |||||||||
120,600 | BellSouth Corp. | 3,204,342 | ||||||||||
44,600 | SBC Communications, Inc. | 1,059,250 | ||||||||||
62,400 | Sprint Corp. | 1,565,616 | ||||||||||
106,300 | Verizon Communications, Inc. | 3,672,665 | ||||||||||
TOTAL TELECOMMUNICATION SERVICES | 12,883,677 | |||||||||||
UTILITIES — 2.8% | ||||||||||||
Electric Utilities — 2.7% | ||||||||||||
10,600 | AES Corp.* | 173,628 | ||||||||||
48,000 | CMS Energy Corp.* | 722,880 | ||||||||||
13,300 | Constellation Energy Group | 767,277 | ||||||||||
15,800 | Dominion Resources, Inc. | 1,159,562 | ||||||||||
53,000 | Edison International | 2,149,150 | ||||||||||
19,700 | Entergy Corp. | 1,488,335 | ||||||||||
42,700 | Exelon Corp. | 2,191,791 | ||||||||||
2,600 | Pepco Holdings, Inc. | 62,244 | ||||||||||
50,300 | TECO Energy, Inc. | 951,173 | ||||||||||
9,666,040 | ||||||||||||
Gas Utilities — 0.1% | ||||||||||||
13,300 | AGL Resources, Inc. | 514,045 | ||||||||||
TOTAL UTILITIES | 10,180,085 | |||||||||||
TOTAL COMMON STOCK (Cost — $343,799,346) | 359,127,498 | |||||||||||
FACE | |||||||||||||
AMOUNT | |||||||||||||
CONVERTIBLE BOND — 0.0% | |||||||||||||
Semiconductors — 0.0% | |||||||||||||
$ | 180,000 | B- | ASM International NV, Subordinated Notes, 4.250% due 12/6/11 (a) | ||||||||||
(Cost — $184,261) | 175,275 | ||||||||||||
TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENT | |||||||||||||
(Cost — $343,983,607) | 359,302,773 | ||||||||||||
14
Schedules of Investments (unaudited) (continued) | June 30, 2005 |
FACE | ||||||||||||
AMOUNT | SECURITY | VALUE | ||||||||||
SHORT-TERM INVESTMENT — 0.5% | ||||||||||||
Repurchase Agreement — 0.5% | ||||||||||||
$ | 1,828,000 | State Street Bank & Trust Co., dated 6/30/05, 2.550% due 7/1/05; Proceeds at maturity — $1,828,129; (Fully collateralized by U.S. Treasury Bond, 7.500% due 11/15/16; Market value — $1,869,075) (Cost — $1,828,000) | $ | 1,828,000 | ||||||||
TOTAL INVESTMENTS — 100.2% (Cost — $345,811,607#) | 361,130,773 | |||||||||||
Liabilities in Excess of Other Assets — (0.2)% | (768,480) | |||||||||||
TOTAL NET ASSETS — 100.0% | $ | 360,362,293 | ||||||||||
* | Non-income producing security. | |
‡ | All ratings are by Standard & Poor’s Ratings Service. | |
(a) | Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Trustees. | |
# | Aggregate cost for Federal income tax purposes is substantially the same. | |
Abbreviation used in this schedule: | ||
ADR — American Depositary Receipt |
Bond Ratings (unaudited):
B — | Bonds rated “B” are regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. “BB” represents a lower degree of speculation than “B”, “CCC” and “CC” the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. |
15
Schedules of Investments (unaudited) (continued) | June 30, 2005 |
SHARES | SECURITY | VALUE | ||||||
COMMON STOCK — 98.8% | ||||||||
CONSUMER DISCRETIONARY — 17.1% | ||||||||
Distributors — 0.9% | ||||||||
70,900 | Spectrum Brands, Inc.* | $ | 2,339,700 | |||||
Hotels, Restaurants & Leisure — 2.2% | ||||||||
150,600 | Penn National Gaming, Inc.* | 5,496,900 | ||||||
Household Durables — 8.2% | ||||||||
183,200 | D.R. Horton, Inc. | 6,890,152 | ||||||
73,400 | KB HOME | 5,595,282 | ||||||
29,600 | Lennar Corp., Class A Shares | 1,878,120 | ||||||
74,300 | Ryland Group, Inc. | 5,637,141 | ||||||
11,800 | Toll Brothers, Inc.* | 1,198,290 | ||||||
21,198,985 | ||||||||
Multiline Retail — 3.6% | ||||||||
55,000 | Costco Wholesale Corp. | 2,465,100 | ||||||
66,900 | Federated Department Stores, Inc. | 4,902,432 | ||||||
12,800 | Sears Holdings Corp.* | 1,918,336 | ||||||
9,285,868 | ||||||||
Textiles, Apparel & Luxury Goods — 2.2% | ||||||||
147,600 | Timberland Co., Class A Shares* | 5,715,072 | ||||||
TOTAL CONSUMER DISCRETIONARY | 44,036,525 | |||||||
CONSUMER STAPLES — 9.1% | ||||||||
Food & Staples Retailing — 4.7% | ||||||||
97,200 | 7-Eleven, Inc.* | 2,939,328 | ||||||
78,800 | Wal-Mart Stores, Inc. | 3,798,160 | ||||||
118,700 | Walgreen Co. | 5,459,013 | ||||||
12,196,501 | ||||||||
Food Products — 4.4% | ||||||||
56,700 | Bunge Ltd. | 3,594,780 | ||||||
35,500 | General Mills, Inc. | 1,661,045 | ||||||
60,200 | Hormel Foods Corp. | 1,765,666 | ||||||
96,500 | Kellogg Co. | 4,288,460 | ||||||
11,309,951 | ||||||||
TOTAL CONSUMER STAPLES | 23,506,452 | |||||||
ENERGY — 3.2% | ||||||||
Oil, Gas & Consumable Fuels — 3.2% | ||||||||
21,500 | Exxon Mobil Corp. | 1,235,605 | ||||||
20,200 | Tesoro Corp. | 939,704 | ||||||
76,100 | Valero Energy Corp. | 6,020,271 | ||||||
TOTAL ENERGY | 8,195,580 | |||||||
16
Schedules of Investments (unaudited) (continued) | June 30, 2005 |
SHARES | SECURITY | VALUE | ||||||
FINANCIALS — 5.9% | ||||||||
Commercial Banks — 1.3% | ||||||||
28,400 | Bank of America Corp. | $ | 1,295,324 | |||||
32,200 | Wells Fargo & Co. | 1,982,876 | ||||||
3,278,200 | ||||||||
Diversified Financial Services — 0.3% | ||||||||
8,700 | American Express Co. | 463,101 | ||||||
5,800 | Moody’s Corp. | 260,768 | ||||||
723,869 | ||||||||
Insurance — 4.3% | ||||||||
95,800 | AFLAC, Inc. | 4,146,224 | ||||||
55,100 | Ambac Financial Group, Inc. | 3,843,776 | ||||||
4,000 | MGIC Investment Corp. | 260,880 | ||||||
62,600 | Radian Group Inc. | 2,955,972 | ||||||
11,206,852 | ||||||||
TOTAL FINANCIALS | 15,208,921 | |||||||
HEALTH CARE — 20.6% | ||||||||
Biotechnology — 6.4% | ||||||||
75,800 | Biogen Idec, Inc.* | 2,611,310 | ||||||
77,500 | Genentech, Inc.* | 6,221,700 | ||||||
131,400 | Gilead Sciences, Inc.* | 5,780,286 | ||||||
41,400 | United Therapeutics Corp.* | 1,995,480 | ||||||
16,608,776 | ||||||||
Health Care Equipment & Supplies — 1.4% | ||||||||
39,900 | Dade Behring Holdings, Inc. | 2,593,899 | ||||||
17,900 | Medtronic, Inc. | 927,041 | ||||||
3,520,940 | ||||||||
Health Care Providers & Services — 7.4% | ||||||||
78,200 | Aetna, Inc. | 6,476,524 | ||||||
51,300 | CIGNA Corp. | 5,490,639 | ||||||
39,600 | Sierra Health Services, Inc.* | 2,829,816 | ||||||
82,600 | UnitedHealth Group, Inc. | 4,306,764 | ||||||
19,103,743 | ||||||||
Pharmaceuticals — 5.4% | ||||||||
123,400 | Abbott Laboratories | 6,047,834 | ||||||
99,100 | Johnson & Johnson | 6,441,500 | ||||||
53,560 | Pfizer, Inc. | 1,477,185 | ||||||
13,966,519 | ||||||||
TOTAL HEALTH CARE | 53,199,978 | |||||||
17
Schedules of Investments (unaudited) (continued) | June 30, 2005 |
SHARES | SECURITY | VALUE | ||||||
INDUSTRIALS — 13.9% | ||||||||
Aerospace & Defense — 3.4% | ||||||||
49,800 | L-3 Communications Holdings, Inc. | $ | 3,813,684 | |||||
87,400 | Northrop Grumman Corp. | 4,828,850 | ||||||
8,642,534 | ||||||||
Air Freight & Logistics — 1.0% | ||||||||
32,000 | FedEx Corp. | 2,592,320 | ||||||
Electrical Equipment — 1.9% | ||||||||
45,600 | Energizer Holdings, Inc.* | 2,834,952 | ||||||
41,900 | Rockwell Automation, Inc. | 2,040,949 | ||||||
4,875,901 | ||||||||
Industrial Conglomerates — 2.5% | ||||||||
188,900 | General Electric Co. | 6,545,385 | ||||||
Machinery — 2.3% | ||||||||
89,500 | Deere & Co. | 5,861,355 | ||||||
Road & Rail — 2.8% | ||||||||
174,100 | Norfolk Southern Corp. | 5,390,136 | ||||||
36,200 | Yellow Roadway Corp.* | 1,838,960 | ||||||
7,229,096 | ||||||||
TOTAL INDUSTRIALS | 35,746,591 | |||||||
INFORMATION TECHNOLOGY — 25.8% | ||||||||
Communications Equipment — 1.4% | ||||||||
135,561 | Cisco Systems, Inc.* | 2,590,571 | ||||||
31,700 | QUALCOMM, Inc. | 1,046,417 | ||||||
3,636,988 | ||||||||
Computers & Peripherals — 6.2% | ||||||||
195,100 | Apple Computer, Inc.* | 7,181,631 | ||||||
160,500 | Dell Inc.* | 6,341,355 | ||||||
183,100 | Western Digital Corp.* | 2,457,202 | ||||||
15,980,188 | ||||||||
Internet Software & Services — 3.6% | ||||||||
3,700 | Google, Inc., Class A Shares* | 1,088,355 | ||||||
226,300 | McAfee Inc.* | 5,924,534 | ||||||
44,700 | Websense, Inc.* | 2,147,835 | ||||||
9,160,724 | ||||||||
IT Services — 1.0% | ||||||||
55,300 | Cognizant Technology Solutions Corp., Class A Shares* | 2,606,289 | ||||||
18
Schedules of Investments (unaudited) (continued) | June 30, 2005 |
SHARES | SECURITY | VALUE | ||||||
Semiconductors & Semiconductor Equipment — 8.1% | ||||||||
128,400 | Intel Corp. | $ | 3,346,104 | |||||
193,200 | Lam Research Corp.* | 5,591,208 | ||||||
31,100 | Marvell Technology Group Ltd.* | 1,183,044 | ||||||
145,100 | QLogic Corp.* | 4,479,237 | ||||||
190,500 | Tessera Technologies Inc.* | 6,364,605 | ||||||
20,964,198 | ||||||||
Software — 5.5% | ||||||||
300,900 | Activision, Inc.* | 4,970,868 | ||||||
125,600 | Autodesk, Inc. | 4,316,872 | ||||||
190,100 | Microsoft Corp. | 4,722,084 | ||||||
14,009,824 | ||||||||
TOTAL INFORMATION TECHNOLOGY | 66,358,211 | |||||||
MATERIALS — 2.0% | ||||||||
Chemicals — 1.3% | ||||||||
75,200 | Dow Chemical Co. | 3,348,656 | ||||||
Metals & Mining — 0.7% | ||||||||
20,200 | Carpenter Technology Corp. | 1,046,360 | ||||||
9,600 | Phelps Dodge Corp. | 888,000 | ||||||
1,934,360 | ||||||||
TOTAL MATERIALS | 5,283,016 | |||||||
TELECOMMUNICATION SERVICES — 0.6% | ||||||||
Wireless Telecommunication Services — 0.6% | ||||||||
49,100 | Nextel Communications, Inc., Class A Shares* | 1,586,421 | ||||||
UTILITIES — 0.6% | ||||||||
Electric Utilities — 0.6% | ||||||||
3,200 | Edison International | 129,760 | ||||||
7,200 | PG&E Corp. | 270,288 | ||||||
14,000 | TXU Corp. | 1,163,260 | ||||||
TOTAL UTILITIES | 1,563,308 | |||||||
TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENT | ||||||||
(Cost — $249,645,624) | 254,685,003 | |||||||
19
Schedules of Investments (unaudited) (continued) | June 30, 2005 |
FACE | ||||||||
AMOUNT | SECURITY | VALUE | ||||||
SHORT-TERM INVESTMENT — 1.3% | ||||||||
Repurchase Agreement — 1.3% | ||||||||
$ | 3,272,000 | State Street Bank & Trust Co., dated 6/30/05, 2.550% due 7/1/05; Proceeds at maturity — $3,272,232; (Fully collateralized by U.S. Treasury Bond, 7.500% due 11/15/16; Market value — $3,343,275) (Cost — $3,272,000) | $ | 3,272,000 | ||||
TOTAL INVESTMENTS — 100.1% (Cost — $252,917,624#) | 257,957,003 | |||||||
Liabilities in Excess of Other Assets — (0.1)% | (265,056 | ) | ||||||
TOTAL NET ASSETS — 100.0% | $ | 257,691,947 | ||||||
* | Non-income producing security. | |
# | Aggregate cost for Federal income tax purposes is substantially the same. |
20
Statements of Assets and Liabilities (unaudited) | June 30, 2005 |
Equity Income | Large Cap | |||||||||
Portfolio | Portfolio | |||||||||
ASSETS: | ||||||||||
Investments, at cost | $ | 345,811,607 | $ | 252,917,624 | ||||||
Foreign currency, at cost | 722 | 267,127 | ||||||||
Investments, at value | $ | 361,130,773 | $ | 257,957,003 | ||||||
Foreign currency, at value | 710 | 258,178 | ||||||||
Receivable for securities sold | 6,182,817 | 23,730,223 | ||||||||
Dividends and interest receivable | 511,948 | 113,394 | ||||||||
Receivable for Fund shares sold | 17,406 | 34,646 | ||||||||
Other receivables | 60,994 | 45,751 | ||||||||
Total Assets | 367,904,648 | 282,139,195 | ||||||||
LIABILITIES: | ||||||||||
Payable for securities purchased | 7,018,631 | 23,529,518 | ||||||||
Investment advisory fee payable | 219,494 | 160,403 | ||||||||
Payable for Fund shares repurchased | 203,480 | 680,290 | ||||||||
Administration fee payable | 17,933 | 12,864 | ||||||||
Due to custodian | 9,929 | 10,251 | ||||||||
Accrued expenses | 72,888 | 53,922 | ||||||||
Total Liabilities | 7,542,355 | 24,447,248 | ||||||||
Total Net Assets | $ | 360,362,293 | $ | 257,691,947 | ||||||
NET ASSETS: | ||||||||||
Paid-in capital (Note 4) | 331,020,401 | 339,125,962 | ||||||||
Undistributed net investment income | 2,128,658 | 361,174 | ||||||||
Accumulated net realized gain (loss) on investment and foreign currency transactions | 11,894,080 | (86,825,856 | ) | |||||||
Net unrealized appreciation of investments and foreign currencies | 15,319,154 | 5,030,667 | ||||||||
Total Net Assets | $ | 360,362,293 | $ | 257,691,947 | ||||||
Shares Outstanding | 21,666,481 | 18,533,643 | ||||||||
Net Asset Value | $16.63 | $13.90 | ||||||||
21
Statements of Operations (unaudited) | For the Six Months Ended June 30, 2005 |
Equity Income | Large Cap | ||||||||||
Portfolio | Portfolio | ||||||||||
INVESTMENT INCOME: | |||||||||||
Dividends | $ | 3,466,919 | $ | 1,431,776 | |||||||
Interest | 101,042 | 40,497 | |||||||||
Less: Foreign taxes withheld | (24,250 | ) | (13,119 | ) | |||||||
Total Investment Income | 3,543,711 | 1,459,154 | |||||||||
EXPENSES: | |||||||||||
Investment advisory fee (Note 2) | 1,302,931 | 958,423 | |||||||||
Administration fees (Note 2) | 106,367 | 76,843 | |||||||||
Custody | 39,822 | 26,484 | |||||||||
Shareholder reports | 13,496 | 12,216 | |||||||||
Legal fees | 12,592 | 11,857 | |||||||||
Audit and tax | 11,000 | 9,167 | |||||||||
Trustees’ fees | 4,600 | 2,600 | |||||||||
Miscellaneous expenses | 2,684 | 525 | |||||||||
Total Expenses | 1,493,492 | 1,098,115 | |||||||||
Net Investment Income | 2,050,219 | 361,039 | |||||||||
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS (NOTES 1 AND 3): | |||||||||||
Net Realized Gain (Loss) From: | |||||||||||
Investment transactions | 12,175,238 | 14,794,566 | |||||||||
Foreign currency transactions | (432 | ) | (8,744 | ) | |||||||
Net Realized Gain | 12,174,806 | 14,785,822 | |||||||||
Change in net Unrealized Appreciation/ Depreciation From: | |||||||||||
Investments | (20,380,154 | ) | (15,884,212 | ) | |||||||
Foreign currencies | (71 | ) | (14,856 | ) | |||||||
Change in Net Unrealized Appreciation/ Depreciation | (20,380,225 | ) | (15,899,068 | ) | |||||||
Net Loss on Investments and Foreign Currencies | (8,205,419 | ) | (1,113,246 | ) | |||||||
Decrease in Net Assets From Operations | $ | (6,155,200 | ) | $ | (752,207 | ) | |||||
22
For the Six Months Ended June 30, 2005 (unaudited)
Equity Income Portfolio | 2005 | 2004 | |||||||
OPERATIONS: | |||||||||
Net investment income | $ | 2,050,219 | $ | 4,306,673 | |||||
Net realized gain | 12,174,806 | 14,556,038 | |||||||
Change in net unrealized appreciation/ depreciation | (20,380,225 | ) | 13,069,565 | ||||||
Increase (Decrease) in Net Assets From Operations | (6,155,200 | ) | 31,932,276 | ||||||
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 1): | |||||||||
Net investment income | — | (4,384,748 | ) | ||||||
Net realized gains | (5,182,603 | ) | (15,860,220 | ) | |||||
Decrease in Net Assets From Distributions to Shareholders | (5,182,603 | ) | (20,244,968 | ) | |||||
FUND SHARE TRANSACTIONS (NOTE 4): | |||||||||
Net proceeds from sale of shares | 22,810,213 | 49,762,623 | |||||||
Reinvestment of distributions | 5,182,603 | 20,244,968 | |||||||
Cost of shares repurchased | (15,135,181 | ) | (20,346,265 | ) | |||||
Increase in Net Assets From Fund Share Transactions | 12,857,635 | 49,661,326 | |||||||
Increase in Net Assets | 1,519,832 | 61,348,634 | |||||||
NET ASSETS: | |||||||||
Beginning of period | 358,842,461 | 297,493,827 | |||||||
End of period* | $ | 360,362,293 | $ | 358,842,461 | |||||
* Includes undistributed net investment income of: | $2,128,658 | $78,439 | |||||||
23
For the Six Months Ended June 30, 2005 (unaudited)
Large Cap Portfolio | 2005 | 2004 | ||||||||
OPERATIONS: | ||||||||||
Net investment income | $ | 361,039 | $ | 1,991,693 | ||||||
Net realized gain | 14,785,822 | 7,905,466 | ||||||||
Change in net unrealized appreciation/ depreciation | (15,899,068 | ) | 7,153,395 | |||||||
Increase (Decrease) in Net Assets From Operations | (752,207 | ) | 17,050,554 | |||||||
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 1): | ||||||||||
Net investment income | — | (2,103,304 | ) | |||||||
Decrease in Net Assets From Distributions to Shareholders | — | (2,103,304 | ) | |||||||
FUND SHARE TRANSACTIONS (NOTE 4): | ||||||||||
Net proceeds from sale of shares | 7,994,015 | 54,371,360 | ||||||||
Reinvestment of distributions | — | 2,103,304 | ||||||||
Cost of shares repurchased | (17,710,283 | ) | (31,061,137 | ) | ||||||
Increase (Decrease) in Net Assets From Fund Share Transactions | (9,716,268 | ) | 25,413,527 | |||||||
Increase (Decrease) in Net Assets | (10,468,475 | ) | 40,360,777 | |||||||
NET ASSETS: | ||||||||||
Beginning of period | 268,160,422 | 227,799,645 | ||||||||
End of period* | $ | 257,691,947 | $ | 268,160,422 | ||||||
* Includes undistributed net investment income of: | $361,174 | $135 | ||||||||
24
For a share of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:
EQUITY INCOME PORTFOLIO | 2005(1) | 2004 | 2003 | 2002(2) | 2001(2) | 2000(2) | |||||||||||||||||||
Net Asset Value, Beginning of Period | $17.17 | $16.59 | $12.75 | $14.99 | $16.26 | $15.05 | |||||||||||||||||||
Income (Loss) From Operations: | |||||||||||||||||||||||||
Net investment income | 0.09 | 0.21 | 0.14 | 0.16 | 0.20 | 0.13 | |||||||||||||||||||
Net realized and unrealized gain (loss) | (0.39 | ) | 1.39 | 3.83 | (2.25 | ) | (1.27 | ) | 1.24 | ||||||||||||||||
Total Income (Loss) From Operations | (0.30 | ) | 1.60 | 3.97 | (2.09 | ) | (1.07 | ) | 1.37 | ||||||||||||||||
Less Distributions From: | |||||||||||||||||||||||||
Net investment income | — | (0.22 | ) | (0.13 | ) | (0.15 | ) | (0.16 | ) | (0.16 | ) | ||||||||||||||
Net realized gains | (0.24 | ) | (0.80 | ) | — | — | (0.04 | ) | — | ||||||||||||||||
Total Distributions | (0.24 | ) | (1.02 | ) | (0.13 | ) | (0.15 | ) | (0.20 | ) | (0.16 | ) | |||||||||||||
Net Asset Value, End of Period | $16.63 | $17.17 | $16.59 | $12.75 | $14.99 | $16.26 | |||||||||||||||||||
Total Return(3) | (1.73 | )% | 9.88 | % | 31.17 | % | (13.94 | )% | (6.61 | )% | 9.13 | % | |||||||||||||
Net Assets, End of Period (000s) | $360,362 | $358,842 | $297,494 | $191,010 | $200,389 | $170,727 | |||||||||||||||||||
Ratios to Average Net Assets: | |||||||||||||||||||||||||
Gross expenses | 0.84 | %(4) | 0.86 | % | 0.87 | % | 0.84 | % | 0.85 | % | 0.87 | % | |||||||||||||
Net expenses(5) | 0.84 | (4) | 0.85 | (6) | 0.87 | 0.84 | 0.85 | 0.87 | |||||||||||||||||
Net investment income | 1.16 | (4) | 1.35 | 1.11 | 1.14 | 1.28 | 1.17 | ||||||||||||||||||
Portfolio Turnover Rate | 71 | % | 119 | % | 141 | % | 131 | % | 121 | % | 151 | % | |||||||||||||
(1) | For the six months ended June 30, 2005 (unaudited). |
(2) | Per share amounts have been calculated using the average shares method. |
(3) | Performance figures may reflect fee waivers and/or expense reimbursements. Past performance is no guarantee of future results. In the absence of fee waivers and/or expense reimbursements, the total return would be lower. Total returns do not reflect expenses associated with your variable contract, such as administrative fees, account charges and surrender charges which, if reflected, would reduce the total return for all periods shown. Total returns for periods of less than one year are not annualized. |
(4) | Annualized. |
(5) | As a result of an expense limitation, the ratio of expenses to average net assets of the fund will not exceed 0.95%. |
(6) | The sub-administrator waived a portion of its fee. |
See Notes to Financial Statements.
25
For a share of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:
LARGE CAP PORTFOLIO | 2005(1) | 2004 | 2003 | 2002(2) | 2001(2) | 2000(2) | |||||||||||||||||||
Net Asset Value, Beginning of Period | $13.93 | $13.18 | $10.61 | $13.82 | $16.81 | $21.11 | |||||||||||||||||||
Income (Loss) From Operations: | |||||||||||||||||||||||||
Net investment income | 0.02 | 0.10 | 0.05 | 0.05 | 0.07 | 0.03 | |||||||||||||||||||
Net realized and unrealized gain (loss) | (0.05 | ) | 0.76 | 2.57 | (3.20 | ) | (2.98 | ) | (3.05 | ) | |||||||||||||||
Total Income (Loss) From Operations | (0.03 | ) | 0.86 | 2.62 | (3.15 | ) | (2.91 | ) | (3.02 | ) | |||||||||||||||
Less Distributions From: | |||||||||||||||||||||||||
Net investment income | — | (0.11 | ) | (0.05 | ) | (0.06 | ) | (0.07 | ) | (0.02 | ) | ||||||||||||||
In excess of net investment income | — | — | — | — | — | (0.01 | ) | ||||||||||||||||||
Net realized gains | — | — | — | — | (0.01 | ) | (0.94 | ) | |||||||||||||||||
In excess of net realized gains | — | — | — | — | — | (0.31 | ) | ||||||||||||||||||
Total Distributions | — | (0.11 | ) | (0.05 | ) | (0.06 | ) | (0.08 | ) | (1.28 | ) | ||||||||||||||
Net Asset Value, End of Period | $13.90 | $13.93 | $13.18 | $10.61 | $13.82 | $16.81 | |||||||||||||||||||
Total Return(3) | (0.22 | )% | 6.52 | % | 24.67 | % | (22.79 | )% | (17.33 | )% | (14.48 | )% | |||||||||||||
Net Assets, End of Period (000s) | $257,692 | $268,160 | $227,800 | $179,863 | $249,292 | $277,897 | |||||||||||||||||||
Ratios to Average Net Assets: | |||||||||||||||||||||||||
Gross expenses | 0.86 | %(4) | 0.86 | % | 0.86 | % | 0.85 | % | 0.83 | % | 0.84 | % | |||||||||||||
Net expenses(5) | 0.86 | (4) | 0.86 | (6) | 0.86 | 0.85 | 0.83 | 0.84 | |||||||||||||||||
Net investment income | 0.28 | (4) | 0.81 | 0.43 | 0.44 | 0.50 | 0.15 | ||||||||||||||||||
Portfolio Turnover Rate | 133 | % | 56 | % | 60 | % | 95 | % | 131 | % | 96 | % | |||||||||||||
(1) | For the six months ended June 30, 2005 (unaudited). |
(2) | Per share amounts have been calculated using the average shares method. |
(3) | Performance figures may reflect fee waivers and/or expense reimbursements. Past performance is no guarantee of future results. In the absence of fee waivers and/or expense reimbursements, the total return would be lower. Total returns do not reflect expenses associated with your variable contract, such as administrative fees, account charges and surrender charges which, if reflected, would reduce the total return for all periods shown. Total returns for periods of less than one year are not annualized. |
(4) | Annualized. |
(5) | As a result of an expense limitation, the ratio of expenses to average net assets of the fund will not exceed 0.95%. |
(6) | The sub-administrator waived a portion of its fee. |
See Notes to Financial Statements.
26
1. Organization and Significant Accounting Policies
The Equity Income Portfolio (“EIP”) and the Large Cap Portfolio (“LCP”) (“Fund(s)”) are separate diversified investment funds of The Travelers Series Trust (“Trust”). The Trust is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. Shares of the Trust are offered exclusively for use with certain variable annuity and variable life insurance contracts offered through the separate accounts of various affiliated life insurance companies.
The following are significant accounting policies consistently followed by the Funds. These policies are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.
(a) Investment Valuation. Equity securities for which market quotations are available are valued at the last sale price or official closing price on the primary market or exchange on which they trade. Debt securities are valued at the mean between the bid and asked prices provided by an independent pricing service that are based on transactions in debt obligations, quotations from bond dealers, market transactions in comparable securities and various relationships between securities. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Funds calculate their net asset values, the Funds may value these investments at fair value as determined in accordance with the procedures approved by the Funds’ Board of Trustees. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates market value.
(b) Repurchase Agreements. When entering into repurchase agreements, it is the Funds’ policy that their custodian or a third party custodian takes possession of the underlying collateral securities, the market value of which at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market to ensure the adequacy of the collateral. If the seller defaults and the market value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Funds may be delayed or limited.
(c) Forward Foreign Currency Contracts. The Funds may enter into forward foreign currency contracts to hedge against foreign currency exchange rate risk on their non-US dollar denominated securities or to facilitate settlement of foreign currency denominated portfolio transactions. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The contract is marked-to-market daily and the change in value is recorded by the Funds as an unrealized gain or loss. When a forward foreign currency contract is extinguished, through either delivery or offset by entering into another forward foreign currency contract, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it was extinguished.
Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected in the Statements of Assets and Liabilities. The Funds bear the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
(d) Security Transactions and Investment Income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as practical after the Funds determine the existence of a dividend declaration after exercising reasonable due diligence. The cost of investments sold is determined by use of the specific identification method.
(e) Foreign Currency Translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
27
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Funds’ books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities, at the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(f) Distributions to Shareholders. Distributions from net investment income and net realized gains, if any, are declared at least annually. Distributions to shareholders of the Funds are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(g) Federal and Other Taxes. It is the Funds’ policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, the Funds intend to distribute substantially all of their taxable income and net realized gains on investments, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Funds’ financial statements. Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates.
(h) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement, Administration Agreement and Other Transactions with Affiliates
Travelers Asset Management International Company LLC (“TAMIC”), an indirect wholly-owned subsidiary of Citigroup Inc. (“Citigroup”), acts as investment adviser to the Funds. As compensation for its services, the Funds pay TAMIC a fee calculated daily and paid monthly at the following annual rates:
Average Daily Net Assets | Fee | |||
First $250 million | 0.75% | |||
Next $500 million | 0.70 | |||
Over $750 million | 0.65 | |||
TAMIC has entered into a sub-advisory agreement with Fidelity Management & Research Co. (“FMR”). Pursuant to the sub-advisory agreement, FMR is responsible for the day-to-day fund operations and investment decisions and is compensated by TAMIC for such service at the following annual rates:
Average Daily Net Assets | Fee | |||
First $250 million | 0.45% | |||
Next $500 million | 0.40 | |||
Over $750 million | 0.35 | |||
The Travelers Insurance Company (“TIC”), another indirect wholly-owned subsidiary of Citigroup, acts as the Funds’ administrator. As compensation for its services, the Funds pay TIC an administration fee calculated at the annual rate of 0.06% of each respective Fund’s average daily net assets. This fee is calculated daily and paid monthly.
TIC has entered into a Sub-Administrative Services Agreement with Smith Barney Fund Management LLC (“SBFM”), another indirect wholly-owned subsidiary of Citigroup. TIC pays SBFM, as sub-administrator, a fee calculated at an annual rate of 0.02% of the respective average daily net assets of each Fund, plus $30,000 per Fund, subject to a maximum of 0.06% of each Fund’s respective average daily net assets.
During the six months ended June 30, 2005, the Funds had contractual expense limitations in place of 0.95% for each Fund. This expense limitation is renewed annually and can be terminated at any time by TIC with 60 days’ notice.
Citigroup Trust Bank, fsb (“CTB”), another subsidiary of Citigroup, acts as the Funds’ transfer agent. For the six months ended June 30, 2005, the Funds did not pay transfer agent fees to CTB.
28
During the six months ended June 30, 2005, Citigroup Global Markets Inc., another indirect wholly-owned subsidiary of Citigroup, and its affiliates received brokerage commissions in the amount of $1,462 for LCP.
All officers and one trustee of the Trust are employees of Citigroup or its affiliates and do not receive compensation from the Trust.
3. Investments
During the six months ended June 30, 2005, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
Purchases | Sales | |||||||
EIP | $ | 265,244,540 | $ | 249,073,831 | ||||
LCP | 339,625,061 | 348,587,299 | ||||||
At June 30, 2005, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:
Gross | Gross | Net | ||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||
Appreciation | Depreciation | Appreciation | ||||||||||
EIP | $ | 23,943,262 | $ | (8,624,096 | ) | $ | 15,319,166 | |||||
LCP | 15,138,355 | (10,098,976 | ) | 5,039,379 | ||||||||
4. | Shares of Beneficial Interest |
The Declaration of Trust authorizes the issuance of an unlimited number of shares of beneficial interest without par value. Transactions in shares of each Fund were as follows:
Six Months Ended | Year Ended | |||||||
June 30, 2005 | December 31, 2004 | |||||||
EIP | ||||||||
Shares sold | 1,355,647 | 2,991,545 | ||||||
Shares issued on reinvestment | 311,268 | 1,203,210 | ||||||
Shares repurchased | (904,104 | ) | (1,225,319 | ) | ||||
Net Increase | 762,811 | 2,969,436 | ||||||
LCP | ||||||||
Shares sold | 590,934 | 4,158,997 | ||||||
Shares issued on reinvestment | — | 150,788 | ||||||
Shares repurchased | (1,304,865 | ) | (2,340,686 | ) | ||||
Net Increase (Decrease) | (713,931 | ) | 1,969,099 | |||||
5. | Capital Loss Carryforward |
As of December 31, 2004, LCP had net capital loss carryforwards as follows:
Year of Expiration | LCP | |||
12/31/2009 | 34,154,428 | |||
12/31/2010 | 52,058,326 | |||
12/31/2011 | 14,415,260 | |||
$ | 100,628,014 | |||
These amounts will be available to offset any future capital gains.
29
6. | Commission Recapture Program |
In addition to trade execution, many of the brokers with whom FMR places trades pay for certain expenses of these Funds or provide other services. During the six months ended June 30, 2005, the Funds received cash rebates from these brokers in lieu of additional services or expense reductions. The amounts of these rebates, included in realized gains on investment transactions in the statements of operations, are noted below.
Brokerage | ||||
Service | ||||
Arrangements | ||||
EIP | $ | 119,116 | ||
LCP | 70,058 | |||
7. Additional Information
On May 31, 2005, the U.S. Securities and Exchange Commission (“SEC”) issued an order in connection with the settlement of an administrative proceeding against Smith Barney Fund Management LLC (“SBFM”) and Citigroup Global Markets Inc. (“CGMI”) relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds (the “Funds”), which includes the Funds (“TL&A Funds”).
The SEC order finds that SBFM and CGMI willfully violated Section 206(1) of the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the order finds that SBFM and CGMI knowingly or recklessly failed to disclose to the boards of the Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that First Data Investors Services Group (“First Data”), the Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before. Additionally, the SEC order finds that Citigroup Asset Management (“CAM”), the Citigroup business unit that includes each Fund’s sub-administrator, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange, among other things, for a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGMI. The order also finds that SBFM and CGMI willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Funds’ best interests and that no viable alternatives existed. SBFM and CGMI do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.
The SEC censured SBFM and CGMI and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order requires Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Funds, primarily through fee waivers. In addition, Travelers Life & Annuity and CAM reviewed the adequacy and accuracy of the disclosure provided to the TL&A Fund boards at the time the revised transfer agency arrangement was discussed with the boards and concluded that the transfer agency fees paid to CTB, for the period from June 1, 1999 to August 23, 2004, by the TL&A Funds that did not have expense caps in effect should be reimbursed with interest to the TL&A Funds. The reimbursement occurred on November 1, 2004.
The remaining $183.7 million to be paid under the SEC order, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan to be prepared by Citigroup and submitted within 90 days of the entry of the order for approval by the SEC. The order also requires that transfer agency fees received from the Funds since December 1, 2004 less certain expenses be placed in escrow and provides that a portion of such fees may be subsequently distributed in accordance with the terms of the order.
The order requires SBFM to recommend a new transfer agent contract to the Funds’ boards within 180 days of the entry of the order.
At this time, there is no certainty as to how the proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. Although there can be no assurance, Citigroup does not believe that this matter will have a material adverse effect on the Funds.
30
8. Subsequent Events
On July 1, 2005, MetLife, Inc., a Delaware corporation (“MetLife”), acquired all of the outstanding shares of capital stock of certain indirect subsidiaries held by Citigroup, including TIC, The Travelers Life and Annuity Company, a wholly owned subsidiary of TIC and certain other domestic insurance companies of Citigroup and substantially all of the Citigroup’s international insurance businesses for $11.8 billion. The sale also included TIC’s affiliated investment advisor, TAMIC which serves as the investment adviser to the Funds.
TIC filed a Form 8-K Current Report with The United States Securities and Exchange Commission on July 8, 2005, with additional information about the transaction.
Also effective July 1, 2005, PFPC Inc. replaced CTB as transfer agent for the Funds; and State Street Bank and Trust Company replaced SBFM as sub-administrator for the Funds.
9. Change in Independent Registered Public Accounting Firm
KPMG LLP was previously the independent registered public accounting firm for the Funds. In connection with the transaction described in Note 8, the decision to change the independent registered public accounting firm was approved by the Audit Committee and by the Board of Trustees, resulting in Deloitte and Touche LLP’s appointment as independent registered public accounting firm.
The reports on the financial statements of the Funds audited by KPMG LLP through the year ended December 31, 2004 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. There were no disagreements between the Funds and KPMG LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures.
31
the Subadvisory Agreements and the Sub Subadvisory Agreements (unaudited)
Beginning at a telephonic meeting on March 17, 2005 and at in person meetings on March 29 and 30, 2005, the Independent Trustees for the Equity Income Portfolio and the Large Cap Portfolio (the “Portfolios”) approved the investment advisory agreements (the “Agreements”) between TAMIC and the Portfolios, the subadvisory agreements between TAMIC and Fidelity Research & Management Company (“FMR”) (the “Subadvisory Agreements”), the sub subadvisory agreements among TAMIC, FMR and (FMR U.K.), and the sub subadvisory agreement among TAMIC, FMR and FMR Far East (together the “Sub Subadvisory Agreements”). In voting to approve the Agreements, the Subadvisory Agreements and the Sub Subadvisory Agreements, the Independent Trustees considered whether the approval of the Agreements, the Subadvisory Agreements and the Sub Subadvisory Agreements would be in the best interests of the Portfolios and their shareholders, an evaluation largely based on the nature and quality of the services provided under the Agreements, the Subadvisory Agreements, and the Sub Subadvisory Agreements, and the overall fairness of the Agreements, the Subadvisory Agreements and the Sub Subadvisory Agreements to the shareholders.
The Independent Trustees did not identify any one factor, piece of information or written document as all important or controlling, and each Independent Trustee attributed different weight to different factors. Prior to voting, the Independent Trustees reviewed the proposed continuance of the Agreements, the Subadvisory Agreements and the Sub Subadvisory Agreements with management and with experienced independent and fund counsel and received materials from counsel discussing the legal standards for their consideration of the proposed continuation of the Agreements, the Subadvisory Agreements and the Sub Subadvisory Agreements. The Independent Trustees also reviewed the proposed continuation of the Agreements, the Subadvisory Agreements, and the Sub Subadvisory Agreements in private sessions alone and with their independent counsel at which no representatives of management were present. Based on an evaluation of all material factors including those described below, the Independent Trustees concluded that the Agreements, the Subadvisory Agreements and the Sub Subadvisory Agreements were reasonable and fair and in the best interest of the Portfolios and their shareholders.
As background, MetLife Inc. (“MetLife”) and Citigroup Inc. (“Citigroup”) announced an agreement for the sale of The Travelers Insurance Company and certain affiliates by Citigroup to MetLife (the “MetLife Transaction”). The MetLife Transaction included the acquisition of TAMIC, a subsidiary of The Travelers Insurance Company and the investment adviser to the Portfolios, by MetLife. The MetLife Transaction closed on July 1, 2005. The approval of the Agreements, the Subadvisory Agreements and the Sub Subadvisory Agreements was necessary because under the 1940 Act the change in control of TAMIC resulted in the termination of the then current investment advisory, the subadvisory and sub subadvisory agreements for the Portfolios on the closing of the MetLife Transaction. The Agreements, the Subadvisory Agreements, and the Sub Subadvisory Agreements were reapproved by the Independent Trustees and the Agreements were submitted to a vote of the shareholders.
The Independent Trustees met in executive session and considered: (a) the nature, extent and quality of the services to be provided by TAMIC and FMR and their affiliates under the Agreements, the Subadvisory Agreements, and the Sub Subadvisory; (b) the investment performance of the Portfolios; (c) the cost of services to be provided and the profit realized by TAMIC and FMR and their affiliates, which information was to be reviewed in depth at the July 2005 Board meeting; (d) the extent to which TAMIC realizes economies of scale as the Portfolios grow; and (e) whether the fee levels reflect these economies of scale for the benefit of the shareholders.
The Agreements |
As part of the process, legal counsel to the Portfolios requested certain information from MetLife and in response MetLife provided certain written and oral information that addressed certain factors designed to inform the Independent Trustees regarding their consideration of the Agreements. In making their determination, the Independent Trustees were provided with information about MetLife and its purchase of The Travelers Insurance Company from Citigroup. At the various meetings, MetLife representatives discussed MetLife’s intentions regarding the preservation and strengthening of TAMIC’s business and MetLife’s intentions regarding staffing changes and executive leadership changes at TAMIC. The MetLife representatives also discussed and provided certain written information on MetLife’s business and products, including MetLife’s advisory subsidiaries and their experience in overseeing subadvised mutual funds. The Independent Trustees also discussed the plans and anticipated role and responsibilities of certain of employees and officers after the MetLife Transaction.
With respect to the nature, scope and quality of the services to be provided by TAMIC after the MetLife Transaction, the Board considered the experience of MetLife’s advisory subsidiaries and its two fund series and also MetLife’s efforts to build and maintain a strong investment team in TAMIC. The Board also considered the level and depth of knowledge of TAMIC,
32
the Subadvisory Agreements and the Sub Subadvisory Agreements (unaudited) (continued)
including the professional experience and qualifications of its personnel as well as current staffing levels. The Independent Trustees also considered
• | the ability of TAMIC to continue the oversight of both the investment and compliance operations of the sub adviser after the MetLife transaction, | |
• | the intention of MetLife to integrate Travelers Insurance Company and its affiliates, including TAMIC into MetLife’s current businesses to create a single business operation, | |
• | MetLife’s compliance with certain conditions set forth in Section 15(f) of the 1940 Act regarding placing unfair burdens on the Portfolios, anticipated changes to back office operations to the Portfolios, including the provision of administrative and transfer agency services, after the MetLife Transaction, and | |
• | the fact that the Agreements including the investment advisory fees would be identical to the current agreements, except for the inception date. |
In addition, the Independent Trustees noted that the performance of the Equity Income Portfolio had generally been satisfactory, and with respect to the Large Cap Portfolio the Independent Trustees noted that although the Portfolio’s investment performance had been disappointing, the Portfolio had a new portfolio manager beginning on May 1, 2005. As to the profits realized by TAMIC from its relationship with the Portfolios, the Board noted that it was satisfied that TAMIC’s profits were not excessive in the past, and that it was not possible to predict how the MetLife Transaction would affect such profits at this time, but would reconsider this factor in connection with its future review of the Agreements under Section 15(c) of the 1940 Act in July 2005. As to whether economies of scale would be realized as the Portfolios grow and whether fee levels reflect any such economies of scale, the Board noted that the investment advisory and subadvisory fees for the Portfolios included breakpoints that reduced the fees payable at higher asset levels. Finally, the Independent Trustees considered the level of service expected to be provided by TAMIC after the MetLife Transaction.
The Independent Trustees considered its plans to perform the annual review of the Agreements, the Subadvisory Agreements and the Sub Subadvisory Agreements pursuant to Section 15(c) of the 1940 Act at its regularly scheduled Board meeting which was scheduled to occur three weeks after the closing of the MetLife Transaction. In light of the continuity of investment management under the Agreements, the short period between the effective date of those Agreements, the Subadvisory Agreements, and the Sub Subadvisory Agreements and the upcoming annual review, and the information provided by MetLife, the Board considered the information provided to it sufficient for its consideration of the Agreements at this time.
The Subadvisory and Sub Subadvisory Agreements |
MetLife recommended and the Independent Trustees reapproved the Subadvisory and Sub Subadvisory Agreements for the Portfolios between TAMIC and FMR and among TAMIC, FMR, FMR U.K. and FMR Far East. As discussed above, a change in control of TAMIC resulted in the termination of TAMIC’s subadvisory and sub subadvisory agreements with FMR the subadvisory and sub subadvisory on the closing of the MetLife Transaction. With respect to the nature, scope and quality of the services to be provided by FMR and its affiliates after the MetLife Transaction, the Board considered that it would remain the same after the MetLife Transaction. The Independent Trustees noted that the subadvisory and sub subadvisory fees, which contained breakpoints, were not changing. In evaluating the subadvisory fees, the Independent Trustees considered that the investment subadvisory fees were paid by TAMIC out of the investment advisory fees it receives under the Agreements. So, the cost of the services to be provided by FMR and the profitability to FMR with regard to the Portfolios along with the economies of scale in its management of the Portfolios were not material to the consideration of the Subadvisory and Sub Subadvisory Agreements by the Independent Trustees. The Independent Trustees considered its plans to perform the annual review of the Subadvisory and Sub Subadvisory Agreements pursuant to Section 15(c) of the 1940 Act at its regularly scheduled Board meeting which was scheduled to occur three weeks after the closing of the MetLife Transaction. The Board also considered that it had received quarterly performance information regarding the Portfolios. In light of the continuity of portfolio management under the Subadvisory and the Sub Subadvisory Agreements, the performance of the Equity Income Portfolio and the change in the portfolio manager for the Large Cap Portfolio, and the short period between the effective date of the subadvisory and sub subadvisory agreements and the upcoming annual review, the Board considered the information provided to it sufficient for its consideration of the Subadvisory and Sub Subadvisory Agreements at this time.
33
the Subadvisory Agreements and the Sub Subadvisory Agreements (unaudited) (continued)
Other Business Relationships |
The Independent Trustees considered other business relationships that MetLife and TAMIC would enter into with Citigroup. In connection with the closing of the MetLife Transaction, MetLife, Citigroup and certain of their affiliates entered into a Distribution Agreement under which Citigroup-affiliated broker-dealers will continue to offer certain TIC and MetLife insurance contracts until July 1, 2015. In addition, MetLife, Citigroup and certain of their affiliates entered into an Investment Products Agreement under which certain TIC and MetLife insurance products will include certain Citigroup-sponsored funds as investment options until July 1, 2010.
Conclusion |
Based on the deliberations of the Independent Trustees and their evaluation of the information described above, the Independent Trustees unanimously concluded that (a) the terms of the Agreements, the Subadvisory Agreements, and the Sub Subadvisory are fair and reasonable; (b) the fees are reasonable in light of the services TAMIC and FMR and its affiliates provided to the Portfolios and their shareholders (d) TAMIC and FMR and its affiliates possess the capabilities to perform the duties required of them under the Agreements, the Subadvisory Agreements and the Sub Subadvisory Agreements; (e) the investment performance of the Equity Income Portfolio is satisfactory; (f) the investment performance of the Large Cap Portfolio is disappointing and steps have been taken to address the Portfolio’s performance; and (g) the Agreements, the Subadvisory Agreements, and the Sub Subadvisory Agreements are approved.
34
Combined Special Meeting of the Funds were held on June 23 and adjourned to June 30, 2005.
There were three proposals submitted to shareholders. Proposal 1 was the approval of the investment advisory contracts between the Funds and TAMIC. The agreements terminated as a matter of law at the closing of the MetLife Transaction. Proposal 2 was the approval of future sub-advisory agreements without a shareholder vote. Proposal 3 was the election of a new member of the Board of Trustees, Elizabeth Forget, who is affiliated with MetLife.
The shareholders approved all proposals.
The following table sets forth the number of shares voted for, against and withheld as to each Proposal.
Proposal 1
Number of | ||||
Equity Income Portfolio | Shares | |||
For | 18,728,199.746 | |||
Against | 962,205.772 | |||
Withhold | 1,607,421.482 | |||
Total | 21,297,827.000 | |||
Large Cap Portfolio | ||||
For | 16,754,575.898 | |||
Against | 610,736.953 | |||
Withhold | 1,652,553.149 | |||
Total | 19,017,866.000 | |||
Proposal 2
Number of | ||||
Equity Income Portfolio | Shares | |||
For | 17,289,426.364 | |||
Against | 2,332,624.950 | |||
Withhold | 1,675,775.686 | |||
Total | 21,297,827.000 | |||
Large Cap Portfolio | ||||
For | 15,467,400.686 | |||
Against | 1,834,899.852 | |||
Withhold | 1,715,565.462 | |||
Total | 19,017,866.000 | |||
Proposal 3
Number of | ||||
Equity Income Portfolio | Shares | |||
For | 20,235,162.658 | |||
Against | 1,062,664.342 | |||
Total | 21,297,827.000 | |||
Large Cap Portfolio | ||||
For | 18,118,091.146 | |||
Against | 899,774.854 | |||
Total | 19,017,866.000 | |||
35
(This page intentionally left blank.)
The Travelers Series Trust
TRUSTEES* Elizabeth M. Forget Chairperson Frances M. Hawk, CFA, CFP Lewis Mandell Robert E. McGill, III OFFICERS* Elizabeth M. Forget President and Chief Executive Officer Peter H. Duffy Chief Financial Officer and Treasurer Leonard M. Bakal Chief Anti-Money Laundering Compliance Officer and Chief Compliance Officer Paul G. Cellupica Secretary Jack P. Huntington Assistant Secretary | INVESTMENT ADVISER* Travelers Asset Management International Company LLC ADMINISTRATOR* The Travelers Insurance Company CUSTODIAN* State Street Bank and Trust Company TRANSFER AGENT* PFPC, Inc. |
* | As of July 1, 2005 |
The Funds are separate investment funds of The Travelers Series Trust, a Massachusetts business trust.
This report is prepared for the general information of variable annuity and life contract owners and is not an offer of shares of The Travelers Series Trust: Equity Income and Large Cap Portfolios. All the Funds contained in this report may not be available under your variable annuity or life contract.
This report must be preceded or accompanied by a free prospectus. Investors should consider the Funds’ investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about the Funds. Please read the prospectus carefully before investing.
The Funds file their complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q are available on the Commission’s website at www.sec.gov. The Funds’ Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Funds, shareholders can call 1-800-842-9406.
Information on how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 and a description of the policies and procedures that the Funds use to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling 1-800-842-9406 and (2) on the SEC’s website at www.sec.gov.
Series Trust (Semi-Annual) (8-05) Printed in U.S.A.
(a) | The registrant’s principal executive officer and principal financial officer 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”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. | ||
(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) that occurred during the registrant’s second fiscal quarter of the period covered by this report that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
(a) (1) | Not applicable. | ||
(2) | Exhibit 99.CERT Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
(3) | Not applicable. | ||
(b) | Exhibit 99.906CERT Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
The Travelers Series Trust | ||
By: | /s/ Elizabeth M. Forget Elizabeth M. Forget Chief Executive Officer of The Travelers Series Trust | |
Date: September 7, 2005 |
By: | /s/ Elizabeth M. Forget Elizabeth M. Forget Chief Executive Officer of The Travelers Series Trust | |
Date: September 7, 2005 | ||
By: | /s/ Peter H. Duffy Peter H. Duffy Chief Financial Officer of The Travelers Series Trust | |
Date: September 7, 2005 |