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 811-8748
Wanger Advisors Trust
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(Exact name of registrant as specified in charter)
One Financial Center, Boston, Massachusetts 02111
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(Address of principal executive offices) (Zip code)
Vincent Pietropaolo, Esq.
Columbia Management Group, Inc.
One Financial Center
Boston, MA 02111
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(Name and address of agent for service)
Registrant's telephone number, including area code: 1-617-772-3698
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Date of fiscal year end: December 31, 2005
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Date of reporting period: December 31, 2005
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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. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
WANGER U.S. SMALLER COMPANIES
2005 Annual Report
[graphic: squirrel]
WANGER ADVISORS FUNDS
managed by Columbia Wanger Asset Management, L.P.
[graphic: squirrel]
WANGER U.S. SMALLER COMPANIES
2005 ANNUAL REPORT
Table of Contents
1 Understanding Your Expenses
2 No Ordinary Portfolio Managers
4 Performance Review
6 Statement of Investments
13 Statement of Assets and Liabilities
13 Statement of Operations
14 Statements of Changes in Net Assets
15 Financial Highlights
16 Notes to Financial Statements
19 Report of Independent Registered Public Accounting Firm
20 Unaudited Information
21 Management Fee Evaluation of the Senior Officer
25 Board Approval of the Existing Advisory Agreement
27 Special Notice
28 Board of Trustees and Management of Wanger Advisors Trust
COLUMBIA WANGER ASSET MANAGEMENT, L.P. ("COLUMBIA WAM") IS ONE OF THE
LEADING GLOBAL SMALL-CAP EQUITY MANAGERS IN THE UNITED STATES WITH MORE THAN 30
YEARS OF SMALL-CAP INVESTMENT EXPERIENCE. COLUMBIA WAM MANAGES MORE THAN $27
BILLION IN EQUITIES AND IS THE INVESTMENT ADVISER TO WANGER U.S. SMALLER
COMPANIES, WANGER INTERNATIONAL SMALL CAP, WANGER SELECT, WANGER INTERNATIONAL
SELECT AND THE COLUMBIA ACORN FAMILY OF FUNDS.
FOR MORE COMPLETE INFORMATION ABOUT OUR FUNDS, INCLUDING THE COLUMBIA ACORN
FUNDS, OUR FEES, RISKS ASSOCIATED WITH INVESTING, OR EXPENSES, CALL
1-888-4-WANGER FOR A PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND
MONEY. THIS REPORT IS NOT AN OFFER OF THE SHARES OF THE COLUMBIA ACORN FUND
FAMILY.
THE DISCUSSION IN THE REPORT OF PORTFOLIO COMPANIES IS FOR ILLUSTRATION ONLY
AND IS NOT A RECOMMENDATION OF INDIVIDUAL STOCKS. THE INFORMATION IS BELIEVED TO
BE ACCURATE, BUT THE INFORMATION AND THE VIEWS OF THE PORTFOLIO MANAGERS MAY
CHANGE AT ANY TIME WITHOUT NOTICE AND THE PORTFOLIO MANAGERS MAY ALTER A FUND'S
PORTFOLIO HOLDINGS BASED ON THESE VIEWS AND THE FUND'S CIRCUMSTANCES AT THAT
TIME.
Wanger U.S. Smaller Companies 2005 Annual Report
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UNDERSTANDING YOUR EXPENSES
As a fund shareholder, you incur two types of costs. There are transaction
costs, which generally include sales charges on purchases and may include
redemption or exchange fees. There are also ongoing costs, which generally
include investment advisory and other fund expenses. The information on this
page is intended to help you understand your ongoing costs of investing in the
fund and to compare these costs with the ongoing costs of investing in other
mutual funds.
ANALYZING YOUR FUND'S EXPENSES
To illustrate these ongoing costs, we have provided an example and calculated
the expenses paid by investors in the fund during the reporting period. The
information in the following table is based on an initial investment of
$1,000.00, which is invested at the beginning of the reporting period and held
for the entire period. Expense information is calculated two ways and each
method provides you with different information. The amount listed in the
"actual" column is calculated using actual operating expenses and total return
for the fund. The amount listed in the "hypothetical" column assumes that the
return each year is 5% before expenses and then applies each Fund's actual
expense ratio for the period to the hypothetical return. You should not use the
hypothetical account values and expenses to estimate either your actual account
balance at the end of the period or the expenses you paid during the reporting
period. See the "Compare with other funds" information for details on using the
hypothetical data.
ESTIMATING YOUR ACTUAL EXPENSES
To estimate the expenses that you paid over the period, first you will need your
account balance at the end of the period.
1. Divide your ending account balance by $1,000.00. For example, if an
account balance was $8,600.00 at the end of the period, the result
would be 8.6.
2. In the section of the table below titled "Expenses paid during the
period," locate the amount for your fund. You will find this number is
in the column labeled "actual." Multiply this number by the result
from step 1. Your answer is an estimate of the expenses you paid on
your account during the period.
July 1, 2005 - December 31, 2005
Account value at the Account value at the Expenses paid during Fund's annualized
beginning of the period ($) end of the period ($) the period ($) expense ratio (%)*
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Actual Hypothetical Actual Hypothetical Actual Hypothetical
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Wanger U.S. Smaller
Companies 1,000.00 1,000.00 1,076.52 1,020.37 5.02 4.89 0.96
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Expenses paid during the period are equal to the fund's annualized expense
ratio, multiplied by the average account value over the period, then multiplied
by the number of days in the fund's most recent fiscal half-year and divided by
365.
Had the investment adviser not waived a portion of expenses, total return would
have been reduced.
It is important to note that the expense amounts shown in the table are meant to
highlight only ongoing costs of investing in the fund. As a shareholder of the
fund, you do not incur any transaction costs, such as sales charges, redemption
or exchange fees. Expenses paid during the period do not include any insurance
charges imposed by your insurance company's separate accounts. The hypothetical
example provided is useful in comparing ongoing costs only and will not help you
determine the relative total costs of owning different funds whose shareholders
may incur transaction costs.
*For the six months ended 12/31/05.
COMPARE WITH OTHER FUNDS
Since all mutual funds are required to include the same hypothetical
calculations about expenses in shareholder reports, you can use this information
to compare the ongoing cost of investing in the fund with other funds. To do so,
compare the 5% hypothetical example with the 5% hypothetical examples of other
funds. As you compare hypothetical examples of other funds, it is important to
note that hypothetical examples are meant to highlight the continuing cost of
investing in a fund and do not reflect any transactional costs, such as sales
charges or redemption or exchange fees, that may be incurred by shareholders of
other funds. Expenses paid during the period do not include any insurance
charges imposed by your insurance company's separate accounts.
1
Wanger U.S. Smaller Companies 2005 Annual Report
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[graphic: squirrel]
NO ORDINARY PORTFOLIO MANAGERS
I began working with Ralph Wanger, founder of Columbia Wanger Asset Management,
in 1978. Shortly thereafter he issued the third quarter shareholder report for
one of our retail funds. In it he wrote: "...hedonism is in... Let us explore
the possibility that we have been going through the oldest cycle of all--from
Good to Bad." In order to prove that badness was more profitable than goodness,
Ralph tested two portfolios for 36-month price changes. The virtuous portfolio
included Angelica, up 45%, and Church's Fried Chicken, up 520%. The wicked
portfolio included Playboy, up 600%, and DeBeers Mines, up 59%.1 The wicked
portfolio won. Ralph's footnote to his essay read: "This study was done by the
usual techniques of Financial Analysis: (A) The stocks chosen had nothing to do
with the subject, and (B) The portfolios were readjusted until the answer
affirmed the hypothesis." At that point it became very clear to me that Ralph
Wanger was no ordinary portfolio manager!
Ralph parlayed his legendary shareholder reports into his book, A Zebra in Lion
Country.2 The book could have been titled, The Wit and Wisdom of Ralph Wanger.
In it Ralph admits that his first quarterly newsletters were serious and stuffy.
He said that he gave market and economic forecasts that quickly became outdated.
Then he decided, "If most mutual fund communications are both boring and wrong,
well then, I figured, I'd rather be lively and wrong."
There's a lot of Wisdom in A Zebra in Lion Country. Examples include: "Look for
stocks that have basic value but are out of fashion." Ralph also wrote, "The
greatest investment profit comes when an ugly duckling becomes a swan." And, "If
a company's earnings beat the Merrill Lynch analyst's forecast by 2 cents, that
doesn't excite me. I need a long-term reason to own a stock."
And Ralph meant long term. "...you can't make five or ten or twenty times your
money if you don't hold on to your stocks. Most people are delighted when a
stock doubles, and quickly sell to lock in their gain," he wrote in his book.
Ralph's long-term thinking was driven home in a report essay he wrote in June
1992: "What really makes for successful investing is having a few enormous hits.
In 22 years, I've really had three Super Stocks." Houston Oil & Minerals was
one. Houston Oil cost $220,000 in 1973 and went to $5.3 million in 1977. Another
was Cray Research, which cost $1.5 million in 1978 and was worth $20 million in
1985. International Game Technology, a maker of slot machines, cost $5 million
in 1988 and was worth $80 million by June 1992.3
Ralph also had his share of disasters. He wrote in that 1992 report, "There is
one stock we tried to sell for two years and never got a bid on any of it. A
stock like that just slides from 4 to 3 to 2 to 1 and finally disappears..."
Ralph said, "It's kind of like a doctor saying don't worry about it, it's just
going to shrivel up and fall off." Atchison Casting, an owner of steel
foundries, was a painful example of this. Ralph began purchasing the stock in
1994 and it ended up being nearly worthless when it was sold in 2003.
The wisdom here is that small-cap investing can be a winner's game. Let your
winners run. On any individual stock, one can possibly make several thousand
percent, but the most that one can lose is 100%. Small-cap investors will have
some big percentage losers, but damage to portfolios can be minor as long as
investors don't keep throwing money at them and if they maintain a
well-diversified portfolio.
How did Ralph use his genius and wisdom to build a successful firm? A few years
after I joined Ralph we had a heated discussion about a stock. The next day I
asked him if I had crossed the line during our debate. He looked at me kind of
puzzled and said, course not, if we always agreed, why would I need you?" Ralph
always respected differing opinions and created a culture of intellectual
freedom.
In an investment world full of wishful thinking, Ralph also demanded
intellectual honesty. The ability to ask tough questions, get sound answers,
discover good businesses, detect strong managers and then value stocks
appropriately, requires intellectual honesty. Then it's time to act. I remember
an analyst saying that a stock trades by appointment and Ralph responding, "Then
make an appointment and buy it!" The culture that Ralph fostered allowed
Columbia Wanger Asset Management to grow and helped its shareholders to prosper.
Leah Zell's contribution to Columbia Wanger Asset Management has also been huge
and complementary to Ralph's. Leah seemed to have the ability to see around
corners strategically and make quick, good decisions. When Leah joined our team
in 1984, she began as a domestic analyst following mostly real estate and retail
stocks. Leah then became our first foreign analyst. She successfully launched
our first international retail mutual fund, Acorn International, realizing great
investment results, and taking the Fund from zero to one billion dollars in
assets under management in 14 months. Of course, she could not have done it
without a team. Leah built the international area at Columbia Wanger Asset
Management. International investing requires all the skills needed for domestic
investing, and more. At Columbia Wanger, we like to hire international analysts
who also have language skills and cultural
2
Wanger U.S. Smaller Companies 2005 Annual Report
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knowledge. In a number of cases, Leah successfully mentored new analysts who had
these traits and fine financial skills but had a lot to learn about security
analysis.
We at Columbia Wanger Asset Management are happy that Ralph and Leah kept their
offices with us and have been advisors over the last two years. We've gotten
good advice, but Ralph and Leah made it clear that the decisions were ours. In
our semiannual report we published Ralph's last column, which appeared in this
section. Ralph once said of writing his essays, "It is fun for me and only
mildly irritating to our shareholders." We are grateful to have had Ralph's and
Leah's presence and wisdom for all these years. On September 30, 2005, they
retired from their advisory roles with the firm.
DOMESTIC SMALL-CAP CYCLE
Small caps have outperformed large caps for over six years now; by our
reckoning, small caps bottomed vs. large caps in March 1999. The small-cap
Russell 2500 Index returned 110% from that date through December 31, 2005, far
outpacing the S&P 500, which returned 8%.
In the past, small-cap stocks had long cycles of out- and under-performance vs.
large caps. There is no science and there is no magic in predicting the exact
top of a small-cap cycle. Perhaps small caps will continue to outperform--some
believe small caps will outperform as long as rapid earnings growth continues
and some others believe outperformance will persist until the overall market
turns. Numerous economists are predicting higher inflation rates, and small caps
did relatively well during the inflationary periods of the 1970s.
However, when looking at price-to-earnings ratios, small caps appear expensive
vs. large caps. Using another measure, price-to-book value, small caps appear
somewhat more reasonably priced. While we don't think domestic small caps are
back to their all-time relative high valuations, we do think small-cap domestic
stocks on average are no longer cheap.
We do not predict market cycles. We stick to what we believe we do best: buying
reasonably priced small- and mid-cap stocks and when they enter periods of
higher valuations, we try to become more selective. Over time this consistently
applied approach has weathered the Funds through a variety of market cycles.
While we certainly can't predict what the future holds, the best defense against
unknown market factors is diversification across assets, which is a prudent and
time-tested investment strategy.
COLUMBIA WAM NEWS
We are pleased to announce that Satoshi Matsunaga has joined our international
analyst team covering Japan. He came on board in September. Before joining
Columbia Wanger Asset Management, he was with Compass Advisers in New York.
Satoshi holds an MBA from the University of Michigan and a bachelor's in
economics from Keio University in Tokyo, Japan. As a Japanese national, Satoshi
brings first-hand knowledge of the country and culture.
After the close of the period, we hired a new energy analyst. In January,
William Doyle came on board. Bill was most recently a manager of PPM America's
credit analysis team where part of his responsibilities included following the
high yield energy sector. Bill's degrees include an MBA from Loyola University
in Chicago and bachelor's degrees in finance and history from Illinois State
University.
We are pleased to welcome Satoshi and Bill to the team.
photo of: Charles P. Mcquaid
/s/ Charles P. Mcquaid
CHARLES P. MCQUAID
President and Chief Investment Officer
Columbia Wanger Asset Management, L.P.
1 The 36-month period tested ran from September 30, 1975 to September 30,
1978. The stocks mentioned were not held at that time nor are they held by
any Wanger Advisors Fund now.
2 Wanger, Ralph, "A Zebra in Lion Country," Simon & Schuster, New York, 1997.
3 Companies Houston Oil & Minerals and the original Cray Research have
disappeared through acquisitions. International Game Technology (IGT) is
not held by any Wanger Advisors Fund portfolio.
The views expressed here are those of the respective parties. These views are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions that are difficult to predict so actual outcomes and results may
differ significantly from the views expressed. These views are subject to change
at any time based upon economic, market or other conditions and the respective
parties disclaim any responsibility to update such views. These views may not be
relied on as investment advice and, because investment decisions for a Wanger
Advisor Fund are based on numerous factors, may not be relied on as an
indication of trading intent on behalf of any particular Fund. References to
specific company securities should not be construed as a recommendation or
investment advice.
Past performance is no guarantee of future results.
Mid- and small-cap stocks are often more volatile and less liquid than the
stocks of larger companies. Small companies may have a shorter history of
operations than larger companies and may have a less diversified product line,
making them more susceptible to market pressure. Investments in foreign
securities have special risks, including political or economic instability,
higher costs, different regulations, accounting standards, trading practices and
levels of information, and currency exchange rate fluctuations.
3
Wanger U.S. Smaller Companies 2005 Annual Report
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[graphic: squirrel]
PERFORMANCE REVIEW WANGER U.S. SMALLER COMPANIES
Photo of: Robert A. Mohn
ROBERT A. MOHN
Portfolio Manager
Performance data quoted represents past performance and current performance may
be lower or higher. Past performance is no guarantee of future results. The
investment return and principal value will fluctuate so that shares, when
redeemed, may be worth more or less than the original cost. For monthly
performance updates call 1-888-4-WANGER.
Wanger U.S. Smaller Companies gained 11.25% in 2005. This return more than
doubled the 4.55% annual increase of the Russell 2000.
The Fund's top returns came from the energy sector. Oil and gas producers
Southwestern Energy, Ultra Petroleum, Quicksilver Resources and Western Gas
Resources hit pay dirt thanks to increased demand and higher energy prices.
Southwestern Energy gained 184%, Ultra Petroleum was up 133%, Quicksilver
climbed 72% and Western Gas increased 62% for the year.
After dropping in the third quarter on fears of slowed consumer spending, retail
stocks came back strong in the fourth quarter, helping annual performance of the
Fund's retail names. Chico's FAS gained 93%, Ann Taylor Stores increased 60% and
teen retailer Abercrombie & Fitch was up 41% at year end. Our niche technology
stocks benefited from strong earnings growth. Credit card processor Global
Payments was up 60%. Plexus, a developer and manufacturer of electronic
products, gained 75%. SSA Global Technologies, a developer of enterprise
resource planning software, ended the year up 65%.
On the downside, Seachange International, a developer of systems used for
video-on-demand, was off 55% in the year as cable and telephone customers
delayed new video-on-demand launches. Spanish Broadcasting Systems lost 52% as
revenues failed to meet expectations. Petco Animal Supplies fell 44% in the year
due to weaker than expected sales and elevated distribution costs.
As always, we will continue to search for what we believe to be the best
small-cap stocks to add to the portfolio.
Small-cap stocks are often more volatile and less liquid than the stocks of
larger companies. Small companies may have a shorter history of operations than
larger companies and may have a less diversified product line, making them more
susceptible to market pressure.
As of 12/31/05, the Fund's positions in the stocks mentioned were: Southwestern
Energy, 0.5%; Ultra Petroleum, 1.5%; Quicksilver Resources, 0.5%; Western Gas,
0.9%; Chico's FAS, 0.7%; Ann Taylor Stores, 0.6%; Abercrombie & Fitch, 1.9%;
Global Payments, 1.7%; Plexus, 0.3%; SSA Global Technologies, 0.4%; Seachange
International, 0.2%; Spanish Broadcasting Systems, 0.2%; Petco Animal Supplies,
0.8%.
4
Wanger U.S. Smaller Companies 2005 Annual Report
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GROWTH OF A $10,000 INVESTMENT IN WANGER U.S. SMALLER COMPANIES
TOTAL RETURN FOR EACH PERIOD, MAY 3, 1995 (INCEPTION DATE) THROUGH
DECEMBER 31, 2005
AVERAGE ANNUAL TOTAL RETURN
------------------------------------------------
1 year 5 years 10 years Life of fund
11.25% 11.81% 15.26% 15.84%
WANGER U.S. SMALLER COMPANIES: $47,992
Russell 2000: $29,152
WANGER U.S. SMALLER COMPANIES Russell 2000
5/3/95 10000 10000
5/31/95 9870 10179
6/30/95 10770 10707
10000 10000
11940 11559
9/30/95 12060 11765
11380 11239
11640 11711
12/31/95 11600 12020
11950 12007
12580 12381
3/31/96 13297 12633
14690 13309
15471 13833
6/30/96 15351 13265
14529 12107
15090 12810
9/30/96 15792 13310
15902 13105
16423 13645
12/31/96 17004 14003
17475 14282
16994 13936
3/31/97 16366 13279
16355 13316
17986 14797
6/30/97 19093 15431
20201 16149
20703 16519
9/30/97 22395 17728
21995 16949
21892 16839
12/31/97 22005 17134
21554 16864
23379 18111
3/31/98 24865 18858
25803 18962
24887 17941
6/30/98 25361 17978
23959 16523
20358 13315
9/30/98 20875 14356
21598 14942
22601 15725
12/31/98 23916 16698
23453 16920
22223 15549
3/31/99 22388 15792
24321 17207
25005 17459
6/30/99 26375 18248
27216 17747
25677 17090
9/30/99 25389 17094
26940 17163
28202 18188
12/31/99 29909 20247
28911 19922
30029 23212
3/31/00 29077 21682
26164 20377
24858 19189
6/30/00 25545 20862
25174 20191
26672 21731
9/30/00 26741 21093
26768 20151
25147 18083
12/31/00 27469 19636
27936 20658
27469 19302
3/31/01 26306 18358
29276 19794
30473 20281
6/30/01 31669 20981
31710 19845
30308 19204
9/30/01 26567 16619
27214 17592
28988 18954
12/31/01 30597 20124
30528 19914
29634 19369
3/31/02 32219 20925
32247 21116
30652 20179
6/30/02 28754 19178
25027 16281
24959 16240
9/30/02 23226 15073
24546 15557
26499 16945
12/31/02 25454 16002
24959 15559
24601 15089
3/31/03 24670 15283
26815 16732
29125 18528
6/30/03 29717 18863
31463 20043
33168 20962
9/30/03 32549 20575
35643 22303
36193 23094
12/31/03 36455 23563
38105 24587
37789 24807
3/31/04 37417 25038
36592 23762
37857 24140
6/30/04 38765 25157
36578 23463
36358 23342
9/30/04 37665 24438
38999 24919
41763 27080
12/31/04 43138 27882
42368 26719
43124 27171
3/31/05 42794 26393
40786 24882
42973 26510
6/30/05 44582 27533
46699 29277
46204 28734
9/30/05 46727 28825
45517 27930
47882 29286
12/31/05 47992 29152
This graph compares the results of $10,000 invested in Wanger U.S. Smaller
Companies on May 3, 1995 (the date the Fund began operations) through December
31, 2005, with the Russell 2000. Dividends and capital gains are reinvested. Due
to ongoing market volatility, performance is subject to substantial short-term
fluctuations. Wanger U.S. Smaller Companies is a diversified fund that invests
primarily in the stocks of small- and medium-size U.S. companies. Smaller
company stocks are often more volatile or less liquid than the stocks of larger
companies.
Performance shown here is past performance, which cannot guarantee future
results. Current performance may be higher or lower. The investment return and
principal value of an investment in the Fund will fluctuate so that Fund shares,
when redeemed, may be worth more or less than their original cost. Performance
changes over time. Current returns for the Fund may be different than that
shown. For monthly performance updates, please contact us at 1-888-4-WANGER.
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RESULTS AS OF DECEMBER 31, 2005
4th quarter 1 year
WANGER U.S. SMALLER
COMPANIES 2.71% 11.25%
Russell 2000 1.13 4.55
S&P MidCap 400 3.34 12.56
S&P 500 2.09 4.91
NAV AS OF 12/31/05: $34.90
PERFORMANCE NUMBERS REFLECT ALL FUND EXPENSES BUT DO NOT INCLUDE ANY INSURANCE
CHARGE IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. IF PERFORMANCE
INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, IT WOULD BE LOWER.
The Russell 2000 is formed by taking the 3,000 largest U.S. companies and then
eliminating the largest 1,000, leaving a mainly small company index. The S&P
MidCap 400 is a market value-weighted index of 400 U.S. stocks that are in the
next tier down from the S&P 500. The S&P 500 is a broad market-weighted average
of blue-chip U.S. companies. All indexes are unmanaged and include reinvested
dividends. It is not possible to invest directly in an index.
- --------------------------------------------------------------------------------
TOP 5 INDUSTRIES
As a % of net assets, as of 12/31/05
Information 28.0%
Consumer Goods/Services 19.1
Health Care 11.9
Energy/Minerals 11.7
Industrial Goods 10.1
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TOP 10 HOLDINGS
As a % of net assets, as of 12/31/05
1. ITT Educational Services 3.8%
Postsecondary Degree Programs
2. Lincare Holdings 2.4%
Home Health Care Services
3. AmeriCredit 1.9%
Auto Lending
4. Abercrombie & Fitch 1.9%
Teen Apparel Retailer
5. Alltel 1.8%
Cellular & Wireline Telephone Services
6. Micros Systems 1.7%
Information Systems for Restaurants & Hotels
7. Chicago Bridge & Iron 1.7%
Engineering & Construction for Petrochemicals
8. Global Payments 1.7%
Credit Card Processor
9. Genlyte Group 1.6%
Commercial Lighting Fixtures
10. Kronos 1.6%
Labor Management Solutions
5
Wanger U.S. Smaller Companies 2005 Annual Report
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WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
COMMON STOCKS - 90.7%
INFORMATION - 28.0%
- -----------------------------------------------------------------
BUSINESS/CONSUMER SOFTWARE - 6.8%
535,800 Micros Systems (b) $25,889,856
Information Systems for Restaurants & Hotels
563,437 Kronos (b) 23,585,473
Labor Management Solutions
2,030,000 Novell (b) 17,924,900
Security & Identity Management Software
780,000 JDA Software Group (b) 13,267,800
Applications/Software & Services for Retailers
330,800 SSA Global Technologies (b) 6,017,252
Enterprise Resource Planning (ERP) Software
818,000 Parametric Technology (b) 4,989,800
Engineering Software & Services
251,200 MRO Software (b) 3,526,848
Enterprise Maintenance Software
820,000 Indus International (b) 2,574,800
Enterprise Asset Management Software
32,400 Avid Technology (b) 1,774,224
Digital Nonlinear Editing Software & Systems
47,400 Witness Systems (b) 932,358
Customer Experience Management Software
50,600 Concur Technologies (b) 652,234
Web Enabled Enterprise Applications
- -----------------------------------------------------------------
101,135,545
- -----------------------------------------------------------------
TELECOMMUNICATION SERVICES - 5.6%
435,192 Alltel 27,460,615
Cellular & Wireline Telephone Services
640,000 American Tower (b) 17,344,000
Communication Towers in USA & Mexico
495,000 Crown Castle International (b) 13,320,450
Communication Towers
1,091,000 Time Warner Telecom (b) 10,746,350
Competitive Local Exchange Carrier
1,293,000 Dobson Communications (b) 9,697,500
Rural & Small City Cellular Telephone Services
163,300 Commonwealth Telephone 5,514,641
Rural Phone Franchises & Competing Telco
- -----------------------------------------------------------------
84,083,556
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
BUSINESS INFORMATION/BUSINESS
SERVICES/PUBLISHING - 2.5%
153,700 Getty Images (b) $13,720,799
Photographs for Publications & Electronic Media
485,000 Ceridian (b) 12,052,250
HR Services & Payment Processing
443,200 Navigant Consulting (b) 9,741,536
Financial Consulting Firm
200,000 InfoUSA 2,186,000
Business Data for Sales Leads
- -----------------------------------------------------------------
37,700,585
- -----------------------------------------------------------------
COMPUTER HARDWARE/RELATED SYSTEMS - 2.1%
880,000 Symbol Technologies 11,281,600
Mobile Computers & Barcode Scanners
120,000 Intermec (formerly known as Unova) (b) 4,056,000
Bar Code & Wireless Lan Systems
76,400 Nice Systems (b) 3,679,424
Audio & Video Recording Solutions
415,800 Seachange International (b) 3,284,820
Systems for Video on Demand & Ad Insertion
81,600 Rogers (b) 3,197,088
PCB Laminates & High Performance Foams
195,000 CTS 2,156,700
Electronic Components, Sensors & EMS
90,000 Netgear (b) 1,732,500
Networking Products for Small Business & Home
50,000 Avocent (b) 1,359,500
Computer Control Switches
301,205 SensAble Technologies Series C, Pfd. (b)(c) 111,446
1,581,292 SensAble Technologies (b)(c) 15,813
Sensory Devices for Computer Based Sculpting
- -----------------------------------------------------------------
30,874,891
- -----------------------------------------------------------------
TRANSACTION PROCESSORS - 2.0%
546,880 Global Payments 25,490,077
Credit Card Processor
448,000 Pegasus Systems (b) 4,018,560
Transaction Processor for Hotel Industry
- -----------------------------------------------------------------
29,508,637
See accompanying notes to financial statements.
6
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT - 1.6%
1,915,000 Tellabs (b) $20,873,500
Telecommunications Equipment
210,000 Andrew (b) 2,253,300
Wireless Infrastructure Equipment
100,000 Symmetricom (b) 847,000
Network Timing & Synchronization Devices
- -----------------------------------------------------------------
23,973,800
- -----------------------------------------------------------------
SEMICONDUCTORS/RELATED EQUIPMENT - 1.6%
615,500 Integrated Device Technology (b) 8,112,290
Communications Semiconductors
670,000 Entegris (b) 6,311,400
Semiconductor Wafer Shipping & Handling Products
122,800 Amphenol 5,435,128
Electronic Connectors
70,000 Littelfuse (b) 1,907,500
Little Fuses
125,900 IXYS (b) 1,471,771
Power Semiconductors
- -----------------------------------------------------------------
23,238,089
- -----------------------------------------------------------------
INSTRUMENTATION - 1.3%
288,000 Tektronix 8,124,480
Analytical Instruments
145,000 Mettler Toledo (b) 8,004,000
Laboratory Equipment
90,000 Trimble Navigation (b) 3,194,100
GPS-Based Instruments
- -----------------------------------------------------------------
19,322,580
- -----------------------------------------------------------------
INTERNET - 1.3%
740,000 Cnet Networks (b) 10,870,600
Internet Advertising on Niche Websites
355,000 ValueClick (b) 6,429,050
Internet Advertising
310,000 Skillsoft Publishing (b) 1,705,000
Provider of Web-Based Learning Solutions (E-Learning)
- -----------------------------------------------------------------
19,004,650
- -----------------------------------------------------------------
RADIO - 1.0%
561,900 Salem Communications (b) 9,827,631
Radio Stations for Religious Programming
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
260,000 Cumulus Media, Cl. A (b) $3,226,600
Radio Stations in Small Cities
515,000 Spanish Broadcasting (b) 2,631,650
Spanish Language Radio Stations
- -----------------------------------------------------------------
15,685,881
- -----------------------------------------------------------------
TELEVISION PROGRAMMING - 0.6%
460,000 Lions Gate Entertainment (b) 3,532,800
Film & TV Studio
880,000 Gemstar TV Guide International (b) 2,296,800
TV Program Guides & CATV Programming
140,000 Discovery Holding (b) 2,121,000
CATV Programming
138,500 Gray Television 1,360,070
Mid Market Affiliated TV Stations
- -----------------------------------------------------------------
9,310,670
- -----------------------------------------------------------------
TV/SATELLITE BROADCASTING - 0.5%
1,030,000 Entravision Communications (b) 7,333,600
Spanish Language TV, Radio & Outdoor
- -----------------------------------------------------------------
COMPUTER SERVICES - 0.5%
753,000 RCM Technologies (b)(d) 3,840,300
Technology Engineering Services
705,500 AnswerThink Consulting (b) 2,998,375
I/T Consultant Offering Best Practices Benchmarking
- -----------------------------------------------------------------
6,838,675
- -----------------------------------------------------------------
CONTRACT MANUFACTURING - 0.3%
220,000 Plexus (b) 5,002,800
Electronic Manufacturing Services
- -----------------------------------------------------------------
GAMING EQUIPMENT - 0.2%
98,500 Shuffle Master (b) 2,476,290
Card Shufflers & Casino Games
- -----------------------------------------------------------------
ELECTRONICS DISTRIBUTION - 0.1%
40,000 CDW 2,302,800
Technology Reseller
- -----------------------------------------------------------------
INFORMATION - TOTAL 417,793,049
CONSUMER GOODS/SERVICES - 19.1%
- -----------------------------------------------------------------
RETAIL - 7.0%
431,000 Abercrombie & Fitch 28,092,580
Teen Apparel Retailer
See accompanying notes to financial statements.
7
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
RETAIL - 7.0% (CONT)
575,000 Petco Animal Supplies (b) $12,621,250
Pet Supplies & Services
230,000 Chico's FAS (b) 10,103,900
Women's Specialty Retail
265,000 Ann Taylor Stores (b) 9,147,800
Womens Apparel Retailer
409,150 Christopher & Banks 7,683,837
Women's Apparel Retailer
190,000 Michaels Stores 6,720,300
Craft & Hobby Specialty Retailer
163,000 Genesco (b) 6,322,770
Multi-Concept Branded Footware Retailer
890,000 Restoration Hardware (b) 5,357,800
Home Furnishing Retailer
198,000 Zale Corp (b) 4,979,700
Specialty Retailer of Jewelry
182,750 Aeropostale (b) 4,806,325
Mall Based Teen Retailer
130,000 Sports Authority (b) 4,046,900
Sporting Goods Store
100,000 Urban Outfitters (b) 2,531,000
Apparel & Home Specialty Retailer
150,000 Gaiam (b) 2,026,500
Healthy Living Catalogs & E-Commerce
- -----------------------------------------------------------------
104,440,662
- -----------------------------------------------------------------
CONSUMER SERVICES - 4.5%
972,000 ITT Educational Services (b) 57,454,920
Postsecondary Degree Programs
426,500 Central Parking 5,851,580
Owner, Operator & Manager of Parking Lots & Garages
80,000 Weight Watchers (b) 3,954,400
Weight Loss Program
- -----------------------------------------------------------------
67,260,900
- -----------------------------------------------------------------
APPAREL - 2.5%
459,000 Coach (b) 15,303,060
Designer & Retailer of Branded Leather Accessories
254,200 Oxford Industries 13,904,740
Branded & Private Label Apparel
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
150,100 Carter's (b) $8,833,385
Children's Branded Apparel
- -----------------------------------------------------------------
38,041,185
- -----------------------------------------------------------------
ENTERTAINMENT/LEISURE PRODUCTS - 2.5%
366,300 International Speedway Motors 17,545,770
Largest Motorsport Racetrack Owner & Operator
248,200 Speedway Motorsports 8,605,094
Motorsport Racetrack Owner & Operator
390,000 Callaway Golf 5,397,600
Premium Golf Clubs & Balls
106,000 Polaris Industries 5,321,200
Leisure Vehicles & Related Products
- -----------------------------------------------------------------
36,869,664
- -----------------------------------------------------------------
NON-DURABLES - 1.0%
288,000 Scotts Miracle-Gro 13,029,120
Consumer Lawn & Garden Products
100,000 Prestige Brands (b) 1,250,000
OTC, Household & Personal Care Products
- -----------------------------------------------------------------
14,279,120
- -----------------------------------------------------------------
FURNITURE & TEXTILES - 0.9%
100,000 HNI 5,493,000
Office Furniture & Fireplaces
152,000 Herman Miller 4,284,880
Office Furniture
33,000 Mohawk Industries (b) 2,870,340
Carpet & Flooring
50,000 American Woodmark 1,239,500
Kitchen Cabinet Manufacturer
- -----------------------------------------------------------------
13,887,720
- -----------------------------------------------------------------
RESTAURANTS - 0.4%
208,200 Sonic (b) 6,141,900
Drive-in Restaurants
- -----------------------------------------------------------------
CASINOS - 0.2%
205,000 Alliance Gaming (b) 2,669,100
Diversified Gaming Company
- -----------------------------------------------------------------
TRAVEL - 0.1%
12,400 Kerzner International (b) 852,500
Destination Resorts & Casinos
See accompanying notes to financial statements.
8
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
FOOD - 0.0%
25,100 NBTY (b) $407,875
Vitamins & Supplements
- -----------------------------------------------------------------
CONSUMER GOODS/SERVICES - TOTAL 284,850,626
HEALTH CARE - 11.9%
- -----------------------------------------------------------------
SERVICES - 5.3%
866,000 Lincare Holdings (b) 36,294,060
Home Health Care Services
258,709 Coventry Health Care (b) 14,736,065
PPO Network
481,800 NDCHealth Group 9,265,014
Health Claims Processing & Drug Marketing Services
466,000 Serologicals (b) 9,198,840
Blood Collection & Antibody Production
200,000 Charles River Laboratories (b) 8,474,000
Pharmaceutical Research
35,000 United Surgical Partners (b) 1,125,250
Outpatient Surgery Center
31,435 Pra International (b) 884,895
Contract Research Organization
- -----------------------------------------------------------------
79,978,124
- -----------------------------------------------------------------
MEDICAL EQUIPMENT - 3.4%
412,000 Edwards Lifesciences (b) 17,143,320
Heart Valves
207,300 Diagnostic Products 10,064,415
Immunodiagnostic Kits
137,227 Advanced Medical Optics (b) 5,736,089
Medical Devices for Eye Care
190,000 Arrow International 5,508,100
Disposable Catheters
115,700 ICU Medical (b) 4,536,597
Intravenous Therapy Products
125,450 Intermagnetics General (b) 4,001,855
MRI Equipment
93,500 Orthofix International (b) 3,729,715
Bone Fixation & Stimulation Devices
- -----------------------------------------------------------------
50,720,091
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
BIOTECHNOLOGY/DRUG DELIVERY - 2.2%
260,600 Neurocrine Biosciences (b) $16,347,438
Drugs for Sleep, Diabetes, MS & Endometriosis
350,000 AtheroGenics (b) 7,003,500
Drugs for Atherosclerosis
270,000 Nektar Therapeutics (b) 4,444,200
Drug Delivery Technologies
372,500 Ligand Pharmaceuticals (b) 4,153,375
Drugs for Pain, Cancer, Osteoporosis & Diabetes
50,000 Momenta Pharmaceuticals (b) 1,102,000
Sugar Analysis Technology for Drug Design
250,000 Locus Discovery, Series D. Pfd. (c) 375,000
High Throughput Rational Drug Design
- -----------------------------------------------------------------
33,425,513
- -----------------------------------------------------------------
PHARMACEUTICALS - 0.7%
315,500 Par Pharmaceuticals (b) 9,887,770
Generics
- -----------------------------------------------------------------
MEDICAL SUPPLIES - 0.3%
70,700 Techne (b) 3,969,805
Cytokines, Antibodies, Other Reagents For Life Sciences
- -----------------------------------------------------------------
HEALTH CARE - TOTAL 177,981,303
ENERGY/MINERALS - 11.7%
- -----------------------------------------------------------------
OIL SERVICES - 6.6 %
1,015,000 Chicago Bridge & Iron 25,588,150
Engineering & Construction for Petrochemicals
490,700 FMC Technologies (b) 21,060,844
Oil & Gas Well Head Manufacturer
580,000 Pride International (b) 17,835,000
Offshore Drilling Contractor
1,231,000 Newpark Resources (b) 9,392,530
Drilling Fluid Services to Oil & Gas Industry
625,000 Hanover Compressor (b) 8,818,750
Natural Gas Compressor Rental
142,500 Carbo Ceramics 8,054,100
Natural Gas Well Stimulants
266,800 Pioneer Drilling (b) 4,783,724
Oil & Gas Well Driller
205,000 Key Energy Services (b) 2,761,350
Oil & Gas Well Workover Services
- -----------------------------------------------------------------
98,294,448
9
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
OIL/GAS PRODUCERS - 4.6%
400,000 Ultra Petroleum (b) $22,320,000
Natural Gas Producer
416,000 Equitable Resources 15,263,040
Natural Gas Producer & Utility
296,000 Western Gas Resources 13,938,640
Oil Producer & Coal Seam Gas Producer
195,000 Quicksilver Resources (b) 8,191,950
Natural Gas & Coal Seam Gas Producer
193,600 Southwestern Energy (b) 6,957,984
Oil & Gas Exploration/Production
450,000 Vaalco Energy (b) 1,908,000
Oil & Gas Producer
71,500 McMoran Exploration (b) 1,413,555
Natural Gas Producers & Developer
- -----------------------------------------------------------------
69,993,169
- -----------------------------------------------------------------
DISTRIBUTION/MARKETING/REFINING - 0.5%
185,000 Atmos Energy (b) 4,839,600
Natural Gas Utility
94,000 Oneok 2,503,220
Natural Gas Utility, Marketing & Processing
- -----------------------------------------------------------------
7,342,820
- -----------------------------------------------------------------
ENERGY/MINERALS - TOTAL 175,630,437
INDUSTRIAL GOODS/SERVICES - 10.1%
- -----------------------------------------------------------------
MACHINERY - 4.5%
492,300 Esco Technologies (b) 21,902,427
Automatic Electric Meter Readers
585,600 Pentair 20,214,912
Pumps, Water Treatment & Tools
365,100 Nordson 14,790,201
Dispensing Systems for Adhesives & Coatings
210,000 Ametek 8,933,400
Aerospace/Industrial Instruments
50,000 Kaydon 1,607,000
Specialized Friction & Motion Control Products
- -----------------------------------------------------------------
67,447,940
- -----------------------------------------------------------------
INDUSTRIAL GOODS - 2.9%
453,000 Genlyte Group (b) 24,267,210
Commercial Lighting Fixtures
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
191,300 Mine Safety Appliances $6,926,973
Safety Equipment
196,000 Clarcor 5,823,160
Mobile & Industrial Filters
177,300 Donaldson 5,638,140
Industrial Air Filtration
- -----------------------------------------------------------------
42,655,483
- -----------------------------------------------------------------
CONSTRUCTION - 0.6%
191,400 Florida Rock Industries 9,390,084
Concrete & Aggregates
- -----------------------------------------------------------------
SPECIALTY CHEMICALS & INDUSTRIAL MATERIALS - 0.6%
407,500 Spartech 8,944,625
Plastics Distribution & Compounding
- -----------------------------------------------------------------
INDUSTRIAL DISTRIBUTION - 0.5%
113,000 Nuco2 (b) 3,150,440
Bulk CO2 Gas Distribution to Restaurants
100,000 Aviall (b) 2,880,000
Aircraft Replacement Parts Distributor
50,000 Airgas 1,645,000
Industrial Gas Distributor
- -----------------------------------------------------------------
7,675,440
- -----------------------------------------------------------------
LOGISTICS - 0.5%
130,000 Forward Air 4,764,500
Freight Transportation Between Airports
21,000 UTI Worldwide 1,949,640
Global Logistics & Freight Forwarding
- -----------------------------------------------------------------
6,714,140
- -----------------------------------------------------------------
OUTSOURCING SERVICES - 0.4%
450,000 Quanta Services (b) 5,926,500
Electrical & Telecom Construction Services
- -----------------------------------------------------------------
STEEL - 0.1%
75,000 Gibraltar Industries 1,720,500
Steel Processing
- -----------------------------------------------------------------
INDUSTRIAL SERVICES - 0.0%
17,200 Clark 227,900
Executive Compensation & Benefits Consulting
- -----------------------------------------------------------------
INDUSTRIAL GOODS/SERVICES - TOTAL 150,702,612
See accompanying notes to financial statements.
10
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
FINANCE - 7.5%
- -----------------------------------------------------------------
INSURANCE - 3.0%
670,500 HCC Insurance Holdings $19,900,440
Specialty Insurance
36,500 Markel (b) 11,572,325
Specialty Insurance
138,000 Leucadia National 6,549,480
Insurance Holding Company
35,000 Philadelphia Consolidated Holding (b) 3,384,150
Specialty Insurance
75,000 Endurance Specialty Holdings 2,688,750
Commerical Lines Insurance/Reinsurance
77,000 United America Indemnity (b) 1,413,720
Specialty Insurance
- -----------------------------------------------------------------
45,508,865
- -----------------------------------------------------------------
FINANCE COMPANIES - 2.4%
1,135,400 AmeriCredit (b) 29,100,302
Auto Lending
217,100 World Acceptance (b) 6,187,350
Personal Loans
- -----------------------------------------------------------------
35,287,652
- -----------------------------------------------------------------
BANKS/SAVINGS & LOANS - 1.3%
317,000 TCF Financial 8,603,380
Great Lakes Bank
131,875 Chittenden 3,667,444
Vermont & Western Massachusetts Bank
85,200 Anchor Bancorp Wisconsin 2,584,968
Wisconsin Thrift
74,017 Greene City Bancshares 2,025,105
Tennessee Bank
35,000 Associated Banc-Corp 1,139,250
Midwest Bank
20,000 First Financial BankShares 701,200
West Texas Bank
30,000 West Bancorporation 561,000
Des Moines Commercial Bank
- -----------------------------------------------------------------
19,282,347
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
MONEY MANAGEMENT - 0.8%
321,000 SEI Investments $11,877,000
Mutual Fund Administration & Investment Management
- -----------------------------------------------------------------
FINANCE - TOTAL 111,955,864
OTHER INDUSTRIES - 2.4%
- -----------------------------------------------------------------
REAL ESTATE - 0.9 %
225,000 Highland Hospitality 2,486,250
Hotel Owner
150,000 Kite Realty Group 2,320,500
Community Shopping Centers
55,000 Mills 2,306,700
Regional Shopping Malls
90,000 American Campus Communities 2,232,000
Student Housing/Apartments
100,000 Crescent Real Estate Equities 1,982,000
Class A Office Buildings
130,600 Diamondrock Hospitality 1,561,975
Hotel Owner
- -----------------------------------------------------------------
12,889,425
- -----------------------------------------------------------------
TRANSPORTATION - 0.8 %
601,000 Heartland Express 12,194,290
Regional Trucker
- -----------------------------------------------------------------
REGULATED UTILITIES - 0.4%
345,000 Northeast Utilities 6,793,050
Regulated Electric Utility
- -----------------------------------------------------------------
WASTE MANAGEMENT - 0.3%
122,800 Waste Connections (b) 4,231,688
Solid Waste Management
- -----------------------------------------------------------------
OTHER INDUSTRIES - TOTAL 36,108,453
TOTAL COMMON STOCKS (COST: $864,175,002) - 90.7% 1,355,022,344
- -----------------------------------------------------------------
See accompanying notes to financial statements.
11
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER U.S. SMALLER COMPANIES STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Principal Value
Amount
SHORT-TERM OBLIGATIONS - 10.4%
- -----------------------------------------------------------------
$64,000,000 Countrywide Financial
4.32% - 4.34% Due 1/3/06 - 1/6/06 $63,973,802
30,000,000 Verizon Network Funding
4.30% Due 1/4/06 29,989,250
30,000,000 American General Finance
4.30% Due 1/5/06 29,985,667
28,000,000 General Electric Capital Corporate
4.10% Due 1/9/06 27,974,489
3,103,000 Repurchase Agreement with
State Street Bank & Trust 3,103,000
dated 12/30/05, due 1/03/06 at 3.75%
Collateralized by Federal Home Loan
Mortgage Discount Notes,
maturing 5/2/06 market value $3,166,228
(repurchase proceeds: $3,104,293)
- -----------------------------------------------------------------
(AMORTIZED COST: $155,026,208) 155,026,208
TOTAL INVESTMENTS
(COST: $1,019,201,210) - 101.1% (a) 1,510,048,552
- -----------------------------------------------------------------
CASH AND OTHER ASSETS LESS LIABILITIES - (1.1%) (16,353,430)
- -----------------------------------------------------------------
TOTAL NET ASSETS - 100% $1,493,695,122
- -----------------------------------------------------------------
NOTES TO STATEMENT OF INVESTMENTS:
(a) At December 31, 2005, for federal income tax purposes cost of investments
was $1,019,596,620 and net unrealized appreciation was $490,451,932
consisting of gross unrealized appreciation of $529,942,867 and gross
unrealized depreciation of $ 39,490,935.
(b) Non-income producing security.
(c) Denotes a restricted security, which is subject to restrictions on resale
under federal securities laws. These securities are valued in good faith by
the Board of Trustees. At December 31, 2005, these securities amounted to
$502,259 which represents 0.03% of net assets.
Additional information on these securities is as follows:
ACQUISITION
SECURITY DATES SHARES COST VALUE
- --------------------------------------------------------------------------------
Locus Discovery,
Series D Pfd. 9/5/01 250,000 $1,000,000 $375,000
Sensable Technologies
Series C Pfd. 4/4/00 301,205 1,000,000 111,446
Sensable Technologies
Series, common 6/28/04 1,581,292 0 15,813
---------- --------
$2,000,000 $502,259
========== ========
(d) An affiliate may include any company in which the Fund owns five percent or
more of its outstanding voting shares. On December 31, 2005, the Fund held
five percent or more of the outstanding voting securities of the following
companies:
RCM Technologies 6.51%
The aggregate cost and value of this company at December 31, 2005, was
$5,474,962 and $3,840,300 respectively. Investments in affiliate companies
represent 0.3% of total net assets at December 31, 2005. Investment
activity and income amounts related to affiliates during the twelve months
ended December 31, 2005 were as follows:
Dividend Income $ 0
Net realized gain or loss 0
Change in unrealized gain 51,957
Purchases 0
Proceeds from sales 0
At December 31, 2005, the Fund held investments in the following sectors:
% OF
SECTOR NET ASSETS
- -------------------------------------------------------------------
Information 28.0%
Consumer Goods/Services 19.1
Health Care 11.9
Energy/Minerals 11.7
Industrial Goods/Services 10.1
Finance 7.5
Other Industries 2.4
Short-Term Obligations 10.4
Cash and Other Assets Less Liabilities (1.1)
-------
100.0%
=======
See accompanying notes to financial statements.
12
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2005
================================================================
ASSETS:
Unaffiliated investments, at cost $1,013,726,248
Affiliated investments, at cost (See Note 4) 5,474,962
- ----------------------------------------------------------------
Unaffiliated investments, at value $1,506,208,252
Affiliated investments, at value (See Note 4) 3,840,300
Cash 23,504
Receivable for:
Investments sold 515,152
Fund shares sold 1,265,704
Interest 646
Dividends 491,729
Foreign tax reclaims 6,240
Liquidated security 60,150
Fee reimbursement due from Investment
Adviser 25,607
- ----------------------------------------------------------------
Total Assets 1,512,437,284
LIABILITIES:
Payable for:
Investments purchased 18,415,572
Fund shares repurchased 189,309
Transfer agent fee 44
Trustees' fees 476
Audit fee 18,999
Custody fee 6,396
Legal fees 27,037
Reports to shareholders 81,158
Other liabilities 3,171
- ----------------------------------------------------------------
Total Liabilities 18,742,162
- ----------------------------------------------------------------
Net Assets $1,493,695,122
================================================================
COMPOSITION OF NET ASSETS:
Paid-in capital $949,065,428
Undistributed net investment income 3,544,817
Accumulated net realized gain 50,177,385
Net unrealized appreciation on:
Investments 490,847,342
Liquidated security 60,150
- ----------------------------------------------------------------
Net Assets $1,493,695,122
================================================================
Fund Shares outstanding 42,800,144
- ----------------------------------------------------------------
Net asset value, offering price and redemption
price per share $34.90
================================================================
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
================================================================
INVESTMENT INCOME:
Dividend income (net of foreign taxes
withheld of $19,596) $11,589,842
Interest income 4,237,978
- ----------------------------------------------------------------
Total Investment Income 15,827,820
EXPENSES:
Investment advisory fee 11,560,012
Transfer agent fee 471
Trustees' fees 135,904
Custody fee 43,711
Compliance fees (See Note 4) 36,152
Audit fee 35,296
Legal fees 188,703
Reports to shareholders 208,133
Non-recurring costs (See Note 8) 229,723
Other expenses 10,309
- ----------------------------------------------------------------
Total Expenses 12,448,414
Fees waived by Investment Adviser
(See Note 4) (21,040)
Non-recurring costs assumed by Investment Adviser
(See Note 8) (229,723)
Custody earnings credit (6,950)
- ----------------------------------------------------------------
Net Expenses 12,190,701
- ----------------------------------------------------------------
Net Investment Income 3,637,119
- ----------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON PORTFOLIO POSITIONS:
Net realized gain on investments 55,808,347
Net change in unrealized appreciation
(depreciation) on:
Unaffiliated investments 83,973,361
Affiliated investments (See Note 4) 51,957
Liquidated security 60,150
- ----------------------------------------------------------------
Net change in unrealized
appreciation (depreciation) 84,085,468
- ----------------------------------------------------------------
Net Gain 139,893,815
- ----------------------------------------------------------------
Net Increase in Net Assets from Operations $143,530,934
================================================================
See accompanying notes to financial statements.
13
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Year ended December 31,
INCREASE (DECREASE) IN NET ASSETS: 2005 2004
==========================================================================================================
FROM OPERATIONS:
Net investment income (loss) $3,637,119 $(4,671,681)
Net realized gain on investments 55,808,347 29,992,766
Net change in unrealized appreciation (depreciation)
on investments 84,085,468 145,968,200
- ----------------------------------------------------------------------------------------------------------
Net Increase in Net Assets from Operations 143,530,934 171,289,285
SHARE TRANSACTIONS:
Subscriptions 281,666,708 231,841,890
Redemptions (85,055,673) (72,236,517)
- ----------------------------------------------------------------------------------------------------------
Net Increase from Share Transactions 196,611,035 159,605,373
- ----------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 340,141,969 330,894,658
NET ASSETS:
Beginning of period 1,153,553,153 822,658,495
- ----------------------------------------------------------------------------------------------------------
End of period $1,493,695,122 $1,153,553,153
- ----------------------------------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME $3,544,817 --
==========================================================================================================
See accompanying notes to financial statements.
14
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended December 31,
Selected data for a share outstanding throughout each period 2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $31.37 $26.51 $18.51 $22.25 $19.99
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (a) 0.09 (0.14) (0.11) (0.10) (0.04)
Net realized and unrealized gain (loss) on investments 3.44 5.00 8.11 (3.64) 2.31
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.53 4.86 8.00 (3.74) 2.27
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income -- -- -- -- (0.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions Declared to Shareholders -- -- -- -- (0.01)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $34.90 $31.37 $26.51 $18.51 $22.25
====================================================================================================================================
Total Return (b) 11.25%(c) 18.33% 43.22% (16.81)% 11.39%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Expenses 0.95%(d) 1.00%(d) 0.99%(d) 1.05%(d) 0.99%
Net investment income (loss) 0.29%(d) (0.49)%(d) (0.48)%(d) (0.47)%(d) (0.20)%
Waiver 0.00%(e) -- -- -- --
Portfolio turnover rate 11% 15% 10% 16% 18%
Net assets, end of period (000's) $1,493,695 $1,153,553 $822,658 $471,726 $498,186
- --------------------------------------------------------------------------------
(a) Net investment income (loss) per share was based upon the average shares
outstanding during the period.
(b) Total return at net asset value assuming all distributions are reinvested.
(c) Had the Investment Adviser not waived a portion of expenses, total return
would have been reduced.
(d) The benefits derived from custody fees paid indirectly had no impact.
(e) Rounds to less than 0.01%.
See accompanying notes to financial statements.
15
Wanger U.S. Smaller Companies 2005 Annual Report
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NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Wanger U.S. Smaller Companies (the "Fund"), is a series of Wanger Advisors Trust
(the "Trust"), an open-end management investment company organized as a
Massachusetts business trust. The investment objective of the Fund is to seek
long-term growth of capital. The Fund is available only for allocation to
certain life insurance company separate accounts established for the purpose of
funding qualified and non-qualified variable annuity contracts, and variable
life insurance policies and may also be offered directly to certain types of
pension plans and retirement arrangements.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Securities of the Fund are valued at market value or, if a market quotation for
a security is not readily available or is deemed not to be reliable because of
events or circumstances that have occurred between the market quotation and the
time as of which the security is to be valued, the security is valued at a fair
value determined in accordance with procedures established by the Board of
Trustees. Securities traded on securities exchanges or in over-the-counter
markets in which transaction prices are reported are valued at the last sales
price at the time of valuation. If a security is traded principally on the
Nasdaq Stock Market Inc., the Nasdaq Official Closing Price will be applied.
Securities for which there are no reported sales on the valuation date are
valued at the latest bid quotation. Short-term debt obligations having a
maturity of 60 days or less from the valuation date are valued on an amortized
cost basis, which approximates fair value. Securities for which quotations are
not readily available and any other assets are valued as determined in good
faith under consistently applied procedures established by and under the general
supervision of the Board of Trustees. The Trust has retained an independent
statistical fair value pricing service to assist in the fair valuation process
for securities principally traded in a foreign market in order to adjust for
possible changes in value that may occur between the close of the foreign
exchange and the time at which fund shares are priced. If a security is valued
at a "fair value", that value may be different from the last quoted market price
for the security.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreement transactions. The Fund, through its
custodians, receives delivery of underlying securities collateralizing each
repurchase agreement. The Fund's investment advisor determines that the value of
the underlying securities is at all times at least equal to the repurchase price
including interest. In the event of default or bankruptcy by the other party to
the agreement, realization and/or retention of the collateral may be subject to
legal proceedings.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed) and dividend income is recorded on the ex-dividend date,
except that certain dividends from foreign securities are recorded as soon as
the information is available to the Fund. Interest income is recorded on an
accrual basis and includes amortization of discounts on short-term debt
obligations and on long-term debt obligations when required for federal income
tax purposes. Realized gains and losses from security transactions are reported
on an identified cost basis.
The Fund estimates components of distributions from Real Estate Investment
Trusts ("REITS"). Distributions received in excess of income are recorded as a
reduction of the cost of the related investments. Results of operations for the
year reflect a change in estimate of these components using more current tax
reporting received from REIT investments. The change in estimate has no impact
on the Fund's net assets.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon registration
under federal securities laws or in transactions exempt from registration. In
some cases, the issuer of restricted securities has agreed to register such
securities for resale at the issuer's expense either upon demand by the Fund or
in connection with another registered offering of the securities. Many
restricted securities may be resold in the secondary market in transactions
exempt from registration. Such restricted securities may be determined to be
liquid under criteria established by the Board of Trustees. The Fund will not
incur any registration costs upon such resale.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results may differ from
those estimated.
FUND SHARE VALUATION
Fund shares are sold and redeemed on a continuing basis at net asset value. Net
asset value per share is determined daily as of the close of trading on the New
York Stock Exchange ("the Exchange") on each day the Exchange is open for
trading by dividing the total value of the Fund's investments and other assets,
less liabilities, by the number of Fund shares outstanding.
CUSTODY FEES/CREDITS
Custody fees are reduced based on the Fund's cash balances maintained with the
custodian. The Fund could have invested a portion of the assets utilized in
connection with the expense offset arrangement in an income-producing asset if
it had not entered into such an agreement. The amount is disclosed as a
reduction of total expenses in the Statement of Operations.
INDEMNIFICATION
In the normal course of business, the Fund enters into contracts that contain a
variety of representations and warranties and which provide general indemnities.
The Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims against the Fund. Also, under the Trust's organizational
documents, the Trustees and Officers of the Trust are indemnified against
certain liabilities that may arise out of their duties to the Trust. However,
based on experience, the Fund expects the risk of loss due to these warranties
and indemnities to be minimal.
FEDERAL INCOME TAXES
The Fund has complied with the provisions of the Internal Revenue Code available
to regulated investment companies and, in the manner provided therein,
distributes all its taxable income, as well as any net realized gain on sales of
investments and foreign currency transactions reportable for federal income tax
purposes. Accordingly, the Fund paid no federal income taxes and no federal
income tax provision was required.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-date.
3. FEDERAL TAX INFORMATION
The timing and character of income and capital gain distributions are determined
in accordance with income tax regulations, which may differ from GAAP.
Reclassifications are made to the Fund's capital accounts for permanent tax
differences to reflect income and gains available for distribution (or available
capital loss carryforwards) under income tax regulations.
16
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
For the year ended December 31, 2005, permanent book and tax basis
differences resulting primarily from differing treatments for REIT adjustments
were identified and reclassified among the components of the Fund's net assets
as follows:
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED
INCOME GAIN PAID-IN CAPITAL
-------------- ------------- ---------------
$(92,302) $92,302 --
Net investment income and net realized gains (losses), as disclosed on the
Statement of Operations, and net assets were not affected by this
reclassification.
As of December 31, 2005, the components of distributable earnings on a tax
basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY LONG-TERM NET UNREALIZED
INCOME CAPITAL GAINS APPRECIATION*
-------------- ------------- ---------------
$3,544,817 $50,572,798 $490,451,932
* The differences between book-basis and tax-basis net unrealized
appreciation/depreciation are primarily due to deferral of losses from wash
sales and REITadjustments.
Capital loss carryforwards of $5,327,851 were utilized during the year ended
December 31, 2005.
4. TRANSACTIONS WITH AFFILIATES
Columbia Wanger Asset Management, L.P., ("Columbia WAM") a wholly-owned
subsidiary of Columbia Management Group, Inc., (CM) which in turn is an indirect
wholly owned subsidiary of Bank of America Corporation ("BOA"), furnishes
continuing investment supervision to the Fund and is responsible for the overall
management of the Fund's business affairs.
Effective March 8, 2005, under the Fund's investment management agreement,
fees are accrued daily and paid monthly to Columbia WAM at the annual rates
shown in the table below:
AVERAGE DAILY NET ASSETS ANNUAL FEE RATE
For the first $100 million 0.99%
Next $150 million 0.94%
In excess of $250 million 0.89%
Prior to March 8, 2005, under the Fund's investment management agreement,
fees were accrued daily and paid monthly to Columbia WAM at the annual rates
shown in the table below:
AVERAGE DAILY NET ASSETS ANNUAL FEE RATE
For the first $100 million 1.00%
Next $150 million 0.95%
In excess of $250 million 0.90%
In accordance with the terms of the Assurance of Discontinuance with the New
York Attorney General, Columbia WAM waived a portion of the fees payable under
the Fund's investment management agreement so that those fees were retained at
the following annual rates as a percentage of average daily net assets: 0.99% -
up to 100 million; 0.94% - $100 million to $250 million; 0.89% - $250 million
and over. The fee waiver was effective from January 1, 2005 through March 8,
2005, but applied as if it had gone into effect on December 1, 2004.
Fees waived by Columbia WAM amounted to $21,040 for the year ended December
31, 2005.
The investment advisory agreement also provides that through April 30, 2005
Columbia WAM will reimburse the Fund to the extent that ordinary operating
expenses, (computed based on the net custodian fees) exceed an annual percentage
of 2.00% of average daily net assets. There was no reimbursement for the year
ended December 31, 2005.
For the year ended December 31, 2005, the Fund's annualized effective
investment advisory fee rate was 0.90%.
Certain officers and trustees of the Trust are also officers of Columbia WAM.
The Trust makes no direct payments to its officers and trustees who are
affiliated with Columbia WAM. For the year ended December 31, 2005, the Fund
paid $135,904 to trustees not affiliated with Columbia WAM. The Board of
Trustees appointed a Chief Compliance Officer to the Fund in accordance with
federal securities regulations. The Fund will pay its pro-rata share of the
expenses associated with the Office of the Chief Compliance Officer. These
expenses are disclosed separately as "Compliance fees" on the Statement of
Operations.
Columbia Management Distributors, Inc. (formerly Columbia Funds Distributor,
Inc.), a wholly owned subsidiary of BOA, serves as the principal underwriter of
the Trust and receives no compensation for its services.
Columbia Management Services, Inc. (formerly Columbia Funds Services, Inc.)
(the "Transfer Agent"), a wholly owned subsidiary of BOA, provides shareholder
services to the Fund and has subcontracted with Boston Financial Data Services
("BFDS") to serve as subtransfer agent. For such services, the Transfer Agent
receives a fee, paid monthly, at the annual rate of $21.00 per open account. The
Transfer Agent also receives reimbursement for certain out-of-pocket expenses.
An affiliate may include any company in which a fund owns five percent or
more of its outstanding voting shares. On December 31, 2005, the Fund held five
percent or more of the outstanding voting securities of one or more companies.
Details of investments in those affiliated companies are presented on page 12.
During the year ended December 31, 2005, the Fund engaged in purchase and
sales transactions with funds that have a common investment advisor (or
affiliated investment advisors), common Directors/Trustees, and/or common
Officers. These purchase and sale transactions complied with the provisions of
Rule 17a-7 under the Investment Company Act of 1940 and were $0 and $372,750,
respectively.
5. BORROWING ARRANGEMENTS
The Trust participates in a $150,000,000 credit facility, which was entered into
to facilitate portfolio liquidity. Interest is charged to each participating
fund based on its borrowings at a rate per annum equal to the Federal Funds rate
plus 0.50%. In addition, a commitment fee of 0.10% per annum is accrued and
apportioned among the participating funds based on their pro-rata portion of the
unutilized line of credit. The commitment fee is included in "Other expenses" on
the Statement of Operations. No amounts were borrowed under this facility for
the year ended December 31, 2005.
6. FUND SHARE TRANSACTIONS
Proceeds and payments on Fund shares as shown in the statement of changes in net
assets are in respect of the following numbers of shares:
Year ended Year ended
December 31, 2005 December 31, 2004
- --------------------------------------------------------------------------
Shares sold 8,661,418 8,353,055
- --------------------------------------------------------------------------
Less shares redeemed 2,637,907 2,612,387
- --------------------------------------------------------------------------
Net increase in shares outstanding 6,023,511 5,740,668
- --------------------------------------------------------------------------
17
Wanger U.S. Smaller Companies 2005 Annual Report
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NOTES TO FINANCIAL STATEMENTS
7. INVESTMENT TRANSACTIONS
The aggregate cost of purchases and proceeds from sales other than short-term
obligations for the year ended December 31, 2005 were $363,861,171 and
$125,617,863.
8. LEGAL PROCEEDINGS
Columbia WAM, Columbia Acorn Trust, another mutual fund family advised by
Columbia WAM, and the trustees of Colombia Acorn Trust, are named as defendants
in class and derivative complaints which have been consolidated in a
Multi-District Action in the federal district court for the District of
Maryland. These lawsuits contend that defendants permitted certain investors to
market time their trades in certain Columbia Acorn Funds. The Multi-District
Action is ongoing. However, all claims against Columbia Acorn Trust and the
independent trustees of Columbia Acorn Trust have been dismissed.
Columbia WAM, the Columbia Acorn Funds and the trustees of Columbia Acorn
Trust are defendants in a consolidated lawsuit filed in the federal district
court of Massachusetts alleging that Columbia WAM used Fund assets to make
undisclosed payments to brokers as an incentive for the brokers to market the
Columbia Acorn Funds over the other mutual funds to investors. The complaint
alleges Columbia WAM and the Trustees of the Trust breached certain common laws
duties and federal laws. All claims against all defendants in this lawsuit have
been dismissed. However, the plaintiffs have filed a notice of appeal with the
First Circuit Court of Appeals.
The Columbia Acorn Trust and Columbia WAM are also defendants in a class
action lawsuit that alleges, in summary, that the Columbia Acorn Trust and
Columbia WAM exposed shareholders of Columbia Acorn International to trading by
market timers by allegedly (a) failing to properly evaluate daily whether a
significant event affecting the value of that Fund's securities had occurred
after foreign markets had closed but before the calculation of the Funds' net
asset value (NAV"); (b) failing to implement the Fund's portfolio valuation and
share pricing policies and procedures; and (c) failing to know and implement
applicable rules and regulations concerning the calculation of NAV (the "Fair
Valuation Lawsuit"). The Seventh Circuit ruled that the plaintiffs' state law
claims were preempted under federal law resulting in the dismissal of
plaintiffs' complaint. However, plaintiffs are in the process of appealing that
decision before the United States Supreme Court.
On March 21, 2005, a class action complaint was filed against the Columbia
Acorn Trust and Columbia WAM seeking to rescind the Contingent Deferred Sales
Charges assessed upon redemption of Class B shares of Columbia Acorn Funds due
to the alleged market timing of the Columbia Acorn Funds. In addition to the
rescission of sales charges, plaintiffs seek recovery of actual damages,
attorneys' fees and costs. The case has been transferred to the Multi-District
Action in the federal district court of Maryland.
The Columbia Acorn Trust and Columbia WAM intend to defend these suits
vigorously.
As a result of these matters or any adverse publicity or other developments
resulting from them, there may be increased redemptions or reduced sales of Fund
shares, which could increase transaction costs or operating expenses, or have
other adverse consequences for the Funds.
In connection with the events described in detail above, various parties have
filed suit against certain funds, their Boards and/or BOA (and affiliated
entities). These suits are ongoing. However, based on currently available
information, the Columbia Acorn Trust believes that the likelihood that these
lawsuits will have a material adverse impact on any fund is remote, and Columbia
WAM believes that the lawsuits are not likely to materially affect its ability
to provide investment management services to the Fund.
For the year ended December 31, 2005, CM has assumed $229,723 in consulting
services and legal fees incurred by the Fund in connection with these matters.
18
Wanger U.S. Smaller Companies 2005 Annual Report
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of Wanger U.S. Smaller Companies Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Wanger U.S. Smaller Companies Fund
(a series of the Wanger Advisors Trust, hereinafter referred to as the "Fund")
at December 31, 2005, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for each of the two years
in the period then ended, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audit of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion. The financial
highlights of the Fund for the periods ended December 31, 2003 and prior were
audited by other independent auditors whose report dated February 6, 2004
expressed an unqualified opinion on those financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 14, 2006
19
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
UNAUDITED INFORMATION
FEDERAL INCOME TAX INFORMATION
For the fiscal year ended December 31, 2005, the Fund designated long-term
capital gains of $50,572,798.
20
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
[EXCERPTS FROM:]
Wanger Advisors Trust
Management Fee Evaluation of the Senior Officer
Prepared Pursuant to the New York Attorney General's
Assurance of Discontinuance
July 2005
21
Wanger U.S. Smaller Companies 2005 Annual Report
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Introduction
The New York Attorney General's Assurance of Discontinuance ("Order") entered
into by Columbia Management Advisors, Inc. ("CMAI") and Columbia Funds
Distributor, Inc., ("CFDI" and collectively with "CMAI," "CMG") in February
2005, allows CMAI to manage or advise a mutual fund, including the Wanger
Advisors Trust's family of funds (the "WAT Funds" or "WAT" or "Trust"), only if
the trustees of the WAT Funds appoint a "Senior Officer" to perform specified
duties and responsibilities. One of these responsibilities includes "managing
the process by which proposed management fees (including but not limited to,
advisory fees) to be charged the WAT Fund[s] are negotiated so that they are
negotiated in a manner which is at arms' length and reasonable and consistent
with this Assurance of Discontinuance."
The Order also provides that the Board of Trustees of the WAT Funds ("Board")
must determine the reasonableness of proposed "management fees" by using either
an annual competitive bidding process supervised by the Senior Officer or
Independent Fee Consultant, or by obtaining "an annual independent written
evaluation prepared by or under the direction of the Senior Officer or the
Independent Fee Consultant."
"Management fees" are only part of the costs and expenses paid by mutual fund
shareholders. The expenses can vary depending upon the class of shares held but
usually include: (1) investment management or advisory fees to compensate
analysts and portfolio managers for stock research and portfolio management, as
well as the cost of operating a trading desk; (2) administrative expenses
incurred to prepare registration statements and tax returns, calculate the
Funds' net asset values, maintain effective compliance procedures and perform
recordkeeping services; (3) transfer agency costs for establishing accounts,
accepting and disbursing funds, as well as overseeing trading in Fund shares;
(4) custodial expenses incurred to hold the securities purchased by the Funds;
and (5) distribution expenses, including commissions paid to brokers that sell
the Fund shares to investors.
Columbia Wanger Asset Management, L.P. ("CWAM"), the adviser to the WAT Funds,
has proposed that the Trust enter into an agreement that "bundles" the first two
categories listed above: advisory and administrative services. The fees paid
under this agreement are referred to as "management fees." Other fund expenses
are governed by separate agreements, in particular agreements with two CWAM
affiliates: CFDI, the broker-dealer that underwrites and distributes the WAT
Funds' shares, and Columbia Funds Services, Inc. ("CFSI"), the Funds' transfer
agent. In conformity with the terms of the Order, this evaluation, therefore,
addresses only the advisory and administrative contract between CWAM and the
Trust, and does not extend to the other agreements.
According to the Order, the Senior Officer's evaluation must consider at least
the following:
(1) Management fees (including components thereof) charged to
institutional and other clients of CWAM for like services;
(2) Management fees (including any components thereof) charged by other
mutual fund companies for like services;
(3) Costs to CWAM and its affiliates of supplying services pursuant to the
management fee agreements, excluding any intra-corporate profit;
(4) Profit margins of CWAM and its affiliates from supplying such
services;
(5) Possible economies of scale as the WAT Funds grow larger; and
(6) The nature and quality of CWAM's services, including the performance
of each WAT Fund.
On November 17, 2004, the Board appointed me, Robert Scales, Senior Officer
under the Order. The Board also determined not to pursue a competitive bidding
process and instead, charged me with the responsibility of evaluating the WAT
Funds' proposed advisory and administrative fee contract with CWAM in conformity
with the requirements of the Order. This Report is an annual evaluation required
under the Order. In discharging their responsibilities, the independent Trustees
have also consulted independent, outside counsel.
* * *
This evaluation was performed in cooperation and regular communication with the
Compliance/Contract Renewal Committee of the Board.
Process and Independence
The objectives of the Order are to ensure the independent evaluation of the
advisory fees paid by the WAT Funds as well as to ensure that all relevant
factors are considered. In my view, the contract renewal process has been
conducted at arms-length and with independence in gathering, considering and
evaluating relevant data. For example, the selection of fund peer groups is
critical in assessing a fund's relative performance and cost. I have required
Lipper and Morningstar, Inc. to prepare their reports without input or
commentary from CWAM; the engagement letters with them reflect this requirement.
As a result, the peer groups reflected in the Morningstar, Inc. and Lipper
reports were determined independently. After submission of the reports, I asked
CWAM to comment on them to avoid errors and to establish a clear record of
CWAM's views on which funds, in its judgment, constitute an appropriate peer
group.
Similarly, I discussed CWAM's profitability analysis with its management but
also sought the independent views of Ernst &Young on the reasonableness of
CWAM's cost allocation methodology and on the adequacy of the financial data it
provided. The evaluation of CWAM's profitability was performed in the context of
the limited industry data available.
My evaluation of the advisory contract was shaped by my experience as WAT's
Chief Compliance Officer ("CCO"). As CCO, I report solely to the Board and have
no reporting obligation to or employment relationship with CMG or its
affiliates, except for administrative purposes. This too contributes to the
independence of this evaluation. I have made several comments on compliance
matters in evaluating the quality of service provided by CWAM and CMG.
22
Wanger U.S. Smaller Companies 2005 Annual Report
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Finally, this Report, its supporting materials and the data contained in other
materials submitted to the Compliance/Contract Renewal Committee of the Board,
in my view, provide a thorough factual basis upon which the Board, in
consultation with independent counsel as it deems appropriate, may conduct
management fee negotiations that are in the best interests of the WAT Funds'
shareholders.
* * *
VI. Conclusions
My review of the data and other material above leads to the following
conclusions with respect to the factors identified in the Order.
1. Performance. The WAT Funds generally have achieved outstanding performance
and rank very favorably against their peers. The international funds have
good recent performance records, but weaker long-term performance relative
to the domestic WAT Funds. Recent management changes have been followed by
improved performance. The domestic WAT Funds and International Select
typically achieve their performance with less risk than their competitors;
relative risks are greater for International Small Cap.
2. Management Fees relative to Peers. The management fee rankings of the Funds
are generally well below the respective medians and, hence, less favorable
to shareholders than their peer group funds.
3. Administrative Fees. The WAT Funds pay a bundled fee that combines advisory
fees and administrative expense, so ranking these fees separately was not
possible.
4. Management Fees relative to Other Accounts. CWAM's focus is its mutual
funds. It does not actively seek to manage separate or institutional
accounts. The few institutional accounts it does manage vary in rate
structures. Some pay advisory fees commensurate with or higher than the WAT
Funds. In a few instances, however, sub-advised accounts pay lower
management fees than do the WAT Funds.
5. Costs to CWAM and its Affiliates. CWAM's costs do not appear excessive,
and, in my view, it uses appropriate methodologies to allocate overhead
costs. CWAM's affiliates do not appear to profit indirectly from CWAM's
management agreement with the WAT Funds.
6. Profit Margins. CWAM's firm-wide profit margins are at the upper end of the
industry, though these comparisons are hampered by limited industry data.
High profit margins are not unexpected for firms that manage large,
successful funds and have provided outstanding investment performance for
investors. Profit margins for the WAT Funds are lower than the margins for
other accounts managed by CWAM because of payments made to intermediaries
that offer the WAT Funds through variable annuity products. CMAI, the
Funds' administrator, currently experiences losses rather than profits, in
connection with its activities relating to the WAT Funds.
7. Economies of Scale. Economies of scale do exist at CWAM and will expand, if
the assets of the WAT Funds get larger. They are, however, only partially
reflected in the management fee schedule for two of the four WAT Funds. If
the Funds' assets continue to grow, under the Funds' current fee schedules,
shareholders might not benefit in a manner generally commensurate with
CWAM's increased profits
8. Nature and quality of services. This category includes a variety of
considerations that are difficult to quantify, yet can have a significant
bearing on the performance of the WAT Funds. Several areas merit comment.
a. Continuity of Management. It is critical that capable and experienced
portfolio managers remain committed to the Funds and are able to hire
and retain analysts to assist them. CWAM must have in place
appropriate incentive plans that align its management's interests with
those of investors. Further, CWAM must maintain the independence of
its investment process. It should also be supported by effective
information technology.
b. Compliance. CWAM has an effective compliance program and a variety of
related services that are valuable to shareholders, such as, systems
to ensure best execution of portfolio transactions and the daily
review of security prices to ensure accuracy of the WAT Funds' NAV.
c. Administration Services. The WAT Funds benefit from a variety of
administrative services that are performed by CWAM and CMAI, including
preparation of registration statements, calculation of Fund NAV's,
accounting services, shareholder services, and other functions
In my opinion, these conclusions, taken together, generally support the
reasonableness of the proposed management agreement. In reaching this
conclusion, I weighed heavily the outstanding performance of the WAT Funds
relative to their peers. Performance is an investor's first concern. The expense
incurred by shareholders to enjoy this performance is, however, high relative to
competing funds, though expenses for the WAT Funds are (with one exception)
comparable to the parallel Acorn Funds. Nonetheless, a more complete breakpoint
schedule could address this issue as well as share with investors more fully the
benefits of economies of scale.
23
Wanger U.S. Smaller Companies 2005 Annual Report
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VII. Recommendations
The Trustees should consider the following proposals to address the issues
identified in this Report. Some of these recommendations require the collection
and evaluation of more data. This work cannot be accomplished effectively before
the expiration of the existing advisory contract on July 31, 2005. Therefore, I
recommend that the Trustees consider extending the existing contract pending
consideration of these recommendations.
These recommendations do not purport to offer the only avenues to address the
opinions and conclusions I have expressed in this Report. Economies of scale,
for example, can be addressed in a variety of ways in a management contract.
Sound business judgment will guide how any particular area is addressed with due
consideration given to all the factors that must be weighed in reaching a
management agreement that best serves the WAT Fund shareholders.
I believe the Trustees should consider the following:
1. Restructure the management fee schedule beyond the current breakpoints to
reflect more fully economies of scale. The Trustees might consider several
ways to accomplish this objective, including instituting a two-tier fee
structure that incorporates a complex- or CWAM-wide fee (including assets
held in separate accounts) and a fund specific fee, with each containing
breakpoints to reflect their separate economies of scale. Another approach
is to consider uniform breakpoints for all WAT Funds, including breakpoints
above and below current asset levels.
2. Conduct further study to ensure that the costs paid to insurance company
intermediaries are transparent. The Trustees could consider forming an ad
hoc committee to gather and evaluate data regarding CWAM's payments to
intermediaries and the services provided by those intermediaries. Such a
committee might also seek the assistance of a consultant such as Ernst
& Young.
3. Administrative Fees. Administrative and advisory fees could be unbundled to
allow greater transparency and to permit distinct comparisons among peers.
An administrative fee could also be formulated with a breakpoint schedule
that shares the economies of scale available with shareholders.
4. Condition contract renewal on submission of an employment agreements or a
management incentive plan designed to ensure the continued employment of
senior management, under terms that align management's incentives with the
interests of the WAT Funds' shareholders. Any incentive plan should be
designed to permit CWAM to attract and retain the highest caliber
investment professionals and support them with effective and reliable
information technology systems.
5. Review with CWAM its anticipated capacity limitations and the degree to
which increased staffing and effective incentives may address those issues.
Robert P. Scales
Chief Compliance Officer, Senior Vice President and General Counsel
July 25, 2005
24
Wanger U.S. Smaller Companies 2005 Annual Report
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BOARD APPROVAL OF THE EXISTING ADVISORY AGREEMENT
The Compliance/Contract Review Committee (the "Committee") of the board of
trustees meets on a regular basis and holds special meetings as otherwise
necessary or advisable to review the advisory agreement (the "Agreement") of
Wanger Advisors Trust (the "Trust") and each series thereof (the "Funds") and
determines whether to recommend that the full board approve the continuation of
the Agreement for an additional term. The Committee is comprised of three or
more trustees, each of whom is an independent trustee, and the Trust's Chief
Compliance Officer ("CCO"), who is a non-voting member of the Committee. After
the Committee has made its recommendation, the full board, including the
independent trustees, determines whether to approve the continuation of the
Agreement. In addition, the board, including the independent trustees, considers
matters bearing on the Agreement at most of their other meetings throughout the
year and meets at least quarterly with the portfolio managers employed by
Columbia Wanger Asset Management, L.P. ("CWAM"), the Funds' investment adviser.
The trustees receive all materials that they and CWAM believe to be
reasonably necessary for them to evaluate the Agreement and determine whether to
approve the continuation of the Agreement. Those materials generally include,
among other items, (i) information on the investment performance of the Funds
and the performance of peer groups of funds and of the Funds' performance
benchmarks, (ii) information on the Funds' advisory fees and other expenses,
including information comparing the Funds' expenses to those of peer groups of
funds and information about any applicable expense caps and fee "breakpoints,"
(iii) share sales and redemption data, (iv) information about the profitability
to CWAM and its affiliates of their relationships with the Funds and potential
"fall-out" or ancillary benefits that CWAM and its affiliates may receive as a
result of their relationships with the Funds and (v) information obtained
through CWAM's response to a questionnaire prepared at the request of the
trustees by Bell, Boyd & Lloyd LLC, independent counsel to the Trust and to the
independent trustees. The trustees may also consider other information such as
(i) CWAM's financial results and financial condition, (ii) each Fund's
investment objective and strategies and the size, education and experience of
CWAM's investment staff and their use of technology, external research and
trading cost measurement tools, (iii) the allocation of the Funds' brokerage, if
any, including allocations to brokers affiliated with CWAM, and the use of
"soft" commission dollars to pay Fund expenses or to pay for research products
and services, (iv) the resources devoted to, and the record of compliance with,
the Funds' investment policies and restrictions, policies on personal securities
transactions and other compliance policies, (v) the response of CWAM and its
affiliates to various legal and regulatory proceedings since 2003 and (vi) the
economic outlook generally and for the mutual fund industry in particular. In
addition, the trustees conferred with, and reviewed the Management Fee
Evaluation prepared by, the Trust's Senior Officer, who was appointed by the
trustees as contemplated by the Assurance of Discontinuance dated February 9,
2005 among affiliates of CWAM and the Office of the New York Attorney General. A
summary of the Management Fee Evaluation is included in this report. Throughout
the process, the trustees have the opportunity to ask questions of and request
additional materials from CWAM.
On July 25, 2005 the board of trustees most recently approved the
continuation of the Agreement through October 31, 2005, and on September 28,
2005 the board approved an amended and restated Agreement (the "Amended
Agreement") for an initial term ending on July 31, 2006. The board actions
followed Committee meetings held in June, July and September 2005. The board
determined in the first instance to continue the Agreement through October
(rather than for a full year period) pending the resolution of the compensation
and incentive plan for key CWAM employees, whose employment agreements were to
terminate in December, 2005. Those matters were resolved prior to September 28,
2005.
In considering whether to approve the continuation of the Agreement and to
approve the Amended Agreement, the trustees, including the independent trustees,
did not identify any single factor as determinative, and each weighed the
various factors as he or she deemed appropriate. The trustees considered the
following matters in connection with their continuation of the Agreement and,
except as noted in connection with their approval of the Amended Agreement
(collectively with the Agreement, the "Agreements").
Nature, quality and extent of services. The trustees reviewed the nature,
quality and extent of CWAM's services to the Funds, taking into account the
investment objective and strategy of each Fund and the knowledge gained from the
board's regular meetings with management. In addition, the trustees reviewed
CWAM's resources and key personnel, especially those who provide investment
management services to the Funds. The trustees considered the importance of the
continuity of management. At the September 28, 2005 meeting, the trustees
considered the fact that Columbia Management Group, Inc. ("CM") and CWAM had
agreed on a new compensation and incentive plan for key CWAM employees. The
trustees also considered other services provided to the Funds by CWAM, such as
managing the execution of portfolio transactions and the selection of
broker-dealers for those transactions, providing support services for the board
and board committees, communicating with shareholders and overseeing the
activities of other service providers, including monitoring compliance with
various Fund policies and procedures and with applicable securities laws and
regulations.
The trustees concluded that the nature and extent of the services provided by
CWAM to each Fund were appropriate and consistent with the terms of the
Agreements, that the quality of those services had been consistent with or
superior to quality norms in the industry and that the Funds were likely to
benefit from the continued provision of those services. They also concluded that
CWAM had sufficient personnel, with the appropriate education and experience, to
serve the Funds effectively and had demonstrated its continuing ability to
attract and retain well qualified personnel.
Performance of the Funds. The trustees considered the short-term and
longer-term performance of each Fund. They reviewed information comparing each
Fund's performance with the performance of the Fund's benchmark and with the
performance of comparable funds and peer groups identified by Lipper Inc.
("Lipper") and Morningstar Associates, LLC ("Morningstar"). They noted that the
two domestic Funds, Wanger U.S. Smaller Companies and Wanger Select, have each
outperformed their respective benchmarks and Lipper and Morningstar peers. The
trustees considered that Lipper and Morningstar ranked Wanger U.S. Smaller
Companies first in its peer group for the past five years and Wanger Select
first in its peer group for the three and five-year periods. The trustees
discussed the performance of the two international Funds, Wanger International
Small Cap and Wanger International Select, noting that each Fund's performance
had improved over the past two years. They considered that Morningstar ranked
Wanger International Small Cap first in its peer group for the one-year period
and Lipper ranked it first in its peer group for the three-year period. They
also considered that Lipper ranked Wanger International Select first in its peer
group for the one-year period and second in its peer group for the three and
five-year periods. The trustees concluded that although past performance is not
necessarily indicative of future results, the Funds' improving performance
record and investment process enhancements were important factors in the
trustees' evaluation of the quality of services provided by CWAM under the
Agreement.
Costs of Services and Profits Realized by CWAM. The trustees examined
information on fees and expenses of each Fund in comparison to information for
other comparable funds as provided by Lipper and Morningstar. They considered
that both the contractual rates of advisory fees and the actual advisory fees
for most of the Funds were higher than the median advisory fees of the
respective peer groups. The trustees also considered that the expense ratios of
each Fund were also higher than the median expense ratios of the respective peer
groups. At the July 25, 2005 meeting, at the recommendation
25
Wanger U.S. Smaller Companies 2005 Annual Report
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BOARD APPROVAL OF THE EXISTING ADVISORY AGREEMENT
of the Committee, the board approved a new breakpoint for Wanger International
Small Cap's fee schedule, reducing fees by 0.10% on net assets of $500 million
and above, effective August 1, 2005.
The trustees reviewed information on the profitability of CWAM in serving as
each Fund's investment adviser and of CWAM and its affiliates in all of their
relationships with each Fund, as well as an explanation of the methodology
utilized in allocating various expenses among the Funds and other business
units. The trustees considered the methodology used by CWAM in determining
compensation payable to portfolio managers and the very competitive environment
for investment management talent. The trustees recognized that profitability
comparisons among fund managers are difficult because very little comparative
information is publicly available and profitability of any manager is affected
by numerous factors, including the organizational structure of the particular
manager, the types of funds and other accounts it manages, possible other lines
of business, the methodology for allocating expenses and the manager's capital
structure and cost of capital. However, based on the information available and
taking those factors into account, the trustees concluded that the profitability
of CWAM regarding each Fund in relation to the services rendered was not
unreasonable.
The trustees also reviewed CWAM's advisory fees for its institutional
separate accounts. Although in most instances its institutional separate account
fees for various investment strategies were lower than the advisory fees charged
to the Funds with corresponding strategies, the trustees noted that CWAM
performs significant additional services for the Funds that it does not provide
to those other clients, including administrative services, oversight of the
Funds' other service providers, trustee support, regulatory compliance and
numerous other services. Finally, the trustees considered the financial
condition of CWAM, which they found to be sound.
The trustees concluded that the advisory fees (including the additional
breakpoint for Wanger International Small Cap) and other compensation payable by
the Funds to CWAM and its affiliates were reasonable in relation to the nature
and quality of the services to be provided, taking into account the fees charged
by other advisers for managing comparable mutual funds with similar strategies
and the fees CWAM charges to other clients. The trustees noted, however, that
they would continue to evaluate the Funds' investment advisory fee rates. The
trustees also concluded that the Funds' estimated overall expense ratios, taking
into account quality of services provided by CWAM and the investment performance
of the Funds, were also reasonable.
Economies of Scale. The trustees noted that the advisory fee schedule for
each of Wanger U.S. Smaller Companies and Wanger International Small Cap
contains two breakpoints that reduce the fee rate on assets above specified
levels. They also noted that they had agreed to establish a new breakpoint for
Wanger International Small Cap. The trustees concluded that with the additional
breakpoint for Wanger International Small Cap, the fee schedule for each Fund
would represent a sharing of economies of scale at current asset levels. They
agreed, however, to continue their periodic consideration of the Funds' fee
structures and economies of scale.
Other Benefits to CWAM. The trustees also considered benefits that accrue to
CWAM and its affiliates from their relationship with the Funds. The trustees
concluded that, other than the services to be provided by CWAM and its
affiliates pursuant to the Agreement and the fees payable by the Funds therefor,
the Funds and CWAM may potentially benefit from their relationship with each
other in other ways. Recognizing that an affiliate of CWAM serves the Funds as
transfer agent and receives compensation from the Funds for those services, the
trustees determined that such compensation was not unreasonable. They noted that
the Funds' transfer agent reported that it made a small profit on its work for
the Funds. The trustees also considered CWAM's use of commissions to be paid by
the Funds on their portfolio brokerage transactions to obtain proprietary
research products and services benefiting the Funds and/or other clients of
CWAM. The trustees concluded that CWAM's use of "soft" commission dollars to
obtain research products and services was consistent with regulatory
requirements and is beneficial to the Funds. They concluded that, although CWAM
derives or may derive additional benefits through the use of soft dollars from
the Funds' portfolio transactions, the Funds also benefit from the receipt of
research products and services to be acquired through commissions paid on the
portfolio transactions of other clients of CWAM.
New Terms of the Amended Agreement. As previously mentioned, the trustees
negotiated a new breakpoint for Wanger International Small Cap's fee schedule,
reducing fees by 0.10% on net assets of $500 million and above. That new
breakpoint is reflected in the Amended Agreement.
In addition, the Amended Agreement includes representations by CWAM that are
substantially similar to those contained in a letter agreement between the Trust
and CM that expired on October 31, 2005. The Amended Agreement provides that:
(1) CWAM will endeavor to preserve the autonomy of the Trust; (2) CWAM remain a
wholly owned subsidiary of CM (or any successor company) as a Chicago-based
management firm; (3) CWAM will maintain the investment philosophy and research
that the Chicago-based management deems appropriate, research activities
separate and dedicated solely to CWAM and its own domestic and international
trading activities; (4) CWAM will use its best efforts to maintain information
systems that will provide timely and uninterrupted operating information and
data consistent with all regulatory and compliance requirements; (5) CWAM's
Chicago-based management will have the responsibility and considerable latitude
to recruit and compensate (on a competitive basis) investment management
personnel and to control travel budgets for analysts consistent with its
operational and strategic plans while subject to the approval of CM; and (6)
CWAM acknowledges the importance that the Board and its compliance/contract
review committee place on full legal and regulatory compliance by CMG, CWAM, and
all other Trust service providers and their personnel (collectively,
"Providers") and agrees to (i) cooperate fully with the Board, the
compliance/contract review committee and the CCO of the Trust with all inquiries
by the Trust concerning such compliance by the Providers and (ii) communicate
proactively with the Board, the compliance/contract review committee and the CCO
of the Trust concerning material compliance matters and any instance of legal or
regulatory non-compliance by the Providers of which CWAM is aware and that CWAM
deems to be material. Such cooperation and communication by CWAM will be done
after receipt of an inquiry or upon learning of any such legal or regulatory
non-compliance. Lastly, the Amended Agreement provides that the principal
investment management focus and responsibilities of CWAM's portfolio managers
and analysts will be dedicated to the Trust and Columbia Acorn Trust.
After full consideration of the above factors as well as other factors that
were instructive in analyzing the Agreement, the trustees, including all of the
independent trustees, concluded that the continuation of the Agreement was in
the best interest of each Fund. On July 25, 2005, the trustees continued the
Agreement, as revised to include an additional breakpoint for Wanger
International Small Cap, through October 31, 2005, and on September 28, 2005,
the trustees approved the Amended Agreement.
26
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
SPECIAL NOTICE
A special meeting of the shareholders was held on November 30, 2005 for the
purpose of electing nine trustees. A Proxy Statement that described the proposal
had been mailed to shareholders of record as of September 28, 2005. The holders
of the majority of the shares of the Trust entitled to vote at the meeting
elected the following five trustees, by the votes shown below:
NOMINEE FOR AGAINST ABSTAIN/BNV*
------- ---- -------- ------------
Jerome L. Duffy 73,936,669.461 1,967,029.183 0
Fred D. Hasselbring 73,923,911.414 1,979,787.230 0
Kathryn A. Krueger 74,060,051.086 1,843,647.558 0
Ralph Wanger 73,916,921.587 1,986,777.057 0
Patricia H. Werhane 73,960,075.551 1,943,623.093 0
* "BNVs" or "broker non-votes" are shares held by brokers or nominees as to
which (i) the broker or nominee does not have discretionary voting power,
and (ii) the broker or nominee has not received instructions from the
beneficial owner or other person who is entitled to instruct how the shares
will be voted.
27
Wanger U.S. Smaller Companies 2005 Annual Report
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BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST
The Board of Trustees of the Trust has overall management responsibility for the
Trust and the Funds. Each trustee serves a term of unlimited duration, provided
that a majority of trustees always has been elected by shareholders. The
trustees appoint their own successors, provided that at least two-thirds of the
trustees, after such appointment, have been elected by shareholders.
Shareholders may remove a trustee, with or without cause, upon the vote of
two-thirds of the Trust's outstanding shares at any meeting called for that
purpose. A trustee may be removed, with or without cause, upon the vote of a
majority of the trustees.
The names of the trustees and officers of the Trust, the date each was first
elected or appointed to office, their principal business occupations during at
least the last five years, number of portfolios in the fund complex they oversee
and other directorships they hold are shown below. Each trustee serves in such
capacity for each of the four series of the Trust.
The business address of each trustee and officer of the Trust is Columbia
Wanger Asset Management, L.P., 227 West Monroe, Suite 3000, Chicago, Illinois
60606, except for Messrs. Clarke, Connaughton, and Pietropaolo, whose address is
Columbia Management Group, Inc., 245 Summer Street, Boston, Massachusetts,
02210. The Trust's Statement of Additional Information includes additional
information about Wanger's trustees and officers. You may obtain a free copy of
the Statement of Additional Information on our website, www.columbiafunds.com,
or by writing or calling toll-free:
Columbia Wanger Asset Management, L.P.
Shareholder Services Group
227 W. Monroe, Suite 3000
Chicago, IL 60606
888-4-Wanger (888-492-6437)
NUMBER OF
NAME, POSITION(S) WITH YEAR FIRST PORTFOLIOS IN
WANGER ADVISORS TRUST ELECTED OR FUND COMPLEX
AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER
DECEMBER 31, 2005 TO OFFICE PAST FIVE YEARS BY TRUSTEE DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
TRUSTEES WHO ARE NOT INTERESTED PERSONS OF WANGER ADVISORS TRUST:
Jerome L. Duffy, 69, 2003 Retired since December 1997; prior thereto, senior vice 4 None.
Trustee president, Kemper Financial Services and treasurer,
Kemper Funds.
Fred D. Hasselbring, 64, 1994 Retail industry, general project development and business 4 None.
Trustee computer systems consultant; voice over specialist for
industrial and institutional applications; former chairman
of the board of the Trust (September 2004 to November 2004);
former lead independent trustee (August 2003 to
September 2004).
Kathryn A. Krueger, M.D., 48, 2003 Medical Fellow I, Cardiovascular Therapeutic Area, Lilly 4 None.
Trustee Research Laboratories (May 2004 to present); Medical
Advisor, Cardiovascular Therapeutic Area, Lilly Research
Laboratories (January 2003 to April 2004); Medical Director,
Cardiovascular Therapeutic Area, Lilly Research Laboratories
(October 2002 to December 2002); Medical Director, Neptune
Product Team, Lilly Research Laboratories (October 2001 to
October 2002); Acting Director and Senior Clinical Research
Physician, Lilly Research Laboratories (April 2001 to
September 2001); Senior Clinical Research Physician, Lilly
Research Laboratories (January 2000 to March 2001); Clinical
Research Physician, Lilly Research Laboratories (June 1996
to December 1999).
Patricia H. Werhane, 70, 1998 Ruffin Professor of Business Ethics, Darden Graduate School 4 None.
Chair of the Board and Trustee of Business Administration, University of Virginia, since
1993; Senior Fellow of the Olsson Center for Applied
Ethics, Darden Graduate School of Business Administration,
University of Virginia, from 2001 to present; and
Wicklander Chair of Business Ethics and Director of
the Institute for Business and Professional Ethics,
DePaul University (since September 2003).
TRUSTEE WHO IS AN INTERESTED PERSON OF WANGER ADVISORS TRUST:
Ralph Wanger, 71, (1) 1994 Founder, former president, chief investment officer and 10 Columbia
Trustee portfolio manager, Columbia Wanger Asset Acorn
Management, L.P. (CWAM) from July 1992 until Trust.
September 2003; Former president, Columbia Acorn
Trust from April 1992 through September 2003;
Former president, Wanger Advisors Trust (1994 through
September 2003); principal, Wanger Asset Management,
L.P. (WAM) from July 1992 until September 2000;
president, WAM Ltd. from July 1992 to September 2000;
director, Wanger Investment Company plc.
28
Wanger U.S. Smaller Companies 2005 Annual Report
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST
NUMBER OF
PORTFOLIOS IN
NAME, POSITION(S) WITH YEAR FIRST FUND COMPLEX
WANGER ADVISORS TRUST ELECTED OR FOR WHICH
AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OFFICER ACTS IN OTHER
DECEMBER 31, 2005 TO OFFICE PAST FIVE YEARS SAME CAPACITY DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF WANGER ADVISORS TRUST:
Ben Andrews, 39, 2004 Analyst and portfolio manager, CWAM since 1998; 10 None.
Vice President vice president, Columbia Acorn Trust.
J. Kevin Connaughton, 41, 2001 Treasurer and CFO of the Columbia Funds and of the 10 Nations
Assistant Treasurer Liberty All-Star Funds since December 2000 Offshore Offshore
(formerly chief accounting officer and controller of Funds
the Columbia Funds and of the Liberty All-Star Funds
from February 1998 to October 2000); treasurer of the Bank of
Galaxy Funds from September 2002 through November 2005; America
treasurer, Columbia Management Multi-Strategy Hedge Fund, Global
LLC from December 2002 through December 2004. Liquidity
Funds, PLC
Banc of
America
Capital
Management
(Ireland),
Limited
Michael G. Clarke, 35, 2004 Chief accounting officer of the Columbia Funds, Liberty 10 None.
Assistant Treasurer Funds, Stein Roe Funds and All-Star Funds since October
2004; Controller of the Columbia Funds, Liberty Funds,
Stein Roe Funds and All-Star Funds from May 2004 to
October 2004; Assistant Treasurer from June 2002 to May
2004; Vice President, Product Strategy & Development
of the Liberty Funds and Stein Roe Funds from February
2001 to June 2002; Assistant Treasurer of the Liberty
Funds, Stein Roe Funds and the All-Star Funds from August
1999 to February 2001.
Bruce H. Lauer, 48, 1995 Chief operating officer, CWAM since April 1995; principal, 10 Banc of
Vice President, Secretary WAM from January 2000 to September 2000; vice president, America
and Treasurer treasurer and secretary, Columbia Acorn Trust; director, Capital
Wanger Investment Company plc and New Americas Small Cap Fund. Management
(Ireland),
Limited
Charles P. McQuaid, 52, 1994 President, CWAM since October 2003; Chief Investment Officer 10 Columbia
President of CWAM since September 2003; senior vice president of the Acorn
Trust from 1994 through September 2003; Portfolio Trust.
manager since 1995 and director of research,
CWAM from July 1992 through December 2003; Interim
director of international research, CWAM from December
2003 until December 2004; principal, WAM from July
1995 to September 2000; Trustee since 1992 and
president since 2003, Columbia Acorn Trust.
Robert A. Mohn, 44, 1997 Analyst and portfolio manager, CWAM since August 1992; 10 None.
Vice President director of domestic research, CWAM since March 2004;
principal, WAM from 1995 to September 2000; vice president,
Columbia Acorn Trust.
Christopher Olson, 41, 2001 Analyst and portfolio manager, CWAM since January 2001; vice 10 None.
Vice President president, Columbia Acorn Trust; prior thereto, director
and portfolio strategy analyst with UBS Asset Management/
Brinson Partners.
Vincent P. Pietropaolo, 40, 2001 Assistant General Counsel, Bank of America (and its 10 None.
Assistant Secretary predecessors), since December 1999.
Robert Scales, 53, 2004 Associate General Counsel, Grant Thornton LLP (2002-2004); 10 None.
Chief Compliance Officer, Senior prior thereto Associate General Counsel, UBS PaineWebber
Vice President and General Counsel (broker-dealer)
Zach Egan, 37, 2004 Director of International Research since December 2004;
Director of International Research Co-manager of Columbia Acorn International Fund since
May 2003; International Analyst, CWAM, 1999-2003.
- -------------------------
(1) Trustee who is an "interested person" of the Trust and of CWAM, as defined
in the Investment Company Act of 1940, because he is a former officer of
the Trust and former employee of CWAM.
29
Wanger U.S. Smaller Companies 2005 Annual Report
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WANGER ADVISORS TRUST
TRANSFER AGENT,
DIVIDEND DISBURSING AGENT
Columbia Management Services, Inc.
P.O. Box 8081
Boston, Massachusetts
02266-8081
DISTRIBUTOR
Columbia Management Distributors, Inc.
One Financial Center
Boston, Massachusetts
02111-2621
INVESTMENT ADVISER
Columbia Wanger Asset
Management, L.P.
227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
1-888-4-WANGER
(1-888-492-6437)
LEGAL COUNSEL
Bell, Boyd & Lloyd LLC
Chicago, Illinois
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
PricewaterhouseCoopers LLP
Chicago, Illinois
This report, including the schedules of investments and financial statements, is
submitted for the general information of the shareholders of the Wanger Advisors
Trust. This report is not authorized for distribution unless preceded or
accompanied by a prospectus.
A description of the fund's proxy voting policies and procedures is available
(i) on the fund's website, www.columbiafunds.com; (ii) on the Securities and
Exchange Commission's website at www.sec.gov, and (iii) without charge, upon
request, by calling 888-492-6437. Information regarding how the fund voted
proxies relating to portfolio securities during the 12-month period ended June
30 is available from the SEC's website.
The fund files a complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is
available on the SEC's website at www.sec.gov and may be reviewed and copied at
the SEC's Public Reference Room in Washington, D.C. Information on the operation
of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
32
WANGER ADVISORS TRUST
SHC-42/105205-1205 0206 06/9824
2 WANGER INTERNATIONAL SMALL CAP
2005 Annual Report
[graphic: squirrel]
Wanger Advisors Funds
managed by Columbia Wanger Asset Management, L.P.
[graphic: squirrel]
WANGER INTERNATIONAL SMALL CAP
2005 ANNUAL REPORT
Table of Contents
1 Understanding Your Expenses
2 No Ordinary Portfolio Managers
4 Performance Review
6 Statement of Investments
13 Statement of Assets and Liabilities
13 Statement of Operations
14 Statements of Changes in Net Assets
15 Financial Highlights
16 Notes to Financial Statements
19 Report of Independent Registered Public Accounting Firm
20 Management Fee Evaluation of the Senior Officer
24 Board Approval of the Existing Advisory Agreement
26 Special Notice
27 Board of Trustees and Management of Wanger Advisors Trust
COLUMBIA WANGER ASSET MANAGEMENT, L.P. ("COLUMBIA WAM") IS ONE OF THE LEADING
GLOBAL SMALL-CAP EQUITY MANAGERS IN THE UNITED STATES WITH MORE THAN 30 YEARS OF
SMALL-CAP INVESTMENT EXPERIENCE. COLUMBIA WAM MANAGES MORE THAN $27 BILLION IN
EQUITIES AND IS THE INVESTMENT ADVISER TO WANGER U.S. SMALLER COMPANIES, WANGER
INTERNATIONAL SMALL CAP, WANGER SELECT, WANGER INTERNATIONAL SELECT AND THE
COLUMBIA ACORN FAMILY OF FUNDS.
FOR MORE COMPLETE INFORMATION ABOUT OUR FUNDS, INCLUDING THE COLUMBIA ACORN
FUNDS, OUR FEES, RISKS ASSOCIATED WITH INVESTING, OR EXPENSES, CALL
1-888-4-WANGER FOR A PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND
MONEY. THIS REPORT IS NOT AN OFFER OF THE SHARES OF THE COLUMBIA ACORN FUND
FAMILY.
THE DISCUSSION IN THE REPORT OF PORTFOLIO COMPANIES IS FOR ILLUSTRATION ONLY
AND IS NOT A RECOMMENDATION OF INDIVIDUAL STOCKS. THE INFORMATION IS BELIEVED TO
BE ACCURATE, BUT THE INFORMATION AND THE VIEWS OF THE PORTFOLIO MANAGERS MAY
CHANGE AT ANY TIME WITHOUT NOTICE AND THE PORTFOLIO MANAGERS MAY ALTER A FUND'S
PORTFOLIO HOLDINGS BASED ON THESE VIEWS AND THE FUND'S CIRCUMSTANCES AT THAT
TIME.
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
UNDERSTANDING YOUR EXPENSES
As a fund shareholder, you incur two types of costs. There are transaction
costs, which generally include sales charges on purchases and may include
redemption or exchange fees. There are also ongoing costs, which generally
include investment advisory and other fund expenses. The information on this
page is intended to help you understand your ongoing costs of investing in the
fund and to compare these costs with the ongoing costs of investing in other
mutual funds.
ANALYZING YOUR FUND'S EXPENSES
To illustrate these ongoing costs, we have provided an example and calculated
the expenses paid by investors in the fund during the reporting period. The
information in the following table is based on an initial investment of
$1,000.00, which is invested at the beginning of the reporting period and held
for the entire period. Expense information is calculated two ways and each
method provides you with different information. The amount listed in the
"actual" column is calculated using actual operating expenses and total return
for the fund. The amount listed in the "hypothetical" column assumes that the
return each year is 5% before expenses and then applies each Fund's actual
expense ratio for the period to the hypothetical return. You should not use the
hypothetical account values and expenses to estimate either your actual account
balance at the end of the period or the expenses you paid during the reporting
period. See the "Compare with other funds" information for details on using the
hypothetical data.
ESTIMATING YOUR ACTUAL EXPENSES
To estimate the expenses that you paid over the period, first you will need your
account balance at the end of the period.
1. Divide your ending account balance by $1,000.00. For example, if an
account balance was $8,600.00 at the end of the period, the result
would be 8.6.
2. In the section of the table below titled "Expenses paid during the
period," locate the amount for your fund. You will find this number is
in the column labeled "actual." Multiply this number by the result
from step 1. Your answer is an estimate of the expenses you paid on
your account during the period.
July 1, 2005 - December 31, 2005
- ------------------------------------------------------------------------------------------------------------------------------------
Account value at the Account value at the Expenses paid during Fund's annualized
beginning of the period ($) end of the period ($) the period ($) expense ratio (%)*
- ------------------------------------------------------------------------------------------------------------------------------------
Actual Hypothetical Actual Hypothetical Actual Hypothetical
- ------------------------------------------------------------------------------------------------------------------------------------
Wanger International
Small Cap 1,000.00 1,000.00 1,170.39 1,019.41 6.29 5.85 1.15
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses paid during the period are equal to the fund's annualized expense
ratio, multiplied by the average account value over the period, then multiplied
by the number of days in the fund's most recent fiscal half-year and divided by
365.
Had the investment adviser not waived a portion of expenses, total return would
have been reduced.
It is important to note that the expense amounts shown in the table are meant to
highlight only ongoing costs of investing in the fund. As a shareholder of the
fund, you do not incur any transaction costs, such as sales charges, redemption
or exchange fees. Expenses paid during the period do not include any insurance
charges imposed by your insurance company's separate account. The hypothetical
example provided is useful in comparing ongoing costs only and will not help you
determine the relative total costs of owning different funds whose shareholders
may incur transaction costs.
*For the six months ended 12/31/05.
COMPARE WITH OTHER FUNDS
Since all mutual funds are required to include the same hypothetical
calculations about expenses in shareholder reports, you can use this information
to compare the ongoing cost of investing in the fund with other funds. To do so,
compare the 5% hypothetical example with the 5% hypothetical examples of other
funds. As you compare hypothetical examples of other funds, it is important to
note that hypothetical examples are meant to highlight the continuing cost of
investing in a fund and do not reflect any transactional costs, such as sales
charges or redemption or exchange fees, that may be incurred by shareholders of
other funds. Expenses paid during the period do not include any insurance
charges imposed by your insurance company's separate accounts.
1
Wanger International Small Cap 2005 Annual Report
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[graphic: squirrel]
NO ORDINARY PORTFOLIO MANAGERS
I began working with Ralph Wanger, founder of Columbia Wanger Asset Management,
in 1978. Shortly thereafter he issued the third quarter shareholder report for
one of our retail funds. In it he wrote: "...hedonism is in... Let us explore
the possibility that we have been going through the oldest cycle of all--from
Good to Bad." In order to prove that badness was more profitable than goodness,
Ralph tested two portfolios for 36-month price changes. The virtuous portfolio
included Angelica, up 45%, and Church's Fried Chicken, up 520%. The wicked
portfolio included Playboy, up 600%, and DeBeers Mines, up 59%.1 The wicked
portfolio won. Ralph's footnote to his essay read: "This study was done by the
usual techniques of Financial Analysis: (A) The stocks chosen had nothing to do
with the subject, and (B) The portfolios were readjusted until the answer
affirmed the hypothesis." At that point it became very clear to me that Ralph
Wanger was no ordinary portfolio manager!
Ralph parlayed his legendary shareholder reports into his book, A Zebra in Lion
Country.2 The book could have been titled, The Wit and Wisdom of Ralph Wanger.
In it Ralph admits that his first quarterly newsletters were serious and stuffy.
He said that he gave market and economic forecasts that quickly became outdated.
Then he decided, "If most mutual fund communications are both boring and wrong,
well then, I figured, I'd rather be lively and wrong."
There's a lot of Wisdom in A Zebra in Lion Country. Examples include: "Look for
stocks that have basic value but are out of fashion." Ralph also wrote, "The
greatest investment profit comes when an ugly duckling becomes a swan." And, "If
a company's earnings beat the Merrill Lynch analyst's forecast by 2 cents, that
doesn't excite me. I need a long-term reason to own a stock."
And Ralph meant long term. "...you can't make five or ten or twenty times your
money if you don't hold on to your stocks. Most people are delighted when a
stock doubles, and quickly sell to lock in their gain," he wrote in his book.
Ralph's long-term thinking was driven home in a report essay he wrote in June
1992: "What really makes for successful investing is having a few enormous hits.
In 22 years, I've really had three Super Stocks." Houston Oil & Minerals was
one. Houston Oil cost $220,000 in 1973 and went to $5.3 million in 1977. Another
was Cray Research, which cost $1.5 million in 1978 and was worth $20 million in
1985. International Game Technology, a maker of slot machines, cost $5 million
in 1988 and was worth $80 million by June 1992.3
Ralph also had his share of disasters. He wrote in that 1992 report, "There is
one stock we tried to sell for two years and never got a bid on any of it. A
stock like that just slides from 4 to 3 to 2 to 1 and finally disappears..."
Ralph said, "It's kind of like a doctor saying don't worry about it, it's just
going to shrivel up and fall off." Atchison Casting, an owner of steel
foundries, was a painful example of this. Ralph began purchasing the stock in
1994 and it ended up being nearly worthless when it was sold in 2003.
The wisdom here is that small-cap investing can be a winner's game. Let your
winners run. On any individual stock, one can possibly make several thousand
percent, but the most that one can lose is 100%. Small-cap investors will have
some big percentage losers, but damage to portfolios can be minor as long as
investors don't keep throwing money at them and if they maintain a
well-diversified portfolio.
How did Ralph use his genius and wisdom to build a successful firm? A few years
after I joined Ralph we had a heated discussion about a stock. The next day I
asked him if I had crossed the line during our debate. He looked at me kind of
puzzled and said, course not, if we always agreed, why would I need you?" Ralph
always respected differing opinions and created a culture of intellectual
freedom.
In an investment world full of wishful thinking, Ralph also demanded
intellectual honesty. The ability to ask tough questions, get sound answers,
discover good businesses, detect strong managers and then value stocks
appropriately, requires intellectual honesty. Then it's time to act. I remember
an analyst saying that a stock trades by appointment and Ralph responding, "Then
make an appointment and buy it!" The culture that Ralph fostered allowed
Columbia Wanger Asset Management to grow and helped its shareholders to prosper.
Leah Zell's contribution to Columbia Wanger Asset Management has also been huge
and complementary to Ralph's. Leah seemed to have the ability to see around
corners strategically and make quick, good decisions. When Leah joined our team
in 1984, she began as a domestic analyst following mostly real estate and retail
stocks. Leah then became our first foreign analyst. She successfully launched
our first international retail mutual fund, Acorn International, realizing great
investment results, and taking the Fund from zero to one billion dollars in
assets under management in 14 months. Of course, she could not have done it
without a team. Leah built the international area at Columbia Wanger Asset
Management. International investing requires all the skills needed for domestic
investing, and more. At Columbia Wanger, we like to hire international analysts
who also have language skills and cultural
2
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
knowledge. In a number of cases, Leah successfully mentored new analysts who had
these traits and fine financial skills but had a lot to learn about security
analysis.
We at Columbia Wanger Asset Management are happy that Ralph and Leah kept their
offices with us and have been advisors over the last two years. We've gotten
good advice, but Ralph and Leah made it clear that the decisions were ours. In
our semiannual report we published Ralph's last column, which appeared in this
section. Ralph once said of writing his essays, "It is fun for me and only
mildly irritating to our shareholders." We are grateful to have had Ralph's and
Leah's presence and wisdom for all these years. On September 30, 2005, they
retired from their advisory roles with the firm.
DOMESTIC SMALL-CAP CYCLE
Small caps have outperformed large caps for over six years now; by our
reckoning, small caps bottomed vs. large caps in March 1999. The small-cap
Russell 2500 Index returned 110% from that date through December 31, 2005, far
outpacing the S&P 500, which returned 8%.
In the past, small-cap stocks had long cycles of out- and under-performance vs.
large caps. There is no science and there is no magic in predicting the exact
top of a small-cap cycle. Perhaps small caps will continue to outperform--some
believe small caps will outperform as long as rapid earnings growth continues
and some others believe outperformance will persist until the overall market
turns. Numerous economists are predicting higher inflation rates, and small caps
did relatively well during the inflationary periods of the 1970s.
However, when looking at price-to-earnings ratios, small caps appear expensive
vs. large caps. Using another measure, price-to-book value, small caps appear
somewhat more reasonably priced. While we don't think domestic small caps are
back to their all-time relative high valuations, we do think small-cap domestic
stocks on average are no longer cheap.
We do not predict market cycles. We stick to what we believe we do best: buying
reasonably priced small- and mid-cap stocks and when they enter periods of
higher valuations, we try to become more selective. Over time this consistently
applied approach has weathered the Funds through a variety of market cycles.
While we certainly can't predict what the future holds, the best defense against
unknown market factors is diversification across assets, which is a prudent and
time-tested investment strategy.
COLUMBIA WAM NEWS
We are pleased to announce that Satoshi Matsunaga has joined our international
analyst team covering Japan. He came on board in September. Before joining
Columbia Wanger Asset Management, he was with Compass Advisers in New York.
Satoshi holds an MBA from the University of Michigan and a bachelor's in
economics from Keio University in Tokyo, Japan. As a Japanese national, Satoshi
brings first-hand knowledge of the country and culture.
After the close of the period, we hired a new energy analyst. In January,
William Doyle came on board. Bill was most recently a manager of PPM America's
credit analysis team where part of his responsibilities included following the
high yield energy sector. Bill's degrees include an MBA from Loyola University
in Chicago and bachelor's degrees in finance and history from Illinois State
University.
We are pleased to welcome Satoshi and Bill to the team.
photo of: Charles P. Mcquaid
/s/ Charles P. Mcquaid
CHARLES P. MCQUAID
President and Chief Investment Officer
Columbia Wanger Asset Management, L.P.
1 The 36-month period tested ran from September 30, 1975 to September 30,
1978. The stocks mentioned were not held at that time nor are they held by
any Wanger Advisors Fund now.
2 Wanger, Ralph, "A Zebra in Lion Country," Simon & Schuster, New York, 1997.
3 Companies Houston Oil & Minerals and the original Cray Research have
disappeared through acquisitions. International Game Technology (IGT) is
not held by any Wanger Advisors Fund portfolio.
The views expressed here are those of the respective parties. These views are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions that are difficult to predict so actual outcomes and results may
differ significantly from the views expressed. These views are subject to change
at any time based upon economic, market or other conditions and the respective
parties disclaim any responsibility to update such views. These views may not be
relied on as investment advice and, because investment decisions for a Wanger
Advisor Fund are based on numerous factors, may not be relied on as an
indication of trading intent on behalf of any particular Fund. References to
specific company securities should not be construed as a recommendation or
investment advice.
Past performance is no guarantee of future results.
Mid- and small-cap stocks are often more volatile and less liquid than the
stocks of larger companies. Small companies may have a shorter history of
operations than larger companies and may have a less diversified product line,
making them more susceptible to market pressure. Investments in foreign
securities have special risks, including political or economic instability,
higher costs, different regulations, accounting standards, trading practices and
levels of information, and currency exchange rate fluctuations.
3
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
[graphic: squirrel]
PERFORMANCE REVIEW WANGER INTERNATIONAL SMALL CAP
Photo of: Louis J. Mendes III
Photo of: Christopher J. Olson
LOUIS J. MENDES III
Co-Portfolio Manager
CHRISTOPHER J. OLSON
Co-Portfolio Manager
Performance data quoted represents past performance and current performance may
be lower or higher. Past performance is no guarantee of future results. The
investment return and principal value will fluctuate so that shares, when
redeemed, may be worth more or less than the original cost. For monthly
performance updates call 1-888-4-WANGER.
Wanger International Small Cap ended 2005 up 21.53%, trailing the 21.99% gain of
the S&P/Citigroup EMI Global ex-US Index by a narrow margin. Fund
underperformance was largely due to an underweight in a rallying Japanese
market. When we find ideas that meet our return requirements and other
investment criteria, we intend to continue adding to the Fund's weighting in
Japanese holdings. We believe Japanese market fundamentals are improving and
valuations are generally reasonable.
Wanger International Small Cap benefited from a number of winners in the energy
sector. Perusahaan Gas Negara, an Indonesian pipeline operator, posted a 232%
return in the year thanks to the Indonesian government's decision to deregulate
natural gas prices earlier than expected. France's Vallourec, a seamless tube
manufacturer supplying energy producers, was up nearly 285% on strong volumes
and favorable pricing. UK oil and gas producer Tullow Oil gained 71% due to
increased demand and rising energy prices.
Winners outside of the energy sector included Japanese parking lot operator Park
24, up 102% in the year. While Japan was among the best performing markets in
2005, Park 24 was also a beneficiary of favorable regulatory changes affecting
its core parking-lot business. Sweden's Hexagon, a manufacturer of measurement
equipment and polymers, had a 91% gain in the year. In 2005 Hexagon launched its
new metrology operating system, strongly boosting margin and profits while
demonstrating a successful shift from equipment to software supplier. Also,
Hexagon acquired leading metrology peer Leica which should provide above average
profit growth over the
next two years.
Laggards for the year included Business Post Group, a UK parcel and express mail
service company that fell 53% on declining volumes and rising costs. Hong Kong's
Global Bio-Chem Technology Group, a refiner of corn-based commodities, dropped
32% on price weakness in some key commodities. Ulster Television, a television
and radio station operator in Ireland, fell 22% as investors were concerned
about a large acquisition the company made in the United Kingdom.
Small-cap international stocks have had a very good run over the last few years.
Share price appreciation has been driven by a combination of improving company
earnings and higher valuations assigned by the market to those earnings. As a
consequence, this group of stocks does not appear to be cheap. We nonetheless
continue to find what we believe to be good companies around the world with
attractive fundamentals not yet fully reflected in their share prices.
On December 7, 2005, Louis Mendes was named co-manager of this Fund.
Investments in foreign securities have special risks, including political or
economic instability, higher costs, different regulations, accounting standards,
trading practices and levels of information, and currency exchange rate
fluctuations. Small-cap stocks are often more volatile and less liquid than the
stocks of larger companies. Small companies may have a shorter history of
operations than larger companies and may have a less diversified product line,
making them more susceptible to market pressure.
As of 12/31/05, the Fund's positions in the stocks mentioned were: Perusahaan
Gas Negara, 0.6%; Vallourec, 1.5%; Tullow Oil, 0.8%; Park 24, 0.9%; Hexagon,
1.4%; Leica, 0.0%; Business Post Group, 0.0%; Global Bio-Chem Technology Group,
0.5%; Ulster Television, 0.6%.
4
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT IN WANGER INTERNATIONAL SMALL CAP
TOTAL RETURN FOR EACH PERIOD, MAY 3, 1995 (INCEPTION DATE) THROUGH
DECEMBER 31, 2005
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------
1 year 5 years 10 years Life of fund
21.53% 9.84% 14.73% 16.96%
WANGER INTERNATIONAL SMALL CAP: $53,152
S&P/Citigroup EMI Global ex-US: $23,023
WANGER INTERNATIONAL S&P/Citigroup
SMALL CAP EMI Global ex-US
Line Chart:
5/3/95 10000 10000
5/31/95 10790 9821.32
6/30/95 10970 9709.85
7/31/95 11910 10255.3
8/31/95 12290 10003.5
9/30/95 12910 10074.1
10/31/95 12700 9783.5
11/30/95 12660 9865.11
12/31/95 13450 10246.3
1/31/96 14260 10479.2
2/29/96 15170 10608.6
3/31/96 15499.1 10829.5
4/30/96 16251 11389.9
5/31/96 16782.4 11301.3
6/30/96 17183.4 11304.3
7/31/96 16722.2 10859.4
8/31/96 17023 10968.9
9/30/96 17023 11028.6
10/31/96 17183.4 10958.9
11/30/96 17704.7 11136.1
12/31/96 17754.8 10951
1/31/97 18246.1 10791.7
2/28/97 18687.2 11010.7
3/31/97 18357.5 10874.3
4/30/97 18203.6 10729
5/31/97 18983.4 11359
6/30/97 19568.3 11650.6
7/31/97 19558.1 11538.2
8/31/97 18460.1 11031.6
9/30/97 19363.1 11209.7
10/31/97 18388.3 10662.3
11/30/97 17967.5 10165.7
12/31/97 17495.5 9952.7
1/31/98 18142 10265.2
2/28/98 19588.8 11041.5
3/31/98 21306.5 11575
4/30/98 21866.7 11668.5
5/31/98 21887.4 11768.1
6/30/98 21410.2 11353
7/31/98 21099 11281.4
8/31/98 17904.1 9798.43
9/30/98 17437.3 9581.46
10/31/98 18101.2 10241.3
11/30/98 19605.3 10594.6
12/31/98 20352.2 10819.6
1/31/99 20694.5 10743.9
2/28/99 20570 10542.9
3/31/99 21564.1 10998.7
4/30/99 23399.8 11670.5
5/31/99 23726.9 11382.9
6/30/99 25404.3 11825.8
7/31/99 27556.5 12208
8/31/99 28928 12422
9/30/99 29265.6 12366.2
10/31/99 30088.5 12252.8
11/30/99 36175.8 12693.7
12/31/99 46071.7 13557.6
1/31/00 46799.6 13299.8
2/29/00 56294.6 13811.4
3/31/00 54788.8 13872.1
4/30/00 46480.7 12961.4
5/31/00 42600.5 12690.7
6/30/00 44628 13461
7/31/00 43055 13015.1
8/31/00 45583.5 13388.4
9/30/00 41179 12700.6
10/31/00 36797.7 11932.3
11/30/00 33453.5 11406.8
12/31/00 33243.8 11851.7
1/31/01 34910.1 12072.6
2/28/01 32556.3 11603.8
3/31/01 29861.7 10705.1
4/30/01 30388.6 11405.8
5/31/01 31170.4 11382.9
6/30/01 29742.8 10996.7
7/31/01 28026.2 10674.3
8/31/01 27907.2 10645.4
9/30/01 23692.2 9258.99
10/31/01 24780 9635.21
11/30/01 25748.7 10031.3
12/31/01 26173.6 10113.9
1/31/02 25714.7 9930.8
2/28/02 25357.8 10097
3/31/02 27006.4 10754.9
4/30/02 28179.2 10978.8
5/31/02 28485.1 11330.1
6/30/02 27635.3 10880.3
7/31/02 24729 9957.67
8/31/02 23743.2 9897.96
9/30/02 21142.9 8984.3
10/31/02 21414.8 9187.33
11/30/02 22332.6 9530.7
12/31/02 22553.5 9417.24
1/31/03 22298.6 9258.99
2/28/03 21533.8 9093.78
3/31/03 21069.1 9005.2
4/30/03 22979.9 9854.16
5/31/03 24941.8 10694.2
6/30/03 25777.7 11093.3
7/31/03 26613.6 11488.4
8/31/03 27893.1 12037.8
9/30/03 29087.3 12588.2
10/31/03 31356.3 13503.8
11/30/03 32089.9 13749.6
12/31/03 33574.1 14598.6
1/31/04 35228.9 15123.1
2/29/04 36662 15644.6
3/31/04 36608 16027.8
4/30/04 35800.6 15489.4
5/31/04 35714.7 15491.4
6/30/04 37003.1 15989
7/31/04 36075.4 15424.7
8/31/04 36041.1 15590.9
9/30/04 37518.4 16172.1
10/31/04 38755.3 16667.8
11/30/04 41727.2 17979.5
12/31/04 43737.1 18872.3
1/31/05 44647.6 19050.5
2/28/05 47138.5 19978
3/31/05 45916 19476.4
4/30/05 44458.3 18864.3
5/31/05 44336.9 18997.7
6/30/05 45412.8 19398.8
7/31/05 47928.9 20171.1
8/31/05 49074.2 20720.5
9/30/05 50636 21583.4
10/31/05 48536.3 20800.1
11/30/05 49959.2 21658.1
12/31/05 53152.2 23022.6
This graph compares the results of $10,000 invested in Wanger International
Small Cap on May 3, 1995 (the date the Fund began operations) through December
31, 2005, to the S&P/Citigroup EMI Global ex-US Index, with dividends and
capital gains reinvested. DUE TO ONGOING MARKET VOLATILITY, PERFORMANCE IS
SUBJECT TO SUBSTANTIAL SHORT-TERM FLUCTUATIONS. Wanger International Small Cap
is a diversified fund that invests primarily in the stocks of non-U.S. companies
with capitalizations of less than $5 billion at the time of initial purchase.
Smaller company stocks are often more volatile or less liquid than the stocks of
larger companies. Investments in foreign securities have special risks,
including political or economic instability, higher costs, different
regulations, accounting standards, trading practices and levels of information
and currency exchange rate fluctuations.
PERFORMANCE SHOWN HERE IS PAST PERFORMANCE, WHICH CANNOT GUARANTEE FUTURE
RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT IN THE FUND WILL FLUCTUATE SO THAT FUND SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE
CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT
SHOWN. FOR MONTHLY PERFORMANCE UPDATES, PLEASE CONTACT US AT 1-888-4-WANGER.
- --------------------------------------------------------------------------------
RESULTS TO DECEMBER 31, 2005
4th quarter 1 year
WANGER INTERNATIONAL
SMALL CAP 4.97% 21.53%
S&P/Citigroup EMI Global ex-US 6.67 21.99
MSCI EAFE 4.08 13.54
Lipper International Small Cap
Funds Index 6.23 23.77
NAV AS OF 12/31/05: $30.63
PERFORMANCE NUMBERS REFLECT ALL FUND EXPENSES BUT DO NOT INCLUDE ANY INSURANCE
CHARGE IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. IF PERFORMANCE
INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, IT WOULD BE LOWER.
The S&P/Citigroup EMI Global ex-U.S. is an index of the bottom 20% of
institutionally investable capital of developed and emerging countries, selected
by the index sponsor, outside the United States. MSCI EAFE is Morgan Stanley's
Europe, Australasia and Far East Index, an index of companies throughout the
world in proportion to world stock market capitalization, excluding the U.S. and
Canada. Lipper Indexes include the largest funds tracked by Lipper, Inc. in the
named category. The Lipper International Small Cap Funds Index is made up of the
10 largest non-U.S. funds investing in small-cap companies. All indexes are
unmanaged and returns include reinvested dividends. It is not possible to invest
directly in an index.
- --------------------------------------------------------------------------------
TOP 5 COUNTRIES
As a % of net assets, as of 12/31/05
United Kingdom 15.5%
Japan 12.7
France 8.5
Germany 7.9
Netherlands 7.7
- --------------------------------------------------------------------------------
TOP 10 HOLDINGS
As a % of net assets, as of 12/31/05
1. Vallourec 1.5%
Seamless Tubes - France
2. Jupiter Telecommunications 1.4%
Largest Cable Service Provider in Japan--Japan
3. Hexagon 1.4%
Measurement Equipment & Polymers - Sweden
4. Major Drilling Group 1.3%
Mining Exploration Driller - Canada
5. Paragon Group 1.3%
Buy-to-Let Finance Company - United Kingdom
6. Fugro 1.2%
Survey & GPS Services - Netherlands
7. Anglo Irish Bank 1.2%
Small Business & Middle Market Banking -- Ireland
8. Smit International 1.2%
Harbor & Offshore Towage & Marine Services - Netherlands
9. Rational 1.2%
Commercial Oven Manufacturer--Germany
10. April Group 1.1%
Insurance Policy Construction - France
5
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
COMMON STOCKS AND OTHER
EQUITY-LIKE SECURITIES- 98.1%
EUROPE - 62.3%
- -----------------------------------------------------------------
UNITED KINGDOM/IRELAND - 20.7%
796,000 Anglo Irish Bank (Ireland) $12,081,367
Small Business & Middle Market Banking
1,114,000 Paragon Group 12,438,983
UK Buy-to-Let Finance Company
2,150,000 Metal Bulletin 10,079,986
Publisher - Metals & Finance Journals
700,000 IAWS (Ireland) 10,069,069
Manufacturer of Baked Goods
2,300,000 United Drug (Ireland) 9,938,840
Irish Pharmaceutical Wholesaler & Outsourcer
600,000 Northern Rock 9,734,595
Lowest Cost Mortgage Bank in UK
600,000 Kensington 9,548,781
Non-Conforming Mortgage Company
1,665,000 Charles Taylor Group 9,059,406
Insurance Services
1,874,000 Debt Free Direct (b) 8,318,485
Consumer Debt Reduction & Management Solutions
335,000 Intermediate Capital 8,028,805
European Provider of Mezzanine Capital
811,700 Expro International 7,960,225
Offshore Oil Field Services
1,700,000 Tullow Oil 7,897,100
Oil & Gas Producer
1,429,100 Workspace Group 7,622,181
Real Estate Company
650,000 Grafton Group (Ireland) 7,079,721
Building Materials Wholesaling & DIY Retailing
1,150,000 Bloomsbury Publishing 6,657,909
Book Publisher
850,500 International Greetings 6,240,916
Private Label Greeting & Wrapping Products
830,000 Ulster Television 6,069,068
Irish Television & Radio Station Operator
350,000 Northgate 5,862,178
Light Commercial Vehicle Rental Specialist
845,000 Vitec Group 5,451,838
Supports for Lighting & Cameras
500,000 Spectris 5,449,687
Electronic Instrumentation & Controls
1,400,000 Taylor Nelson 5,413,557
Market Research
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
2,000,000 RPS Group $5,367,964
Environmental Consulting & Planning
330,000 Paddy Power (Ireland) 4,727,312
Irish Betting Services
500,000 Care UK 4,318,458
Nursing Homes & Health Care Services
1,800,000 Begbies Traynor 3,654,344
Financial Restructuring & Corporate Recovery Services
225,000 Viridian 3,462,724
Northern Ireland Electric Utility
263,000 Kingspan Group (Ireland) 3,316,044
Building Insulation & Environmental Containers
149,300 Kerry (Ireland) 3,307,110
Consumer Foods & Food Ingredients
200,000 Cambridge Antibody 2,403,540
Leader in Human Monoclonal Antibodies
- -----------------------------------------------------------------
201,560,193
- -----------------------------------------------------------------
FRANCE - 8.5%
26,000 Vallourec 14,313,350
Seamless Tubes
270,000 April Group 11,155,889
Insurance Policy Construction
148,000 Iliad 9,163,859
High Speed Internet Service Provider
200,000 Carbone Lorraine 9,139,707
Advanced Industrial Materials
350,000 SES Global 6,128,458
Satellite Broadcasting Services
45,000 Ciments Francais 5,849,649
Leading French & Emerging Markets Cement Producer
55,000 Neopost 5,515,198
Postage Meter Machines
90,000 Norbert Dentressangle 5,299,846
Transport
70,000 Rubis 5,146,413
Tank Storage & LPG Supplier
70,000 Imerys 5,063,540
Industrial Minerals Producer
42,000 Bacou Dalloz 3,617,406
Safety Equipment
178,000 Cerep 2,455,053
Health Care
- -----------------------------------------------------------------
82,848,368
See accompanying notes to financial statements.
6
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
GERMANY/AUSTRIA - 8.4%
86,000 Rational $11,430,814
Commercial Oven Manufacturer
90,000 Wincor Nixdorf 9,522,462
Retail POS Systems & ATM Machines
170,000 Bilfinger Berger 8,110,898
Construction & Related Services
125,000 Grenke Leasing 7,147,796
Financing for IT Equipment
150,000 Rhoen Klinikum Pfd. 5,709,357
Hospital Management
163,000 GFK 5,461,212
Market Research Services
155,000 Hugo Boss Designs 5,450,083
Fashion Apparel
322,000 Deutsche Beteiligung 5,317,960
Private Equity & Investment Management
300,000 Depfa Bank 4,436,073
Investment Banker to Public Authorities
180,000 CTS Eventim (c) 4,392,032
Event Ticket Sales
383,000 Takkt 4,307,620
Mail Order Retailer of Office & Warehouse Durables
85,000 Vossloh 4,135,954
Rail Infrastructure & Diesel Locomotives
100,000 Wienerberger (Austria) 3,982,002
Bricks & Clay Roofing Tiles
60,000 Masterflex 1,917,918
Specialty Hoses for Industrial & Medical Use
- -----------------------------------------------------------------
81,322,181
- -----------------------------------------------------------------
NETHERLANDS - 7.7%
378,076 Fugro 12,143,500
Survey & GPS Services
179,800 Smit International 11,750,159
Harbor & Offshore Towage & Marine Services
99,000 Koninklijke Ten Cate 10,079,724
Advanced Textiles & Industrial Fabrics
236,100 United Services Group 10,006,772
Temporary Staffing Services
142,509 Aalberts Industries 7,566,930
Flow Control & Heat Treatment
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
105,000 OPG Groep $7,495,862
Healthcare Supplies & Pharmacies
143,900 Sligro Food Group 6,010,414
Food Service & Wholesaling
163,000 IM Tech 5,306,831
Engineering & technical Services
310,000 Unit 4 Aggresso (c) 4,462,829
Business & Security Software
- -----------------------------------------------------------------
74,823,021
- -----------------------------------------------------------------
SWEDEN - 4.4%
457,200 Hexagon 13,639,172
Measurement Equipment & Polymers
369,000 Sweco 9,730,694
Nordic Infrastructure/Environment Consulting
875,000 Gambro 9,554,566
Products for Renal & Blood Care
3,400,320 Biotage (c) 5,157,512
Discovery Chemistry (Microwaves & Purification)
231,000 Nobia 4,681,352
Kitchen Cabinet Manufacturing & Distribution
- -----------------------------------------------------------------
42,763,296
- -----------------------------------------------------------------
SWITZERLAND - 3.4%
10,400 Sika 8,626,765
Chemicals for Construction & Industrial Application
25,000 Kuehne & Nagel 7,048,819
Freight Forwarding/Logistics
8,000 Geberit International 6,331,570
Plumbing Supplies
82,326 Amazys 4,836,625
Instruments/Software For Color Management
6,000 Givaudan 4,066,055
Industrial Fragrances & Flavors
39,410 BKW Energie 2,639,230
Electric Utility
- -----------------------------------------------------------------
33,549,064
- -----------------------------------------------------------------
ITALY - 2.2%
100,000 Amplifon 6,748,229
Hearing Aid Retailer
573,000 Granitifiandre 4,948,743
Innovative Stoneware
See accompanying notes to financial statements.
7
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
ITALY - 2.2% (CONT)
200,000 Sabaf $4,195,741
Supplier to White Goods OEMS
500,000 Davide Campari 3,699,687
Spirits & Wine
2,000,000 Ducati Motor (c) 2,187,847
Motorcycles & Related Merchandise
- -----------------------------------------------------------------
21,780,247
- -----------------------------------------------------------------
FINLAND - 1.5%
1,098,050 SysOpen Digia (b) 6,018,913
Software for Smart Phones
122,000 Jaakko Poyry 4,601,724
Engineering Consultants in Forestry, Energy
480,000 Sponda 4,517,762
Office & Warehouse Property Company
- -----------------------------------------------------------------
15,138,399
- -----------------------------------------------------------------
SPAIN - 1.2%
230,000 Red Electrica 7,123,289
Spanish Power Grid
76,000 Bankinter 4,217,194
Mortgage Lender
- -----------------------------------------------------------------
11,340,483
- -----------------------------------------------------------------
RUSSIA - 1.1%
213,000 RBC Information Systems (c) 5,708,400
Financial Information, Media & IT Services
107,000 Mechel Steel Group 2,586,190
Coking Coal
177,500 Novolipetsk Steel Works (c) 2,538,250
Vertically Integrated Steel Producer
- -----------------------------------------------------------------
10,832,840
- -----------------------------------------------------------------
GREECE - 0.7%
380,000 Intralot 6,658,253
Lottery & Gaming Systems & Services
- -----------------------------------------------------------------
DENMARK - 0.7%
120,000 Novozymes 6,569,343
Industrial Enzymes
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
CZECH REPUBLIC - 0.7%
46,200 Komercni Banka $6,466,140
Leading Czech Universal Bank
- -----------------------------------------------------------------
NORWAY - 0.6%
305,000 Ekornes 5,614,842
Niche Furniture Manufacturer
- -----------------------------------------------------------------
POLAND - 0.5%
132,000 Central Euro Distribution (c) 5,298,480
Spirits & Wine Distribution
- -----------------------------------------------------------------
EUROPE - TOTAL 606,565,150
ASIA - 20.5%
- -----------------------------------------------------------------
JAPAN - 12.7%
17,500 Jupiter Telecommunications (c) 13,963,200
Largest Cable Service Provider in Japan
190,000 Daito Trust Construction 9,827,447
Apartment Builder
420,000 Ushio 9,811,337
Industrial Light Sources
1,960 Risa Partners 9,223,725
NPL & Real Estate Related Investment
253,000 Park 24 9,052,953
Parking Lot Operator
340,000 Shimano 8,937,126
Bicycle Components & Fishing Tackle
129,000 USS 8,225,548
Used Car Auctioneer
121,000 Ito En 7,243,482
Bottled Tea & Other Beverages
132,200 Aeon Mall 6,445,500
Suburban Shopping Mall Developer, Owner & Operator
230,000 Sato 5,616,653
Bar Code Printers & Supplies
103,000 Hogy Medical 5,563,319
Disposable Surgical Products
137,000 Meitec 4,437,529
R&D Staffing Services
265,900 Toyo Technica 4,229,689
Value Added Reseller of Imported Instrumentation
130,000 As One 3,417,137
Scientific Supplies Distributor
See accompanying notes to financial statements.
8
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
JAPAN - 12.7% (CONT)
162,500 Ain Pharmaciez $3,231,123
Dispensing Pharmacy/Drugstore Operator
470,400 Hiroshima Bank 3,039,342
Regional Bank
106,200 Kintetsu World Express 2,818,553
Airfreight Logistics
42,200 Yusen Air & Sea Service 2,121,898
Airfreight Logistics
147 Japan Pure Chemical 1,907,067
Precious Metal Plating Chemicals for Electronics
195,000 Fukuoka Bank 1,668,334
Regional Bank
180,000 Bank of Yokohama 1,472,845
Regional Bank
32,700 Nagaileben 798,542
Medical/Healthcare Related Clothes
34,900 T.Hasegawa 519,350
Industrial Flavors & Fragrances
- -----------------------------------------------------------------
123,571,699
- -----------------------------------------------------------------
TAIWAN - 3.4%
6,020,300 Phoenixtec Power 6,565,633
Uninterruptable Power Supplies
1,024,243 Novatek Microelectronics 6,021,930
LCD Related IC Designer
2,099,159 Advantech 5,947,079
Embedded Computers
4,332,900 Taiwan Fu Hsing 4,883,777
Door Lock Manufacturer
2,236,339 Springsoft Systems 3,665,180
Electronic Design Automation Software
1,726,222 Wah Lee Industrial 3,376,036
Distributor of Chemicals, Materials & Equipment
5,000,000 Bank of Kaohsiung 2,756,919
Commerical Banking
- -----------------------------------------------------------------
33,216,554
- -----------------------------------------------------------------
HONG KONG/CHINA - 2.1%
2,000,000 Hong Kong Exchanges & Clearing 8,292,869
Hong Kong Equity & Derivatives Operator
2,000,000 Techtronic Industries 4,759,049
Power Tools & Motorized Appliances
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
10,000,000 Global Bio-Chem Technology
Group (China) $4,385,032
Refiner of Corn-Based Commodities
11,000,000 Linmark 3,014,709
Global Sourcing Agent of Consumer Goods
1,148,000 Lerado Group 68,107
Baby Strollers & Infant Car Seats Manufacturer
- -----------------------------------------------------------------
20,519,766
- -----------------------------------------------------------------
INDIA - 0.8%
300,000 Housing Development Finance 8,054,228
Premier Mortgage Lender in India
- -----------------------------------------------------------------
SINGAPORE - 0.8%
6,000,000 Comfort Del Gro 5,773,915
Taxi & Mass Transit Service
3,759,000 LMA International (c) 1,684,332
Medical Equipment & Supplies
- -----------------------------------------------------------------
7,458,247
- -----------------------------------------------------------------
INDONESIA - 0.7%
9,000,000 Perusahaan Gas Negara 6,285,758
Gas Pipeline Operator
- -----------------------------------------------------------------
ASIA - TOTAL 199,106,252
OTHER COUNTRIES - 9.5%
- -----------------------------------------------------------------
CANADA - 5.6%
823,500 Major Drilling Group 12,461,065
Mining Exploration Driller
1,000,000 Kinross Gold (c) 9,239,107
Gold Mining
500,000 Shawcor 6,692,761
Oil & Gas Pipeline Products
290,000 Rona (c) 5,351,198
Leading Canadian DIY Retailer
741,555 Railpower Technologies 144A (c)(d) 4,120,990
177,600 Railpower Technologies (c) 986,964
Hybrid Locomotives
1,149,900 Northern Orion Resources (c) 3,749,083
Copper & Gold in Argentina
120,000 Enerflex Systems 2,770,700
Natural Gas Compressor
See accompanying notes to financial statements.
9
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares or
Principal Amount
- -----------------------------------------------------------------
CANADA - 5.6% (CONT)
2,536,000 UrAsia Energy (Canada) (c) $4,734,071
Uranium Mining in Kazakhstan
CAD
$ 3,175,000 Main Street Equity Conv. 2,186,406
7.25% 9/30/11 (d) (e)
17,000 Main Street Equity (c) 72,098
Canadian Multi-Family Real Estate
250,000 Ivanhoe Mines (c) 1,795,776
Copper Mining in Mongolia
2,400 Alliance Atlantis Communication (c) 70,568
CATV Channels, TV/Movie Production/Distribution
- -----------------------------------------------------------------
54,230,787
- -----------------------------------------------------------------
AUSTRALIA/NEW ZEALAND - 3.2%
900,000 Billabong International 9,580,154
Action Sports Apparel Brand Manager
1,370,342 ABC Learning Center 7,233,106
Childcare Centers
1,800,000 Sky City Entertainment (New Zealand) 5,764,622
Casino/Entertainment Complex
1,000,000 Jubilee Gold Mines 5,512,914
Nickel Mining in Australia
70,000 Perpetual Trustees 3,489,557
Mutual Fund Manager
- -----------------------------------------------------------------
31,580,353
- -----------------------------------------------------------------
SOUTH AFRICA - 0.7%
1,300,000 Edgars Consolidated Stores 7,223,706
Leading Retail Conglomerate
- -----------------------------------------------------------------
OTHER COUNTRIES - TOTAL 93,034,846
LATIN AMERICA - 5.8%
- -----------------------------------------------------------------
BRAZIL - 3.9%
215,000 Natura Cosmeticos 9,470,970
Direct Retailer of Cosmetics
6,500,000 Caemi 9,394,328
Iron Ore/Kaolin Producer
1,080,000 Suzano 5,413,207
Pulp & Paper Producer
100,000 America Latina Logistics 4,233,085
Rail Operator in Brazil & Argentina
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
330,000 Porto Seguro $3,520,171
Auto & Life Insurance
111,900 Diagnosticos (c) 2,076,534
Medical Diagnostic Services
135,000 Ultrapar 1,875,743
Specialty Chemicals & Liquid Propane Gas Distribution
127,900 Obrascon Huarte (c) 1,383,087
Tollroads
79,800 Universo Online (c) 672,309
Largest Internet Portal in Brazil
- -----------------------------------------------------------------
38,039,434
- -----------------------------------------------------------------
MEXICO - 1.5%
180,000 Grupo Aeroportaurio Del Sureste 5,821,200
Cancun & Cozumel Airport Operator
1,000,000 Consorcio ARA 4,373,383
Affordable Housing Builder
600,000 URBI Desarrollo (c) 4,147,660
Affordable Housing Builder
- -----------------------------------------------------------------
14,342,243
- -----------------------------------------------------------------
CHILE - 0.4%
100,000 CorpBanca 2,765,000
Chilean Local Bank
10,700 Sociedad Quimica Y Minera de Chile 1,168,440
Producer of Specialty Fertilizers, Lithium & Iodine
- -----------------------------------------------------------------
3,933,440
- -----------------------------------------------------------------
LATIN AMERICA - TOTAL 56,315,117
TOTAL COMMON STOCKS AND OTHER
EQUITY-LIKE SECURITIES (COST: $678,010,049) - 98.1% 955,021,365
- -----------------------------------------------------------------
See accompanying notes to financial statements.
10
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Principal Amount Value
SHORT-TERM OBLIGATION - 1.5%
- -----------------------------------------------------------------
$14,059,000 Repurchase Agreement with State
Street Bank & Trust dated 12/30/05,
due 1/03/06 at 3.75% collateralized by
US Treasury Bond, maturing 2/15/26
market value $14,340,768 (repurchase
proceeds: $14,064,858) $14,059,000
- -----------------------------------------------------------------
(COST: $14,059,000) 14,059,000
TOTAL INVESTMENTS (COST: $692,069,049) - 99.6%(a)(f) 969,080,365
- -----------------------------------------------------------------
CASH AND OTHER ASSETS LESS LIABILITIES - 0.4% 4,177,039
- -----------------------------------------------------------------
TOTAL NET ASSETS - 100% $973,257,404
- -----------------------------------------------------------------
NOTES TO STATEMENT OF INVESTMENTS:
(a) At December 31, 2005, for federal income tax purposes cost of investments
was $696,602,875 and net unrealized appreciation was $272,477,490
consisting of gross unrealized appreciation of $289,162,071 and gross
unrealized depreciation of $16,684,581.
(b) An affiliate may include any company in which the Fund owns five percent or
more of its outstanding voting shares. On December 31, 2005, the Fund held
five percent or more of the outstanding voting securities of the following
companies:
SysOpen Digia 5.96%
Debt Free Direct 5.07%
The aggregate cost and value of these companies at December 31, 2005, was
$12,567,249 and $14,337,398 respectively. Investments in affiliate
companies represent 1.5% of total net assets at December 31, 2005.
Investment activity and income amounts related to affiliates during the
twelve months ended December 31, 2005 were as follows:
Dividend Income $ 0
Net realized gain or loss 0
Unrealized gain 1,770,149
Purchases 12,567,249
Proceeds from sales 0
(c) Non-income producing security.
- -----------------------------------------------------------------
- -----------------------------------------------------------------
(d) Denotes a restricted security, which is subject to restrictions on resale
under federal securities laws. At December 31, 2005, these securities
amounted to $6,307,396 which represents 0.65% of net assets.
Additional information on these securities is as follows:
ACQUISITION SHARES/
SECURITY DATES PAR COST VALUE
- --------------------------------------------------------------------------------
Mainstreet
Equity Conv.
7.25% 9/30/11 10/8/04 CAD$3,175,000 $2,527,263 $2,186,406
Railpower
Technologies 11/10 -
144A 11/18/05 741,555 3,355,583 4,120,990
---------- ----------
$5,882,846 $6,307,396
========== ==========
(e) The security is valued in good faith by the Board of Trustees.
(f) On December 31, 2005, the Fund's total investments were denominated in
currencies as follows:
% of Net
Currency Value Assets
- -----------------------------------------------------------------
Euro Dollars $ 344,430,418 35.5%
British Pounds 151,040,731 15.6
Japanese Yen 123,571,698 12.8
Canadian Dollars 54,230,786 5.6
Other currencies less than
5% of total net assets 295,806,732 30.1
------------- -----
$ 969,080,365 99.6%
============= =====
CAD Canadian Dollar
See accompanying notes to financial statements.
11
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP PORTFOLIO DIVERSIFICATION DECEMBER 31, 2005
AT DECEMBER 31, 2005, THE FUND'S PORTFOLIO INVESTMENTS AS A PERCENT OF NET
ASSETS WAS DIVERSIFIED AS FOLLOWS:
Value Percent
- -----------------------------------------------------------------
INDUSTRIAL GOODS/SERVICES
Construction $42,301,387 4.4%
Industrial Materials 35,457,252 3.6
Other Industrial Services 35,245,925 3.6
Machinery 31,806,573 3.3
Specialty Chemicals 24,732,763 2.5
Conglomerates 21,206,102 2.2
Steel 16,851,600 1.7
Outsourcing & Training Services 14,444,301 1.5
Industrial Distribution 10,496,858 1.1
Electrical Compoments 9,811,337 1.0
- -----------------------------------------------------------------
242,354,098 24.9
- -----------------------------------------------------------------
CONSUMER GOODS/SERVICES
Retail 28,999,756 3.0
Durable Goods 25,531,601 2.6
Food 19,386,593 2.0
Apparels 18,044,946 1.8
Consumer Services 16,354,166 1.7
Non Durable Goods 15,711,886 1.6
Goods Distribution 13,524,028 1.4
Gaming 11,385,565 1.2
Beverage 10,943,169 1.1
Furniture and Textiles 10,296,194 1.1
Casinos 5,764,622 0.6
Entertainment 4,392,032 0.4
- -----------------------------------------------------------------
180,334,558 18.5
- -----------------------------------------------------------------
FINANCE
Finance Companies 54,999,372 5.6
Banks 44,420,615 4.6
Insurance 23,735,466 2.4
Savings & Loans 12,271,422 1.3
Money Management 8,807,517 0.9
- -----------------------------------------------------------------
144,234,392 14.8
Value Percent
- -----------------------------------------------------------------
INFORMATION TECHNOLOGY
Computer Hardware and
Related Equipment $22,035,174 2.3%
Publishing 16,737,895 1.7
Business Information &
Marketing Services 16,242,733 1.7
Instrumentation 14,516,001 1.5
Business Software 14,146,922 1.5
Cable Television 13,963,200 1.4
Internet Related 9,836,168 1.0
Financial Processors 8,292,869 0.9
Satellite Broadcasting 6,128,458 0.6
Television Broadcasting 6,069,068 0.6
Semiconductors and Related Equipment 6,021,930 0.6
Computer Services 5,708,400 0.6
Electronics Distribution 3,376,036 0.3
Television Programming 70,568 0.0
- -----------------------------------------------------------------
143,145,422 14.7
- -----------------------------------------------------------------
ENERGY/MINERALS
Oil Services 29,567,186 3.0
Mining 27,772,362 2.8
Non-Ferrous Metals 21,700,172 2.2
Refining/Marketing/Distribution 11,432,171 1.2
Oil/Gas Producers 7,897,100 0.8
Other Resources 5,413,207 0.6
Agricultural Commodities (includes
Forestry) 4,385,032 0.5
- -----------------------------------------------------------------
108,167,230 11.1
- -----------------------------------------------------------------
OTHER
Transportation 34,261,292 3.5
Real Estate 32,143,215 3.3
Regulated Utilities 13,225,243 1.4
- -----------------------------------------------------------------
79,629,750 8.2
- -----------------------------------------------------------------
HEALTH CARE
Services 21,368,886 2.2
Pharmaceuticals 12,393,893 1.3
Hospital/ Laboratory Supplies 8,438,395 0.9
Medical Equipment 6,841,844 0.7
Hospital Management 5,709,357 0.6
Biotechnology/ Drug Delivery 2,403,540 0.2
- -----------------------------------------------------------------
57,155,915 5.9
- -----------------------------------------------------------------
TOTAL COMMON STOCKS AND
OTHER EQUITY-LIKE SECURITIES 955,021,365 98.1
- -----------------------------------------------------------------
SHORT-TERM OBLIGATION 14,059,000 1.5
- -----------------------------------------------------------------
TOTAL INVESTMENTS 969,080,365 99.6
- -----------------------------------------------------------------
CASH AND OTHER ASSETS
LESS LIABILITIES 4,177,039 0.4
- -----------------------------------------------------------------
NET ASSETS $973,257,404 100.0%
=================================================================
See accompanying notes to financial statements.
12
Wanger International Small Cap 2005 Annual Report
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2005
================================================================
ASSETS:
Unaffiliated investments, at cost $679,501,800
Affiliated investments, at cost (See Note 4) 12,567,249
- ----------------------------------------------------------------
Unaffiliated investments, at value $954,742,967
Affiliated investments, at value (See Note 4) 14,337,398
Cash 820
Foreign currency (cost of $4,865,295) 4,930,770
Receivable for:
Investments sold 342,754
Fund shares sold 410,423
Interest 52,984
Dividends 1,079,577
Foreign tax reclaims 75,250
Fee reimbursement due from Investment
Adviser 19,261
- ----------------------------------------------------------------
Total Assets 975,992,204
LIABILITIES:
Payable for:
Investments purchased 2,121,238
Fund shares repurchased 356,469
Transfer agent fee 38
Trustees' fees 475
Custody fee 127,258
Reports to shareholders 89,565
Other liabilities 39,757
- ----------------------------------------------------------------
Total Liabilities 2,734,800
- ----------------------------------------------------------------
Net Assets $973,257,404
- ----------------------------------------------------------------
COMPOSITION OF NET ASSETS:
Paid-in capital $701,646,903
Undistributed net investment income 1,847,515
Accumulated net realized loss (7,299,783)
Net unrealized appreciation on:
Investments 277,011,316
Foreign currency translations 51,453
- ----------------------------------------------------------------
Net Assets $973,257,404
================================================================
Fund Shares outstanding 31,777,313
================================================================
Net asset value, offering price and redemption
price per share $30.63
================================================================
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
- ----------------------------------------------------------------
INVESTMENT INCOME:
Dividend income (net of foreign taxes $1,279,506) $14,323,107
Interest income 1,147,757
- ----------------------------------------------------------------
Total Investment Income 15,470,864
EXPENSES:
Investment advisory fee 7,405,850
Transfer agent fee 296
Trustees' fees 69,728
Custody fee 717,216
Compliance fees (See Note 4) 20,749
Audit fee 35,961
Legal fees 118,260
Reports to shareholders 342,433
Non-recurring costs (See Note 8) 135,829
Other expenses 24,925
- ----------------------------------------------------------------
Total Expenses 8,871,247
Fees waived by Investment Adviser (See Note 4) (188,761)
Non-recurring costs assumed by Investment
Adviser (See Note 8) (135,829)
Custody earnings credit (894)
- ----------------------------------------------------------------
Net Expenses 8,545,763
- ----------------------------------------------------------------
Net Investment Income 6,925,101
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
PORTFOLIO POSITIONS AND FOREIGN CURRENCY:
Net realized gain (loss) on:
Investments 50,498,350
Foreign currency transactions (521,186)
- ----------------------------------------------------------------
Net realized gain 49,977,164
- ----------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Unaffiliated investments 97,433,277
Affiliated investments (See Note 4) 1,770,149
Foreign currency translations (54,941)
- ----------------------------------------------------------------
Net change in unrealized
appreciation (depreciation) 99,148,485
- ----------------------------------------------------------------
Net Gain 149,125,649
- ----------------------------------------------------------------
Net Increase in Net Assets from Operations $156,050,750
================================================================
See accompanying notes to financial statements.
13
Wanger International Small Cap 2005 Annual Report
STATEMENTS OF CHANGES IN NET ASSETS
Year ended December 31,
INCREASE (DECREASE) IN NET ASSETS: 2005 2004
=============================================================================================================
FROM OPERATIONS:
Net investment income $6,925,101 $2,772,979
Net realized gain on investments and foreign currency transactions 49,977,164 38,203,442
Net change in unrealized appreciation (depreciation)
on investments and foreign currency translations 99,148,485 90,796,832
- -------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets from Operations 156,050,750 131,773,253
DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (6,966,978) (2,991,364)
- -------------------------------------------------------------------------------------------------------------
Total Distribution to Shareholders (6,966,978) (2,991,364)
SHARE TRANSACTIONS:
Subscriptions 260,306,767 172,565,632
Distributions reinvested 6,966,978 2,991,364
Redemptions (49,872,795) (78,291,925)
- -------------------------------------------------------------------------------------------------------------
Net Increase from Share Transactions 217,400,950 97,265,071
- -------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 366,484,722 226,046,960
- -------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 606,772,682 380,725,722
- -------------------------------------------------------------------------------------------------------------
End of period $973,257,404 $606,772,682
- -------------------------------------------------------------------------------------------------------------
UNDISTRIBUTED NET INVESTMENT INCOME $1,847,515 $2,410,578
=============================================================================================================
See accompanying notes to financial statements.
14
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended December 31,
Selected data for a share outstanding throughout each period 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $25.46 $19.68 $13.27 $15.40 $28.53
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (a) 0.25 0.13 0.13 0.07 0.02
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 5.20 5.80 6.33 (2.20) (5.12)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 5.45 5.93 6.46 (2.13) (5.10)
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.28) (0.15) (0.05) -- --
From net realized gain and unrealized gain reportable
for federal income taxes -- -- -- -- (8.03)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions Declared to Shareholders (0.28) (0.15) (0.05) -- (8.03)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $30.63 $25.46 $19.68 $13.27 $15.40
===================================================================================================================================
Total Return (b) 21.53%(c) 30.27% 48.86% (13.83)% (21.27)%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Expenses(d) 1.13% 1.36% 1.41% 1.47% 1.43%
Net investment income(d) 0.92% 0.59% 0.85% 0.46% 0.10%
Waiver 0.02% -- -- -- --
Portfolio turnover rate 24% 47% 45% 54% 56%
Net assets, end of period (000's) $973,257 $606,773 $380,726 $216,084 $230,626
- --------------------------------------------------------------------------------
(a) Net investment income per share was based upon the average shares
outstanding during the period.
(b) Total return at net asset value assuming all distributions are reinvested.
(c) Had the Investment Adviser not waived a portion of expenses, total return
would have been reduced.
(d) The benefits derived from custody fees paid indirectly had no impact.
See accompanying notes to financial statements.
15
Wanger International Small Cap 2005 Annual Report
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NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Wanger International Small Cap (the "Fund"), is a series of Wanger Advisors
Trust (the "Trust"), an open-end management investment company organized as a
Massachusetts business trust. The investment objective of the Fund is to seek
long-term growth of capital. The Fund is available only for allocation
to certain life insurance company separate accounts established for the purpose
of funding qualified and non-qualified variable annuity contracts, and variable
life insurance policies and may also be offered directly to certain types of
pension plans and retirement arrangements.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Securities of the Fund are valued at market value or, if a market quotation for
a security is not readily available or is deemed not to be reliable because of
events or circumstances that have occurred between the market quotation and the
time as of which the security is to be valued, the security is valued at a fair
value determined in accordance with procedures established by the Board of
Trustees. Securities traded on securities exchanges or in over-the-counter
markets in which transaction prices are reported are valued at the last sales
price at the time of valuation. If a security is traded principally on the
Nasdaq Stock Market Inc., the Nasdaq Official Closing Price will be applied.
Securities for which there are no reported sales on the valuation date are
valued at the latest bid quotation. Short-term debt obligations having a
maturity of 60 days or less from the valuation date are valued on an amortized
cost basis, which approximates fair value. Securities for which quotations are
not readily available and any other assets are valued as determined in good
faith under consistently applied procedures established by and under the general
supervision of the Board of Trustees. The Trust has retained an independent
statistical fair value pricing service to assist in the fair valuation process
for securities principally traded in a foreign market in order to adjust for
possible changes in value that may occur between the close of the foreign
exchanges and the time at which fund shares are priced. If a security is valued
at a "fair value", that value may be different from the last quoted market price
for the security.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreement transactions. The Fund, through its
custodians, receives delivery of underlying securities collateralizing each
repurchase agreement. The Fund's investment advisor determines that the value of
the underlying securities is at all times at least equal to the repurchase price
including interest. In the event of default or bankruptcy by the other party to
the agreement, realization and/or retention of the collateral may be subject to
legal proceedings.
FOREIGN CURRENCY TRANSLATIONS
Values of investments denominated in foreign currencies are converted into U.S.
dollars using the spot market rate of exchange at the time of valuation.
Purchases and sales of investments and dividend and interest income are
translated into U.S. dollars using the spot market rate of exchange prevailing
on the respective dates of such transactions. The gain or loss resulting from
changes in foreign exchange rates is included with net realized and unrealized
gain or loss from investments, as appropriate.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed) and dividend income is recorded on the ex-dividend date,
except that certain dividends from foreign securities are recorded as soon as
the information is available to the Fund. Interest income is recorded on the
accrual basis and includes amortization of discounts on short-term debt
obligations and on long-term debt obligations when required for federal income
tax purposes. Realized gains and losses from security transactions are reported
on an identified cost basis.
RESTRICTED SECURITIES
Restricted securities are securities that may only be resold upon registration
under federal securities laws or in transactions exempt from registration. In
some cases, the issuer of restricted securities has agreed to register such
securities for resale at the issuer's expense either upon demand by the Fund or
in connection with another registered offering of the securities. Many
restricted securities may be resold in the secondary market in transactions
exempt from registration. Such restricted securities may be determined to be
liquid under criteria established by the Board of Trustees. The Fund will not
incur any registration costs upon such resale.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results may differ from
those estimated.
FUND SHARE VALUATION
Fund shares are sold and redeemed on a continuing basis at net asset value. Net
asset value per share is determined daily as of the close of trading on the New
York Stock Exchange ("the Exchange") on each day the Exchange is open for
trading by dividing the total value of the Fund's investments and other assets,
less liabilities, by the number of Fund shares outstanding.
CUSTODY FEES/CREDITS
Custody fees are reduced based on the Fund's cash balances maintained with the
custodian. The Fund could have invested a portion of the assets utilized in
connection with the expense offset arrangement in an income-producing asset if
it had not entered in to such an agreement. The amount is disclosed as a
reduction of total expenses in the Statement of Operations.
INDEMNIFICATION
In the normal course of business, the Fund enters into contracts that contain a
variety of representations and warranties and which provide general indemnities.
The Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims against the Fund. Also, under the Trust's organizational
documents, the Trustees and Officers of the Trust are indemnified against
certain liabilities that may arise out of their duties to the Trust. However,
based on experience, the Fund expects the risk of loss due to these warranties
and indemnities to be minimal.
FEDERAL INCOME TAXES
The Fund has complied with the provisions of the Internal Revenue Code available
to regulated investment companies and, in the manner provided therein,
distribute all its taxable income, as well as any net realized gain on sales of
investments and foreign currency transactions reportable for federal income tax
purposes. Accordingly, the Fund paid no federal income taxes and no federal
income tax provision was required.
FOREIGN CAPITAL GAINS TAXES
Realized gains in certain countries may be subject to foreign taxes at the fund
level, at rates ranging from 10%-15%. The Fund accrues for such foreign taxes on
net realized and unrealized gains at the appropriate rate for each jurisdiction.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-date.
16
Wanger International Small Cap 2005 Annual Report
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NOTES TO FINANCIAL STATEMENTS
3. FEDERAL TAX INFORMATION
The timing and character of income and capital gain distributions are determined
in accordance with income tax regulations, which may differ from GAAP.
Reclassifications are made to the Fund's capital accounts for permanent tax
differences to reflect income and gains available for distribution (or available
capital loss carryforwards) under income tax regulations.
For the year ended December 31, 2005, permanent book and tax basis
differences resulting primarily from differing treatments for foreign currency
transactions were identified and reclassified among the components of the Fund's
net assets as follows:
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED
INCOME LOSS PAID-IN CAPITAL
-------------- ------------- ---------------
$(521,186) $521,186 $--
Net investment income and net realized gains (losses), as disclosed on the
Statement of Operations, and net assets were not affected by this
reclassification.
The tax character of distributions paid during the year ended December 31,
2005 was as follows:
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
Distributions paid from:
Ordinary Income* $6,966,978 $2,991,364
* For tax purposes short-term capital gains distributions, if any, are
considered ordinary income distributions.
As of December 31, 2005, the components of distributable earnings on a tax
basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY LONG-TERM NET UNREALIZED
INCOME CAPITAL GAINS APPRECIATION*
------------- -------------- --------------
$6,365,890 $-- $272,538,139
* The differences between book-basis and tax-basis net unrealized
appreciation/depreciation are primarily due to deferral of losses from wash
sales, foreign currency transactions and passive foreign investment company
("PFIC") adjustments.
The following capital loss carryforwards, determined as of December 31, 2005,
may be available to reduce taxable income arising from future net realized gains
on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS
EXPIRATION CARRYFORWARDS
- ---------- -------------
2010 $4,559,033
2011 2,734,494
----------
Total $7,293,527
Expired capital loss carryforwards, if any, are recorded as a reduction of
paid in capital. Capital loss carryforwards of $49,979,639 were utilized during
the year ended December 31, 2005 for the Fund.
4. TRANSACTIONS WITH AFFILIATES
Columbia Wanger Asset Management, L.P., ("Columbia WAM") a wholly owned
subsidiary of Columbia Management, Inc. (CM), which in turn is an indirect
wholly owned subsidiary of Bank of America Corporation ("BOA"), furnishes
continuing investment supervision to the Fund and is responsible for the overall
management of the Fund's business affairs.
Effective August 1, 2005, under the fund's investment management agreement,
fees are accrued daily and paid monthly to Columbia WAM at the annual rates
shown in the table below:
AVERAGE DAILY NET ASSETS ANNUAL FEE RATE
For the first $100 million 1.15%
Next $150 million 1.00%
Next $250 million 0.95%
In excess of $500 million 0.85%
Effective March 8, 2005 through July 31, 2005, under the Fund's investment
management agreement, fees were accrued daily and monthly to Columbia WAM at the
annual rates shown in the table below.
AVERAGE DAILY NET ASSETS ANNUAL FEE RATE
For the first $100 million 1.15%
Next $150 Million 1.00%
In excess of $250 million 0.95%
Prior to March 8, 2005, under the Fund's investment management agreement,
fees were accrued daily and paid monthly to Columbia WAM at the annual rates
shown in the table below:
AVERAGE DAILY NET ASSETS ANNUAL FEE RATE
For the first $100 million 1.30%
Next $150 million 1.20%
In excess of $250 million 1.10%
In accordance with the terms of the Assurance of Discontinuance with
the New York Attorney General, Columbia WAM waived a portion of the fees payable
under the Fund's investment management agreement so that those fees were
retained at the following annual rates as a percent of average daily net assets:
1.15% - up to $100 million; 1.00% - $100 million to $250 million; 0.95% - $250
million and over. The fee waiver was effective from January 1, 2005 though March
8, 2005, but applied as if it had gone into effect on December 1, 2004.
Fees waived by Columbia WAM amounted to $188,761 for the year ended December
31, 2005.
The investment advisory agreement also provides that through April 30, 2005
Columbia WAM will reimburse the Fund to the extent that ordinary operating
expenses (computed based on net custodian fees) exceed an annual percentage of
2.00% of average daily net assets. There was no reimbursement for the year ended
December 31, 2005.
For the year ended December 31, 2005, the Fund's annualized the effective
investment advisory fee rate was 0.95%.
Certain officers and trustees of the Trust are also officers of Columbia WAM.
The Trust makes no direct payments to its officers and trustees who are
affiliated with Columbia WAM. For the year ended December 31, 2005, the Fund
paid $69,728 to trustees not affiliated with Columbia WAM. The Board of Trustees
appointed a Chief Compliance Officer to the Fund in accordance with federal
securities regulations. The Fund will pay its pro-rata share of the expenses
associated with the Office of the Chief Compliance Officer. These expenses are
disclosed separately as "Compliance fees" on the Statement of Operations.
Columbia Management Distributors, Inc. (formerly Columbia Funds Distributor,
Inc.), a wholly owned subsidiary of BOA, serves as the principal underwriter of
the Trust and receives no compensation for its services.
17
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Columbia Management Services, Inc. (formerly Columbia Funds Services, Inc.)
(the "Transfer Agent") a wholly-owned subsidiary of BOA, provides shareholder
services to the Fund and has subcontracted with Boston Financial Data Services
("BFDS") to serve as subtransfer agent. For such services, the Transfer Agent
receives a fee, paid monthly, at the annual rate of $21.00 per open account. The
Transfer Agent also receives a reimbursement for certain out-of-pocket expenses.
An affiliate may include any company in which a fund owns five percent or
more of its outstanding voting shares. On December 31, 2005, the Fund held five
percent or more of the outstanding voting securities of one or more companies.
Details of investments in those affiliated companies are presented on page 11.
During the year ended December 31, 2005, the Fund engaged in purchases and
sales transactions with funds that have a common investment advisor (or
affiliated investment advisors), common Directors/Trustees, and/or common
Officers. These purchase and sale transactions complied with the provisions of
Rule 17a-7 under the Investment Company Act of 1940 and were $8,568,216 and $0,
respectively.
5. BORROWING ARRANGEMENTS
The Trust participates in a $150,000,000 credit facility, which was entered into
to facilitate portfolio liquidity. Interest is charged to each participating
fund based on its borrowings at a rate per annum equal to the Federal Funds rate
plus 0.50%. In addition, a commitment fee of 0.10% per annum is accrued and
apportioned among the participating funds based on their pro-rata portion of the
unutilized line of credit. The commitment fee is included in "Other expenses" on
the Statement of Operations. No amounts were borrowed under this facility for
the year ended December 31, 2005.
6. FUND SHARE TRANSACTIONS
Proceeds and payments on Fund shares as shown in the statement of changes in net
assets are in respect of the following numbers of shares:
Year ended Year ended
December 31, 2005 December 31, 2004
- --------------------------------------------------------------------------------
Shares sold 9,532,675 8,009,022
Shares issued in reinvestment
of dividend distributions 252,061 140,969
- --------------------------------------------------------------------------------
Less shares redeemed 1,842,378 3,663,834
Net increase in shares outstanding 7,942,358 4,486,157
- --------------------------------------------------------------------------------
7. INVESTMENT TRANSACTIONS
The aggregate cost of purchases and proceeds from sales other than
short-term obligations for the year ended December 31, 2005 were $426,617,067
and $172,502,988.
8. LEGAL PROCEEDINGS
Columbia WAM, Columbia Acorn Trust, another mutual fund family advised by
Columbia WAM, and the trustees of Colombia Acorn Trust, are named as defendants
in class and derivative complaints which have been consolidated in a
Multi-District Action in the federal district court for the District of
Maryland. These lawsuits contend that defendants permitted certain investors to
market time their trades in certain Columbia Acorn Funds. The Multi-District
Action is ongoing. However, all claims against Columbia Acorn Trust and the
independent trustees of Columbia Acorn Trust have been dismissed.
Columbia WAM, the Columbia Acorn Funds and the trustees of Columbia Acorn
Trust are defendants in a consolidated lawsuit filed in the federal district
court of Massachusetts alleging that Columbia WAM used Fund assets to make
undisclosed payments to brokers as an incentive for the brokers to market the
Columbia Acorn Funds over the other mutual funds to investors. The complaint
alleges Columbia WAM and the Trustees of the Trust breached certain common laws
duties and federal laws. All claims against all defendants in this lawsuit have
been dismissed. However, the plaintiffs have filed a notice of appeal with the
First Circuit Court of Appeals.
The Columbia Acorn Trust and Columbia WAM are also defendants in a class
action lawsuit that alleges, in summary, that the Columbia Acorn Trust and
Columbia WAM exposed shareholders of Columbia Acorn International to trading by
market timers by allegedly (a) failing to properly evaluate daily whether a
significant event affecting the value of that Fund's securities had occurred
after foreign markets had closed but before the calculation of the Funds' net
asset value ("NAV"); (b) failing to implement the Fund's portfolio valuation and
share pricing policies and procedures; and (c) failing to know and implement
applicable rules and regulations concerning the calculation of NAV (the "Fair
Valuation Lawsuit"). The Seventh Circuit ruled that the plaintiffs' state law
claims were preempted under federal law resulting in the dismissal of
plaintiffs' complaint. However, plaintiffs are in the process of appealing that
decision before the United States Supreme Court.
On March 21, 2005, a class action complaint was filed against the Columbia
Acorn Trust and Columbia WAM seeking to rescind the Contingent Deferred Sales
Charges assessed upon redemption of Class B shares of Columbia Acorn Funds due
to the alleged market timing of the Columbia Acorn Funds. In addition to the
rescission of sales charges, plaintiffs seek recovery of actual damages,
attorneys' fees and costs. The case has been transferred to the Multi-District
Action in the federal district court of Maryland.
The Columbia Acorn Trust and Columbia WAM intend to defend these suits
vigorously.
As a result of these matters or any adverse publicity or other developments
resulting from them, there may be increased redemptions or reduced sales of Fund
shares, which could increase transaction costs or operating expenses, or have
other adverse consequences for the Funds.
In connection with the events described in detail above, various parties have
filed suit against certain funds, their Boards and/or BOA (and affiliated
entities). These suits are ongoing. However, based on currently available
information, the Columbia Acorn Trust believes that the likelihood that these
lawsuits will have a material adverse impact on any fund is remote, and Columbia
WAM believes that the lawsuits are not likely to materially affect its ability
to provide investment management services to the Funds.
For the year ended December 31, 2005, CM has assumed $135,829 in consulting
services and legal fees incurred by the Fund in connection with these matters.
18
Wanger International Small Cap 2005 Annual Report
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of Wanger International Small Cap
Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Wanger International Small Cap Fund
(a series of the Wanger Advisors Trust, hereinafter referred to as the "Fund")
at December 31, 2005, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for each of the two years
in the period then ended, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audit of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at December 31, 2005 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion. The financial
highlights of the Fund for the periods ended December 31, 2003 and prior were
audited by other independent auditors whose report dated February 6, 2004
expressed an unqualified opinion on those financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 14, 2006
19
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
[EXCERPTS FROM:]
WANGER ADVISORS TRUST
Management Fee Evaluation of the Senior Officer
Prepared Pursuant to the New York Attorney General's
Assurance of Discontinuance
July 2005
20
Wanger International Small Cap 2005 Annual Report
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Introduction
The New York Attorney General's Assurance of Discontinuance ("Order") entered
into by Columbia Management Advisors, Inc. ("CMAI") and Columbia Funds
Distributor, Inc., ("CFDI" and collectively with "CMAI," "CMG") in February
2005, allows CMAI to manage or advise a mutual fund, including the Wanger
Advisors Trust's family of funds (the "WAT Funds" or "WAT" or "Trust"), only if
the trustees of the WAT Funds appoint a "Senior Officer" to perform specified
duties and responsibilities. One of these responsibilities includes "managing
the process by which proposed management fees (including but not limited to,
advisory fees) to be charged the WAT Fund[s] are negotiated so that they are
negotiated in a manner which is at arms' length and reasonable and consistent
with this Assurance of Discontinuance."
The Order also provides that the Board of Trustees of the WAT Funds ("Board")
must determine the reasonableness of proposed "management fees" by using either
an annual competitive bidding process supervised by the Senior Officer or
Independent Fee Consultant, or by obtaining "an annual independent written
evaluation prepared by or under the direction of the Senior Officer or the
Independent Fee Consultant."
"Management fees" are only part of the costs and expenses paid by mutual fund
shareholders. The expenses can vary depending upon the class of shares held but
usually include: (1) investment management or advisory fees to compensate
analysts and portfolio managers for stock research and portfolio management, as
well as the cost of operating a trading desk; (2) administrative expenses
incurred to prepare registration statements and tax returns, calculate the
Funds' net asset values, maintain effective compliance procedures and perform
recordkeeping services; (3) transfer agency costs for establishing accounts,
accepting and disbursing funds, as well as overseeing trading in Fund shares;
(4) custodial expenses incurred to hold the securities purchased by the Funds;
and (5) distribution expenses, including commissions paid to brokers that sell
the Fund shares to investors.
Columbia Wanger Asset Management, L.P. ("CWAM"), the adviser to the WAT Funds,
has proposed that the Trust enter into an agreement that "bundles" the first two
categories listed above: advisory and administrative services. The fees paid
under this agreement are referred to as "management fees." Other fund expenses
are governed by separate agreements, in particular agreements with two CWAM
affiliates: CFDI, the broker-dealer that underwrites and distributes the WAT
Funds' shares, and Columbia Funds Services, Inc. ("CFSI"), the Funds' transfer
agent. In conformity with the terms of the Order, this evaluation, therefore,
addresses only the advisory and administrative contract between CWAM and the
Trust, and does not extend to the other agreements.
According to the Order, the Senior Officer's evaluation must consider at least
the following:
(1) Management fees (including components thereof) charged to
institutional and other clients of CWAM for like services;
(2) Management fees (including any components thereof) charged by other
mutual fund companies for like services;
(3) Costs to CWAM and its affiliates of supplying services pursuant to the
management fee agreements, excluding any intra-corporate profit;
(4) Profit margins of CWAM and its affiliates from supplying such
services;
(5) Possible economies of scale as the WAT Funds grow larger; and
(6) The nature and quality of CWAM's services, including the performance
of each WAT Fund.
On November 17, 2004, the Board appointed me, Robert Scales, Senior Officer
under the Order. The Board also determined not to pursue a competitive bidding
process and instead, charged me with the responsibility of evaluating the WAT
Funds' proposed advisory and administrative fee contract with CWAM in conformity
with the requirements of the Order. This Report is an annual evaluation required
under the Order. In discharging their responsibilities, the independent Trustees
have also consulted independent, outside counsel.
* * *
This evaluation was performed in cooperation and regular communication with the
Compliance/Contract Renewal Committee of the Board.
Process and Independence
The objectives of the Order are to ensure the independent evaluation of the
advisory fees paid by the WAT Funds as well as to ensure that all relevant
factors are considered. In my view, the contract renewal process has been
conducted at arms-length and with independence in gathering, considering and
evaluating relevant data. For example, the selection of fund peer groups is
critical in assessing a fund's relative performance and cost. I have required
Lipper and Morningstar, Inc. to prepare their reports without input or
commentary from CWAM; the engagement letters with them reflect this requirement.
As a result, the peer groups reflected in the Morningstar, Inc. and Lipper
reports were determined independently. After submission of the reports, I asked
CWAM to comment on them to avoid errors and to establish a clear record of
CWAM's views on which funds, in its judgment, constitute an appropriate peer
group.
Similarly, I discussed CWAM's profitability analysis with its management but
also sought the independent views of Ernst &Young on the reasonableness of
CWAM's cost allocation methodology and on the adequacy of the financial data it
provided. The evaluation of CWAM's profitability was performed in the context of
the limited industry data available.
My evaluation of the advisory contract was shaped by my experience as WAT's
Chief Compliance Officer ("CCO"). As CCO, I report solely to the Board and have
no reporting obligation to or employment relationship with CMG or its
affiliates, except for administrative purposes. This too contributes to the
independence of this evaluation. I have made several comments on compliance
matters in evaluating the quality of service provided by CWAM and CMG.
21
Wanger International Small Cap 2005 Annual Report
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Finally, this Report, its supporting materials and the data contained in other
materials submitted to the Compliance/Contract Renewal Committee of the Board,
in my view, provide a thorough factual basis upon which the Board, in
consultation with independent counsel as it deems appropriate, may conduct
management fee negotiations that are in the best interests of the WAT Funds'
shareholders.
* * *
VI. Conclusions
My review of the data and other material above leads to the following
conclusions with respect to the factors identified in the Order.
1. Performance. The WAT Funds generally have achieved outstanding performance
and rank very favorably against their peers. The international funds have
good recent performance records, but weaker long-term performance relative
to the domestic WAT Funds. Recent management changes have been followed by
improved performance. The domestic WAT Funds and International Select
typically achieve their performance with less risk than their competitors;
relative risks are greater for International Small Cap.
2. Management Fees relative to Peers. The management fee rankings of the Funds
are generally well below the respective medians and, hence, less favorable
to shareholders than their peer group funds.
3. Administrative Fees. The WAT Funds pay a bundled fee that combines advisory
fees and administrative expense, so ranking these fees separately was not
possible.
4. Management Fees relative to Other Accounts. CWAM's focus is its mutual
funds. It does not actively seek to manage separate or institutional
accounts. The few institutional accounts it does manage vary in rate
structures. Some pay advisory fees commensurate with or higher than the WAT
Funds. In a few instances, however, sub-advised accounts pay lower
management fees than do the WAT Funds.
5. Costs to CWAM and its Affiliates. CWAM's costs do not appear excessive,
and, in my view, it uses appropriate methodologies to allocate overhead
costs. CWAM's affiliates do not appear to profit indirectly from CWAM's
management agreement with the WAT Funds.
6. Profit Margins. CWAM's firm-wide profit margins are at the upper end of the
industry, though these comparisons are hampered by limited industry data.
High profit margins are not unexpected for firms that manage large,
successful funds and have provided outstanding investment performance for
investors. Profit margins for the WAT Funds are lower than the margins for
other accounts managed by CWAM because of payments made to intermediaries
that offer the WAT Funds through variable annuity products. CMAI, the
Funds' administrator, currently experiences losses rather than profits, in
connection with its activities relating to the WAT Funds.
7. Economies of Scale. Economies of scale do exist at CWAM and will expand, if
the assets of the WAT Funds get larger. They are, however, only partially
reflected in the management fee schedule for two of the four WAT Funds. If
the Funds' assets continue to grow, under the Funds' current fee schedules,
shareholders might not benefit in a manner generally commensurate with
CWAM's increased profits
8. Nature and quality of services. This category includes a variety of
considerations that are difficult to quantify, yet can have a significant
bearing on the performance of the WAT Funds. Several areas merit comment.
a. Continuity of Management. It is critical that capable and experienced
portfolio managers remain committed to the Funds and are able to hire
and retain analysts to assist them. CWAM must have in place
appropriate incentive plans that align its management's interests with
those of investors. Further, CWAM must maintain the independence of
its investment process. It should also be supported by effective
information technology.
b. Compliance. CWAM has an effective compliance program and a variety of
related services that are valuable to shareholders, such as, systems
to ensure best execution of portfolio transactions and the daily
review of security prices to ensure accuracy of the WAT Funds' NAV.
c. Administration Services. The WAT Funds benefit from a variety of
administrative services that are performed by CWAM and CMAI, including
preparation of registration statements, calculation of Fund NAV's,
accounting services, shareholder services, and other functions
In my opinion, these conclusions, taken together, generally support the
reasonableness of the proposed management agreement. In reaching this
conclusion, I weighed heavily the outstanding performance of the WAT Funds
relative to their peers. Performance is an investor's first concern. The expense
incurred by shareholders to enjoy this performance is, however, high relative to
competing funds, though expenses for the WAT Funds are (with one exception)
comparable to the parallel Acorn Funds. Nonetheless, a more complete breakpoint
schedule could address this issue as well as share with investors more fully the
benefits of economies of scale.
22
Wanger International Small Cap 2005 Annual Report
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VII. Recommendations
The Trustees should consider the following proposals to address the issues
identified in this Report. Some of these recommendations require the collection
and evaluation of more data. This work cannot be accomplished effectively before
the expiration of the existing advisory contract on July 31, 2005. Therefore, I
recommend that the Trustees consider extending the existing contract pending
consideration of these recommendations.
These recommendations do not purport to offer the only avenues to address the
opinions and conclusions I have expressed in this Report. Economies of scale,
for example, can be addressed in a variety of ways in a management contract.
Sound business judgment will guide how any particular area is addressed with due
consideration given to all the factors that must be weighed in reaching a
management agreement that best serves the WAT Fund shareholders.
I believe the Trustees should consider the following:
1. Restructure the management fee schedule beyond the current breakpoints
to reflect more fully economies of scale. The Trustees might consider
several ways to accomplish this objective, including instituting a
two-tier fee structure that incorporates a complex- or CWAM-wide fee
(including assets held in separate accounts) and a fund specific fee,
with each containing breakpoints to reflect their separate economies
of scale. Another approach is to consider uniform breakpoints for all
WAT Funds, including breakpoints above and below current asset levels.
2. Conduct further study to ensure that the costs paid to insurance
company intermediaries are transparent. The Trustees could consider
forming an ad hoc committee to gather and evaluate data regarding
CWAM's payments to intermediaries and the services provided by those
intermediaries. Such a committee might also seek the assistance of a
consultant such as Ernst &Young.
3. Administrative Fees. Administrative and advisory fees could be
unbundled to allow greater transparency and to permit distinct
comparisons among peers. An administrative fee could also be
formulated with a breakpoint schedule that shares the economies of
scale available with shareholders.
4. Condition contract renewal on submission of an employment agreements
or a management incentive plan designed to ensure the continued
employment of senior management, under terms that align management's
incentives with the interests of the WAT Funds' shareholders. Any
incentive plan should be designed to permit CWAM to attract and retain
the highest caliber investment professionals and support them with
effective and reliable information technology systems.
5. Review with CWAM its anticipated capacity limitations and the degree
to which increased staffing and effective incentives may address those
issues.
Robert P. Scales
Chief Compliance Officer, Senior Vice President and General Counsel
July 25, 2005
23
Wanger International Small Cap 2005 Annual Report
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BOARD APPROVAL OF THE EXISTING ADVISORY AGREEMENT
The Compliance/Contract Review Committee (the "Committee") of the board of
trustees meets on a regular basis and holds special meetings as otherwise
necessary or advisable to review the advisory agreement (the "Agreement") of
Wanger Advisors Trust (the "Trust") and each series thereof (the "Funds") and
determines whether to recommend that the full board approve the continuation of
the Agreement for an additional term. The Committee is comprised of three or
more trustees, each of whom is an independent trustee, and the Trust's Chief
Compliance Officer ("CCO"), who is a non-voting member of the Committee. After
the Committee has made its recommendation, the full board, including the
independent trustees, determines whether to approve the continuation of the
Agreement. In addition, the board, including the independent trustees, considers
matters bearing on the Agreement at most of their other meetings throughout the
year and meets at least quarterly with the portfolio managers employed by
Columbia Wanger Asset Management, L.P. ("CWAM"), the Funds' investment adviser.
The trustees receive all materials that they and CWAM believe to be
reasonably necessary for them to evaluate the Agreement and determine whether to
approve the continuation of the Agreement. Those materials generally include,
among other items, (i) information on the investment performance of the Funds
and the performance of peer groups of funds and of the Funds' performance
benchmarks, (ii) information on the Funds' advisory fees and other expenses,
including information comparing the Funds' expenses to those of peer groups of
funds and information about any applicable expense caps and fee "breakpoints,"
(iii) share sales and redemption data, (iv) information about the profitability
to CWAM and its affiliates of their relationships with the Funds and potential
"fall-out" or ancillary benefits that CWAM and its affiliates may receive as a
result of their relationships with the Funds and (v) information obtained
through CWAM's response to a questionnaire prepared at the request of the
trustees by Bell, Boyd & Lloyd LLC, independent counsel to the Trust and to the
independent trustees. The trustees may also consider other information such as
(i) CWAM's financial results and financial condition, (ii) each Fund's
investment objective and strategies and the size, education and experience of
CWAM's investment staffs and their use of technology, external research and
trading cost measurement tools, (iii) the allocation of the Funds' brokerage, if
any, including allocations to brokers affiliated with CWAM, and the use of
"soft" commission dollars to pay Fund expenses or to pay for research products
and services, (iv) the resources devoted to, and the record of compliance with,
the Funds' investment policies and restrictions, policies on personal securities
transactions and other compliance policies, (v) the response of CWAM and its
affiliates to various legal and regulatory proceedings since 2003 and (vi) the
economic outlook generally and for the mutual fund industry in particular. In
addition, the trustees conferred with, and reviewed the Management Fee
Evaluation prepared by, the Trust's Senior Officer, who was appointed by the
trustees as contemplated by the Assurance of Discontinuance dated February 9,
2005 among affiliates of CWAM and the Office of the New York Attorney General. A
summary of the Management Fee Evaluation is included in this report. Throughout
the process, the trustees have the opportunity to ask questions of and request
additional materials from CWAM.
On July 25, 2005 the board of trustees most recently approved the
continuation of the Agreement through October 31, 2005, and on September 28,
2005 the board approved an amended and restated Agreement (the "Amended
Agreement") for an initial term ending on July 31, 2006. The board actions
followed Committee meetings held in June, July and September 2005. The board
determined in the first instance to continue the Agreement through October
(rather than for a full year period) pending the resolution of the compensation
and incentive plan for key CWAM employees, whose employment agreements were to
terminate in December, 2005. Those matters were resolved prior to September 28,
2005.
In considering whether to approve the continuation of the Agreement and to
approve the Amended Agreement, the trustees, including the independent trustees,
did not identify any single factor as determinative, and each weighed the
various factors as he or she deemed appropriate. The trustees considered the
following matters in connection with their continuation of the Agreement and,
except as noted in connection with their approval of the Amended Agreement
(collectively with the Agreement, the "Agreements").
Nature, quality and extent of services. The trustees reviewed the nature,
quality and extent of CWAM's services to the Funds, taking into account the
investment objective and strategy of each Fund and the knowledge gained from the
board's regular meetings with management. In addition, the trustees reviewed
CWAM's resources and key personnel, especially those who provide investment
management services to the Funds. The trustees considered the importance of the
continuity of management. At the September 28, 2005 meeting, the trustees
considered the fact that Columbia Management, Inc. ("CM") and CWAM had agreed on
a new compensation and incentive plan for key CWAM employees. The trustees also
considered other services provided to the Funds by CWAM, such as managing the
execution of portfolio transactions and the selection of broker-dealers for
those transactions, providing support services for the board and board
committees, communicating with shareholders and overseeing the activities of
other service providers, including monitoring compliance with various Fund
policies and procedures and with applicable securities laws and regulations.
The trustees concluded that the nature and extent of the services provided by
CWAM to each Fund were appropriate and consistent with the terms of the
Agreements, that the quality of those services had been consistent with or
superior to quality norms in the industry and that the Funds were likely to
benefit from the continued provision of those services. They also concluded that
CWAM had sufficient personnel, with the appropriate education and experience, to
serve the Funds effectively and had demonstrated its continuing ability to
attract and retain well qualified personnel.
Performance of the Funds. The trustees considered the short-term and
longer-term performance of each Fund. They reviewed information comparing each
Fund's performance with the performance of the Fund's benchmark and with the
performance of comparable funds and peer groups identified by Lipper Inc.
("Lipper") and Morningstar Associates, LLC ("Morningstar"). They noted that the
two domestic Funds, Wanger U.S. Smaller Companies and Wanger Select, have each
outperformed their respective benchmarks and Lipper and Morningstar peers. The
trustees considered that Lipper and Morningstar ranked Wanger U.S. Smaller
Companies first in its peer group for the past five years and Wanger Select
first in its peer group for the three and five-year periods. The trustees
discussed the performance of the two international Funds, Wanger International
Small Cap and Wanger International Select, noting that each Fund's performance
had improved over the past two years. They considered that Morningstar ranked
Wanger International Small Cap first in its peer group for the one-year period
and Lipper ranked it first in its peer group for the three-year period. They
also considered that Lipper ranked Wanger International Select first in its peer
group for the one-year period and second in its peer group for the three and
five-year periods. The trustees concluded that although past performance is not
necessarily indicative of future results, the Funds' improving performance
record and investment process enhancements were important factors in the
trustees' evaluation of the quality of services provided by CWAM under the
Agreement.
Costs of Services and Profits Realized by CWAM. The trustees examined
information on fees and expenses of each Fund in comparison to information for
other comparable funds as provided by Lipper and Morningstar. They considered
that both the contractual rates of advisory fees and the actual advisory fees
for most of the Funds were higher than the median advisory fees of the
respective peer groups. The trustees also considered that the expense ratios of
each Fund were also higher than the median expense ratios of the respective peer
groups. At the July 25, 2005 meeting, at the recommendation
24
Wanger International Small Cap 2005 Annual Report
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BOARD APPROVAL OF THE EXISTING ADVISORY AGREEMENT
of the Committee, the board approved a new breakpoint for Wanger International
Small Cap's fee schedule, reducing fees by 0.10% on net assets of $500 million
and above, effective August 1, 2005.
The trustees reviewed information on the profitability of CWAM in serving as
each Fund's investment adviser and of CWAM and its affiliates in all of their
relationships with each Fund, as well as an explanation of the methodology
utilized in allocating various expenses among the Funds and other business
units. The trustees considered the methodology used by CWAM in determining
compensation payable to portfolio managers and the very competitive environment
for investment management talent. The trustees recognized that profitability
comparisons among fund managers are difficult because very little comparative
information is publicly available and profitability of any manager is affected
by numerous factors, including the organizational structure of the particular
manager, the types of funds and other accounts it manages, possible other lines
of business, the methodology for allocating expenses and the manager's capital
structure and cost of capital. However, based on the information available and
taking those factors into account, the trustees concluded that the profitability
of CWAM regarding each Fund in relation to the services rendered was not
unreasonable.
The trustees also reviewed CWAM's advisory fees for its institutional
separate accounts. Although in most instances its institutional separate account
fees for various investment strategies were lower than the advisory fees charged
to the Funds with corresponding strategies, the trustees noted that CWAM
performs significant additional services for the Funds that it does not provide
to those other clients, including administrative services, oversight of the
Funds' other service providers, trustee support, regulatory compliance and
numerous other services. Finally, the trustees considered the financial
condition of CWAM, which they found to be sound.
The trustees concluded that the advisory fees (including the additional
breakpoint for Wanger International Small Cap) and other compensation payable by
the Funds to CWAM and its affiliates were reasonable in relation to the nature
and quality of the services to be provided, taking into account the fees charged
by other advisers for managing comparable mutual funds with similar strategies
and the fees CWAM charges to other clients. The trustees noted, however, that
they would continue to evaluate the Funds' investment advisory fee rates. The
trustees also concluded that the Funds' estimated overall expense ratios, taking
into account quality of services provided by CWAM and the investment performance
of the Funds, were also reasonable.
Economies of Scale. The trustees noted that the advisory fee schedule for
each of Wanger U.S. Smaller Companies and Wanger International Small Cap
contains two breakpoints that reduce the fee rate on assets above specified
levels. They also noted that they had agreed to establish a new breakpoint for
Wanger International Small Cap. The trustees concluded that with the additional
breakpoint for Wanger International Small Cap, the fee schedule for each Fund
would represent a sharing of economies of scale at current asset levels. They
agreed, however, to continue their periodic consideration of the Funds' fee
structures and economies of scale.
Other Benefits to CWAM. The trustees also considered benefits that accrue to
CWAM and its affiliates from their relationship with the Funds. The trustees
concluded that, other than the services to be provided by CWAM and its
affiliates pursuant to the Agreement and the fees payable by the Funds therefor,
the Funds and CWAM may potentially benefit from their relationship with each
other in other ways. Recognizing that an affiliate of CWAM serves the Funds as
transfer agent and receives compensation from the Funds for those services, the
trustees determined that such compensation was not unreasonable. They noted that
the Funds' transfer agent reported that it made a small profit on its work for
the Funds. The trustees also considered CWAM's use of commissions to be paid by
the Funds on their portfolio brokerage transactions to obtain proprietary
research products and services benefiting the Funds and/or other clients of
CWAM. The trustees concluded that CWAM's use of "soft" commission dollars to
obtain research products and services was consistent with regulatory
requirements and is beneficial to the Funds. They concluded that, although CWAM
derives or may derive additional benefits through the use of soft dollars from
the Funds' portfolio transactions, the Funds also benefit from the receipt of
research products and services to be acquired through commissions paid on the
portfolio transactions of other clients of CWAM.
New Terms of the Amended Agreement. As previously mentioned, the trustees
negotiated a new breakpoint for Wanger International Small Cap's fee schedule,
reducing fees by 0.10% on net assets of $500 million and above. That new
breakpoint is reflected in the Amended Agreement.
In addition, the Amended Agreement includes representations by CWAM that are
substantially similar to those contained in a letter agreement between the Trust
and CM that expired on October 31, 2005. The Amended Agreement provides that:
(1) CWAM will endeavor to preserve the autonomy of the Trust; (2) CWAM remain a
wholly owned subsidiary of CM (or any successor company) as a Chicago-based
management firm; (3) CWAM will maintain the investment philosophy and research
that the Chicago-based management deems appropriate, research activities
separate and dedicated solely to CWAM and its own domestic and international
trading activities; (4) CWAM will use its best efforts to maintain information
systems that will provide timely and uninterrupted operating information and
data consistent with all regulatory and compliance requirements; (5) CWAM's
Chicago-based management will have the responsibility and considerable latitude
to recruit and compensate (on a competitive basis) investment management
personnel and to control travel budgets for analysts consistent with its
operational and strategic plans while subject to the approval of CM; and (6)
CWAM acknowledges the importance that the Board and its compliance/contract
review committee place on full legal and regulatory compliance by CMG, CWAM, and
all other Trust service providers and their personnel (collectively,
"Providers") and agrees to (i) cooperate fully with the Board, the
compliance/contract review committee and the CCO of the Trust with all inquiries
by the Trust concerning such compliance by the Providers and (ii) communicate
proactively with the Board, the compliance/contract review committee and the CCO
of the Trust concerning material compliance matters and any instance of legal or
regulatory non-compliance by the Providers of which CWAM is aware and that CWAM
deems to be material. Such cooperation and communication by CWAM will be done
after receipt of an inquiry or upon learning of any such legal or regulatory
non-compliance. Lastly, the Amended Agreement provides that the principal
investment management focus and responsibilities of CWAM's portfolio managers
and analysts will be dedicated to the Trust and Columbia Acorn Trust.
After full consideration of the above factors as well as other factors that
were instructive in analyzing the Agreement, the trustees, including all of the
independent trustees, concluded that the continuation of the Agreement was in
the best interest of each Fund. On July 25, 2005, the trustees continued the
Agreement, as revised to include an additional breakpoint for Wanger
International Small Cap, through October 31, 2005, and on September 28, 2005,
the trustees approved the Amended Agreement.
25
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
SPECIAL NOTICE
A special meeting of the shareholders was held on November 30, 2005 for the
purpose of electing nine trustees. A Proxy Statement that described the proposal
had been mailed to shareholders of record as of September 28, 2005. The holders
of the majority of the shares of the Trust entitled to vote at the meeting
elected the following five trustees, by the votes shown below:
NOMINEE FOR AGAINST ABSTAIN/BNV*
------- --- ------- ------------
Jerome L. Duffy 73,936,669.461 1,967,029.183 0
Fred D. Hasselbring 73,923,911.414 1,979,787.230 0
Kathryn A. Krueger 74,060,051.086 1,843,647.558 0
Ralph Wanger 73,916,921.587 1,986,777.057 0
Patricia H. Werhane 73,960,075.551 1,943,623.093 0
* "BNVs" or "broker non-votes" are shares held by brokers or nominees as to
which (i) the broker or nominee does not have discretionary voting power,
and (ii) the broker or nominee has not received instructions from the
beneficial owner or other person who is entitled to instruct how the shares
will be voted.
26
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST
The Board of Trustees of the Trust has overall management responsibility for the
Trust and the Funds. Each trustee serves a term of unlimited duration, provided
that a majority of trustees always has been elected by shareholders. The
trustees appoint their own successors, provided that at least two-thirds of the
trustees, after such appointment, have been elected by shareholders.
Shareholders may remove a trustee, with or without cause, upon the vote of
two-thirds of the Trust's outstanding shares at any meeting called for that
purpose. A trustee may be removed, with or without cause, upon the vote of a
majority of the trustees.
The names of the trustees and officers of the Trust, the date each was first
elected or appointed to office, their principal business occupations during at
least the last five years, number of portfolios in the fund complex they oversee
and other directorships they hold are shown below. Each trustee serves in such
capacity for each of the four series of the Trust.
The business address of each trustee and officer of the Trust is Columbia
Wanger Asset Management, L.P., 227 West Monroe, Suite 3000, Chicago, Illinois
60606, except for Messrs. Clarke, Connaughton, and Pietropaolo, whose address is
Columbia Management Group, Inc., 245 Summer Street, Boston, Massachusetts,
02210. The Trust's Statement of Additional Information includes additional
information about Wanger's trustees and officers. You may obtain a free copy of
the Statement of Additional Information on our website, www.columbiafunds.com,
or by writing or calling toll-free:
Columbia Wanger Asset Management, L.P.
Shareholder Services Group
227 W. Monroe, Suite 3000
Chicago, IL 60606
888-4-Wanger (888-492-6437)
NUMBER OF
NAME, POSITION(S) WITH YEAR FIRST PORTFOLIOS IN
WANGER ADVISORS TRUST ELECTED OR FUND COMPLEX
AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER
DECEMBER 31, 2005 TO OFFICE PAST FIVE YEARS BY TRUSTEE DIRECTORSHIPS
- ---------------------- ---------- ------------------------------ ------------- -------------
TRUSTEES WHO ARE NOT INTERESTED PERSONS OF WANGER ADVISORS TRUST:
Jerome L. Duffy, 69, 2003 Retired since December 1997; prior thereto, senior vice 4 None.
Trustee president, Kemper Financial Services and treasurer,
Kemper Funds.
Fred D. Hasselbring, 64, 1994 Retail industry, general project development and business 4 None.
Trustee computer systems consultant; voice over specialist for
industrial and institutional applications; former chairman
of the board of the Trust (September 2004 to November 2004);
former lead independent trustee (August 2003 to
September 2004).
Kathryn A. Krueger, M.D., 48, 2003 Medical Fellow I, Cardiovascular Therapeutic Area, Lilly 4 None.
Trustee Research Laboratories (May 2004 to present); Medical
Advisor, Cardiovascular Therapeutic Area, Lilly Research
Laboratories (January 2003 to April 2004); Medical Director,
Cardiovascular Therapeutic Area, Lilly Research Laboratories
(October 2002 to December 2002); Medical Director, Neptune
Product Team, Lilly Research Laboratories (October 2001 to
October 2002); Acting Director and Senior Clinical Research
Physician, Lilly Research Laboratories (April 2001 to
September 2001); Senior Clinical Research Physician, Lilly
Research Laboratories (January 2000 to March 2001); Clinical
Research Physician, Lilly Research Laboratories (June 1996
to December 1999).
Patricia H. Werhane, 70, 1998 Ruffin Professor of Business Ethics, Darden Graduate School 4 None.
Chair of the Board and Trustee of Business Administration, University of Virginia, since
1993; Senior Fellow of the Olsson Center for Applied
Ethics, Darden Graduate School of Business Administration,
University of Virginia, from 2001 to present; and
Wicklander Chair of Business Ethics and Director of
the Institute for Business and Professional Ethics,
DePaul University (since September 2003).
TRUSTEE WHO IS AN INTERESTED PERSON OF WANGER ADVISORS TRUST:
Ralph Wanger, 71, (1) 1994 Founder, former president, chief investment officer and 10 Columbia
Trustee portfolio manager, Columbia Wanger Asset Acorn
Management, L.P. (CWAM) from July 1992 until Trust.
September 2003; Former president, Columbia Acorn
Trust from April 1992 through September 2003;
Former president, Wanger Advisors Trust (1994 through
September 2003); principal, Wanger Asset Management,
L.P. (WAM) from July 1992 until September 2000;
president, WAM Ltd. from July 1992 to September 2000;
director, Wanger Investment Company plc.
27
Wanger International Small Cap 2005 Annual Report
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST
NUMBER OF
PORTFOLIOS IN
NAME, POSITION(S) WITH YEAR FIRST FUND COMPLEX
WANGER ADVISORS TRUST ELECTED OR FOR WHICH
AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OFFICER ACTS IN OTHER
DECEMBER 31, 2005 TO OFFICE PAST FIVE YEARS SAME CAPACITY DIRECTORSHIPS
- ---------------------- ---------- ------------------------------ ------------- -------------
OFFICERS OF WANGER ADVISORS TRUST:
Ben Andrews, 39, 2004 Analyst and portfolio manager, CWAM since 1998; 10 None.
Vice President vice president, Columbia Acorn Trust.
J. Kevin Connaughton, 41, 2001 Treasurer and CFO of the Columbia Funds and of the 10 Nations
Assistant Treasurer Liberty All-Star Funds since December 2000 Offshore Offshore
(formerly chief accounting officer and controller of Funds
the Columbia Funds and of the Liberty All-Star Funds
from February 1998 to October 2000); treasurer of the Bank of
Galaxy Funds from September 2002 through November 2005; America
treasurer, Columbia Management Multi-Strategy Hedge Fund, Global
LLC from December 2002 through December 2004. Liquidity
Funds, PLC
Banc of
America
Capital
Management
(Ireland),
Limited
Michael G. Clarke, 35, 2004 Chief accounting officer of the Columbia Funds, Liberty 10 None.
Assistant Treasurer Funds, Stein Roe Funds and All-Star Funds since October
2004; Controller of the Columbia Funds, Liberty Funds,
Stein Roe Funds and All-Star Funds from May 2004 to
October 2004; Assistant Treasurer from June 2002 to May
2004; Vice President, Product Strategy & Development
of the Liberty Funds and Stein Roe Funds from February
2001 to June 2002; Assistant Treasurer of the Liberty
Funds, Stein Roe Funds and the All-Star Funds from August
1999 to February 2001.
Bruce H. Lauer, 48, 1995 Chief operating officer, CWAM since April 1995; principal, 10 Banc of
Vice President, Secretary WAM from January 2000 to September 2000; vice president, America
and Treasurer treasurer and secretary, Columbia Acorn Trust; director, Capital
Wanger Investment Company plc and New Americas Small Cap Fund. Management
(Ireland),
Limited
Charles P. McQuaid, 52, 1994 President, CWAM since October 2003; Chief Investment Officer 10 Columbia
President of CWAM since September 2003; senior vice president of the Acorn
Trust from 1994 through September 2003; Portfolio Trust.
manager since 1995 and director of research,
CWAM from July 1992 through December 2003; Interim
director of international research, CWAM from December
2003 until December 2004; principal, WAM from July
1995 to September 2000; Trustee since 1992 and
president since 2003, Columbia Acorn Trust.
Robert A. Mohn, 44, 1997 Analyst and portfolio manager, CWAM since August 1992; 10 None.
Vice President director of domestic research, CWAM since March 2004;
principal, WAM from 1995 to September 2000; vice president,
Columbia Acorn Trust.
Christopher Olson, 41, 2001 Analyst and portfolio manager, CWAM since January 2001; vice 10 None.
Vice President president, Columbia Acorn Trust; prior thereto, director
and portfolio strategy analyst with UBS Asset Management/
Brinson Partners.
Vincent P. Pietropaolo, 40, 2001 Assistant General Counsel, Bank of America (and its 10 None.
Assistant Secretary predecessors), since December 1999.
Robert Scales, 53, 2004 Associate General Counsel, Grant Thornton LLP (2002-2004); 10 None.
Chief Compliance Officer, Senior prior thereto Associate General Counsel, UBS PaineWebber
Vice President and General Counsel (broker-dealer)
Zach Egan, 37, 2004 Director of International Research since December 2004;
Director of International Research Co-manager of Columbia Acorn International Fund since
May 2003; International Analyst, CWAM, 1999-2003.
- -------------------------
(1) Trustee who is an "interested person" of the Trust and of CWAM, as defined
in the Investment Company Act of 1940, because he is a former officer of
the Trust and former employee of CWAM.
28
Wanger International Small Cap 2005 Annual Report
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[graphic: squirrel]
WANGER ADVISORS TRUST
TRANSFER AGENT,
DIVIDEND DISBURSING AGENT
Columbia Management Services, Inc.
P.O. Box 8081
Boston, Massachusetts
02266-8081
DISTRIBUTOR
Columbia Management Distributors, Inc.
One Financial Center
Boston, Massachusetts
02111-2621
INVESTMENT ADVISER
Columbia Wanger Asset
Management, L.P.
227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
1-888-4-WANGER
(1-888-492-6437)
LEGAL COUNSEL
Bell, Boyd & Lloyd LLC
Chicago, Illinois
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
Chicago, Illinois
This report, including the schedules of investments and financial statements, is
submitted for the general information of the shareholders of the Wanger Advisors
Trust. This report is not authorized for distribution unless preceded or
accompanied by a prospectus.
A description of the fund's proxy voting policies and procedures is available
(i) on the fund's website, www.columbiafunds.com; (ii) on the Securities and
Exchange Commission's website at www.sec.gov, and (iii) without charge, upon
request, by calling 888-492-6437. Information regarding how the fund voted
proxies relating to portfolio securities during the 12-month period ended June
30 is available from the SEC's website.
The fund files a complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is
available on the SEC's website at www.sec.gov and may be reviewed and copied at
the SEC's Public Reference Room in Washington, D.C. Information on the operation
of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
32
WANGER ADVISORS TRUST
SHC-42/106120-1205 02/06 06/9825
WANGER SELECT
2005 Annual Report
[Graphic: Squirrel]
WANGER ADVISORS FUNDS
managed by Columbia Wanger Asset Management, L.P.
[Graphic: Squirrel]
WANGER SELECT
2005 ANNUAL REPORT
TABLE OF CONTENTS
1 Understanding Your Expenses
2 No Ordinary Portfolio Managers
4 Performance Review
6 Statement of Investments
9 Statement of Assets and Liabilities
9 Statement of Operations
10 Statements of Changes in Net Assets
11 Financial Highlights
12 Notes to Financial Statements
15 Report of Independent Registered Public Accounting Firm
16 Unaudited Information
17 Management Fee Evaluation of the Senior Officer
21 Board Approval of the Existing Advisory Agreement
23 Special Notice
24 Board of Trustees and Management of Wanger Advisors Trust
COLUMBIA WANGER ASSET MANAGEMENT, L.P. ("COLUMBIA WAM") IS ONE OF THE LEADING
GLOBAL SMALL-CAP EQUITY MANAGERS IN THE UNITED STATES WITH MORE THAN 30 YEARS OF
SMALL-CAP INVESTMENT EXPERIENCE. COLUMBIA WAM MANAGES MORE THAN $27 BILLION IN
EQUITIES AND IS THE INVESTMENT ADVISER TO WANGER U.S. SMALLER COMPANIES, WANGER
INTERNATIONAL SMALL CAP, WANGER SELECT, WANGER INTERNATIONAL SELECT AND THE
COLUMBIA ACORN FAMILY OF FUNDS.
FOR MORE COMPLETE INFORMATION ABOUT OUR FUNDS, INCLUDING THE COLUMBIA ACORN
FUNDS, OUR FEES, RISKS ASSOCIATED WITH INVESTING, OR EXPENSES, CALL
1-888-4-WANGER FOR A PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND
MONEY. THIS REPORT IS NOT AN OFFER OF THE SHARES OF THE COLUMBIA ACORN FUND
FAMILY.
THE DISCUSSION IN THE REPORT OF PORTFOLIO COMPANIES IS FOR ILLUSTRATION ONLY
AND IS NOT A RECOMMENDATION OF INDIVIDUAL STOCKS. THE INFORMATION IS BELIEVED TO
BE ACCURATE, BUT THE INFORMATION AND THE VIEWS OF THE PORTFOLIO MANAGERS MAY
CHANGE AT ANY TIME WITHOUT NOTICE AND THE PORTFOLIO MANAGERS MAY ALTER A FUND'S
PORTFOLIO HOLDINGS BASED ON THESE VIEWS AND THE FUND'S CIRCUMSTANCES AT THAT
TIME.
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
UNDERSTANDING YOUR EXPENSES
As a fund shareholder, you incur two types of costs. There are transaction
costs, which generally include sales charges on purchases and may include
redemption or exchange fees. There are also ongoing costs, which generally
include investment advisory and other fund expenses. The information on this
page is intended to help you understand your ongoing costs of investing in the
fund and to compare these costs with the ongoing costs of investing in other
mutual funds.
ANALYZING YOUR FUND'S EXPENSES
To illustrate these ongoing costs, we have provided an example and calculated
the expenses paid by investors in the fund during the reporting period. The
information in the following table is based on an initial investment of
$1,000.00, which is invested at the beginning of the reporting period and held
for the entire period. Expense information is calculated two ways and each
method provides you with different information. The amount listed in the
"actual" column is calculated using actual operating expenses. The amount listed
in the "hypothetical" column assumes that the return each year is 5% before
expenses and then applies each Fund's actual expense ratio for the period to the
hypothetical return. You should not use the hypothetical account values and
expenses to estimate either your actual account balance at the end of the period
or the expenses you paid during the reporting period. See the "Compare with
other funds" information for details on using the hypothetical data.
ESTIMATING YOUR ACTUAL EXPENSES
To estimate the expenses that you paid over the period, first you will need your
account balance at the end of the period.
1. Divide your ending account balance by $1,000.00. For example, if an
account balance was $8,600.00 at the end of the period, the result
would be 8.6.
2. In the section of the table below titled "Expenses paid during the
period," locate the amount for your fund. You will find this number is
in the column labeled "actual." Multiply this number by the result
from step 1. Your answer is an estimate of the expenses you paid on
your account during the period.
July 1, 2005 - December 31, 2005
Account value at the Account value at the Expenses paid during Fund's annualized
beginning of the period ($) end of the period ($) the period ($) expense ratio (%)*
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Actual Hypothetical Actual Hypothetical Actual Hypothetical
- ---------------------------------------------------------------------------------------------------------------------------
Wanger Select 1,000.00 1,000.00 1,114.08 1,020.21 5.28 5.04 0.99
- ---------------------------------------------------------------------------------------------------------------------------
Expenses paid during the period are equal to the fund's annualized expense
ratio, multiplied by the average account value over the period, then multiplied
by the number of days in the fund's most recent fiscal half-year and divided by
365.
Had the investment adviser not waived a portion of expenses, total return would
have been reduced.
It is important to note that the expense amounts shown in the table are meant to
highlight only ongoing costs of investing in the fund. As a shareholder of the
fund, you do not incur any transaction costs, such as sales charges, redemption
or exchange fees. Expenses paid during the period do not include any insurance
charges imposed by your insurance company's separate accounts. The hypothetical
example provided is useful in comparing ongoing costs only and will not help you
determine the relative total costs of owning different funds whose shareholders
may incur transaction costs.
*For the six months ended 12/31/05.
COMPARE WITH OTHER FUNDS
Since all mutual funds are required to include the same hypothetical
calculations about expenses in shareholder reports, you can use this information
to compare the ongoing cost of investing in the fund with other funds. To do so,
compare the 5% hypothetical example with the 5% hypothetical examples of other
funds. As you compare hypothetical examples of other funds, it is important to
note that hypothetical examples are meant to highlight the continuing cost of
investing in a fund and do not reflect any transactional costs, such as sales
charges or redemption or exchange fees, that may be incurred by shareholders of
other funds. Expenses paid during the period do not include any insurance
charges imposed by your insurance company's separate accounts.
1
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
[Graphic: Squirrel]
NO ORDINARY PORTFOLIO MANAGERS
I began working with Ralph Wanger, founder of Columbia Wanger Asset Management,
in 1978. Shortly thereafter he issued the third quarter shareholder report for
one of our retail funds. In it he wrote: "...hedonism is in... Let us explore
the possibility that we have been going through the oldest cycle of all--from
Good to Bad." In order to prove that badness was more profitable than goodness,
Ralph tested two portfolios for 36-month price changes. The virtuous portfolio
included Angelica, up 45%, and Church's Fried Chicken, up 520%. The wicked
portfolio included Playboy, up 600%, and DeBeers Mines, up 59%.1 The wicked
portfolio won. Ralph's footnote to his essay read: "This study was done by the
usual techniques of Financial Analysis: (A) The stocks chosen had nothing to do
with the subject, and (B) The portfolios were readjusted until the answer
affirmed the hypothesis." At that point it became very clear to me that Ralph
Wanger was no ordinary portfolio manager!
Ralph parlayed his legendary shareholder reports into his book, A Zebra in Lion
Country.2 The book could have been titled, The Wit and Wisdom of Ralph Wanger.
In it Ralph admits that his first quarterly newsletters were serious and stuffy.
He said that he gave market and economic forecasts that quickly became outdated.
Then he decided, "If most mutual fund communications are both boring and wrong,
well then, I figured, I'd rather be lively and wrong."
There's a lot of Wisdom in A Zebra in Lion Country. Examples include: "Look for
stocks that have basic value but are out of fashion." Ralph also wrote, "The
greatest investment profit comes when an ugly duckling becomes a swan." And, "If
a company's earnings beat the Merrill Lynch analyst's forecast by 2 cents, that
doesn't excite me. I need a long-term reason to own a stock."
And Ralph meant long term. "...you can't make five or ten or twenty times your
money if you don't hold on to your stocks. Most people are delighted when a
stock doubles, and quickly sell to lock in their gain," he wrote in his book.
Ralph's long-term thinking was driven home in a report essay he wrote in June
1992: "What really makes for successful investing is having a few enormous hits.
In 22 years, I've really had three Super Stocks." Houston Oil & Minerals was
one. Houston Oil cost $220,000 in 1973 and went to $5.3 million in 1977. Another
was Cray Research, which cost $1.5 million in 1978 and was worth $20 million in
1985. International Game Technology, a maker of slot machines, cost $5 million
in 1988 and was worth $80 million by June 1992.3
Ralph also had his share of disasters. He wrote in that 1992 report, "There is
one stock we tried to sell for two years and never got a bid on any of it. A
stock like that just slides from 4 to 3 to 2 to 1 and finally disappears..."
Ralph said, "It's kind of like a doctor saying don't worry about it, it's just
going to shrivel up and fall off." Atchison Casting, an owner of steel
foundries, was a painful example of this. Ralph began purchasing the stock in
1994 and it ended up being nearly worthless when it was sold in 2003.
The wisdom here is that small-cap investing can be a winner's game. Let your
winners run. On any individual stock, one can possibly make several thousand
percent, but the most that one can lose is 100%. Small-cap investors will have
some big percentage losers, but damage to portfolios can be minor as long as
investors don't keep throwing money at them and if they maintain a
well-diversified portfolio.
How did Ralph use his genius and wisdom to build a successful firm? A few years
after I joined Ralph we had a heated discussion about a stock. The next day I
asked him if I had crossed the line during our debate. He looked at me kind of
puzzled and said, course not, if we always agreed, why would I need you?" Ralph
always respected differing opinions and created a culture of intellectual
freedom.
In an investment world full of wishful thinking, Ralph also demanded
intellectual honesty. The ability to ask tough questions, get sound answers,
discover good businesses, detect strong managers and then value stocks
appropriately, requires intellectual honesty. Then it's time to act. I remember
an analyst saying that a stock trades by appointment and Ralph responding, "Then
make an appointment and buy it!" The culture that Ralph fostered allowed
Columbia Wanger Asset Management to grow and helped its shareholders to prosper.
Leah Zell's contribution to Columbia Wanger Asset Management has also been huge
and complementary to Ralph's. Leah seemed to have the ability to see around
corners strategically and make quick, good decisions. When Leah joined our team
in 1984, she began as a domestic analyst following mostly real estate and retail
stocks. Leah then became our first foreign analyst. She successfully launched
our first international retail mutual fund, Acorn International, realizing great
investment results, and taking the Fund from zero to one billion dollars in
assets under management in 14 months. Of course, she could not have done it
without a team. Leah built the international area at Columbia Wanger Asset
Management. International investing requires all the skills needed for domestic
investing, and more. At Columbia Wanger, we like to hire international analysts
who also have language skills and cultural
2
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
knowledge. In a number of cases, Leah successfully mentored new analysts who had
these traits and fine financial skills but had a lot to learn about security
analysis.
We at Columbia Wanger Asset Management are happy that Ralph and Leah kept their
offices with us and have been advisors over the last two years. We've gotten
good advice, but Ralph and Leah made it clear that the decisions were ours. In
our semiannual report we published Ralph's last column, which appeared in this
section. Ralph once said of writing his essays, "It is fun for me and only
mildly irritating to our shareholders." We are grateful to have had Ralph's and
Leah's presence and wisdom for all these years. On September 30, 2005, they
retired from their advisory roles with the firm.
DOMESTIC SMALL-CAP CYCLE
Small caps have outperformed large caps for over six years now; by our
reckoning, small caps bottomed vs. large caps in March 1999. The small-cap
Russell 2500 Index returned 110% from that date through December 31, 2005, far
outpacing the S&P 500, which returned 8%.
In the past, small-cap stocks had long cycles of out- and under-performance vs.
large caps. There is no science and there is no magic in predicting the exact
top of a small-cap cycle. Perhaps small caps will continue to outperform--some
believe small caps will outperform as long as rapid earnings growth continues
and some others believe outperformance will persist until the overall market
turns. Numerous economists are predicting higher inflation rates, and small caps
did relatively well during the inflationary periods of the 1970s.
However, when looking at price-to-earnings ratios, small caps appear expensive
vs. large caps. Using another measure, price-to-book value, small caps appear
somewhat more reasonably priced. While we don't think domestic small caps are
back to their all-time relative high valuations, we do think small-cap domestic
stocks on average are no longer cheap.
We do not predict market cycles. We stick to what we believe we do best: buying
reasonably priced small- and mid-cap stocks and when they enter periods of
higher valuations, we try to become more selective. Over time this consistently
applied approach has weathered the Funds through a variety of market cycles.
While we certainly can't predict what the future holds, the best defense against
unknown market factors is diversification across assets, which is a prudent and
time-tested investment strategy.
COLUMBIA WAM NEWS
We are pleased to announce that Satoshi Matsunaga has joined our international
analyst team covering Japan. He came on board in September. Before joining
Columbia Wanger Asset Management, he was with Compass Advisers in New York.
Satoshi holds an MBA from the University of Michigan and a bachelor's in
economics from Keio University in Tokyo, Japan. As a Japanese national, Satoshi
brings first-hand knowledge of the country and culture.
After the close of the period, we hired a new energy analyst. In January,
William Doyle came on board. Bill was most recently a manager of PPM America's
credit analysis team where part of his responsibilities included following the
high yield energy sector. Bill's degrees include an MBA from Loyola University
in Chicago and bachelor's degrees in finance and history from Illinois State
University.
We are pleased to welcome Satoshi and Bill to the team.
PHOTO OF: CHARLES P. MCQUAID
/s/ CHARLES P. MCQUAID
CHARLES P. MCQUAID
President and Chief Investment Officer
Columbia Wanger Asset Management, L.P.
1 The 36-month period tested ran from September 30, 1975 to September 30,
1978. The stocks mentioned were not held at that time nor are they held by
any Wanger Advisors Fund now.
2 Wanger, Ralph, "A Zebra in Lion Country," Simon & Schuster, New York, 1997.
3 Companies Houston Oil & Minerals and the original Cray Research have
disappeared through acquisitions. International Game Technology (IGT) is
not held by any Wanger Advisors Fund portfolio.
The views expressed here are those of the respective parties. These views are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions that are difficult to predict so actual outcomes and results may
differ significantly from the views expressed. These views are subject to change
at any time based upon economic, market or other conditions and the respective
parties disclaim any responsibility to update such views. These views may not be
relied on as investment advice and, because investment decisions for a Wanger
Advisor Fund are based on numerous factors, may not be relied on as an
indication of trading intent on behalf of any particular Fund. References to
specific company securities should not be construed as a recommendation or
investment advice.
Past performance is no guarantee of future results. Mid- and small-cap stocks
are often more volatile and less liquid than the stocks of larger companies.
Small companies may have a shorter history of operations than larger companies
and may have a less diversified product line, making them more susceptible to
market pressure. Investments in foreign securities have special risks, including
political or economic instability, higher costs, different regulations,
accounting standards, trading practices and levels of information, and currency
exchange rate fluctuations.
3
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
[Graphic: Squirrel]
PERFORMANCE REVIEW WANGER SELECT
Photo of: BEN ANDREWS
BEN ANDREWS
Portfolio Manager
Performance data quoted represents past performance and current performance may
be lower or higher. Past performance is no guarantee of future results. The
investment return and principal value will fluctuate so that shares, when
redeemed, may be worth more or less than the original cost. For monthly
performance updates call 1-888-4-WANGER.
Wanger Select gained 10.49% in 2005, trailing the S&P MidCap 400, up 12.56%. The
large-cap S&P 500 was up just 4.91% for the year.
Performance was driven by a number of stocks. The Fund's top four dollar gainers
were Abercrombie & Fitch, Tellabs, American Tower and Coventry Health Care,
which added nearly 7% to the Fund's annual return. The Fund had only one big
loser this year, security software developer McAfee, which was sold in the
second quarter. The stock cost the Fund 2.2% for the year.
Wanger Select purchased its first raw material stocks (beyond energy) in the
second half of 2005. Throughout Columbia Wanger's history, we have not focused
on commodities because we felt the majority of commodity companies could not
differentiate themselves enough for us to find a superior business model. To
make money in commodities one has to rely on price appreciation and, when supply
and demand are in line, prices are often flat to down. A year-and-a-half ago,
Columbia Wanger hired its first raw materials analyst, Fritz Kaegi. We
recognized that a number of commodity industries had not added new supply
capacity in more than 10 years. As global demand has increased, many commodity
companies have started to deplete their excess capacity, leaving them with tight
supply and putting upward pressure on prices. September and October of 2005 were
rough months for these stocks and the sell-off that occurred gave us our entry
point. Wanger Select invested in Potash of Saskatchewan and UrAsia Energy, which
focus on the crop nutrient market and the uranium market, respectively. We
believe we are just a few years into what could be a long-term cycle of
outperformance in commodities. However, the sector can be volatile. Potash's
stock, for example, fell 35% from August through October and this drastic
decline was not triggered by any major event. We do not anticipate adding a
large commodities weighting to the Fund but it does seem to be the right time to
broaden the Fund's portfolio to include some exposure to this sector.
In the quarter we purchased the two new stocks mentioned above and sold one,
CDW. CDW, a technology reseller, was sold because we became increasingly
uncertain about the company's ability to meet our growth projections over the
next year.
For 2006 the Fund's focus is simple: To continue to make money for the Fund's
shareholders and to beat the mid-cap benchmark.
Wanger Select is a non-diversified fund. The performance of each of its holdings
will have a greater impact on the Fund's total return, and may make the Fund's
returns more volatile than a more diversified fund. Mid-cap stocks tend to be
more volatile and may be less liquid than the stocks of larger companies.
As of 12/31/05 the Fund's positions in the stocks mentioned were: Abercrombie &
Fitch, 5.0%; Tellabs, 5.8%; American Tower, 3.7%; Coventry Health Care, 2.8%;
McAfee, 0.0%; Potash of Saskatchewan, 0.9%; UrAsia Energy, 3.5%; CDW, 0.0%.
4
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT IN
WANGER SELECT
TOTAL RETURN FOR EACH PERIOD,
FEBRUARY 1, 1999 (INCEPTION DATE) THROUGH DECEMBER 31, 2005
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------
1 year 5 years Life of fund
10.49% 11.67% 14.51%
WANGER SELECT: $25,527
S&P MidCap 400: $21,192
Line Chart: WANGER SELECT S&P MidCap 400
2/28/99 9750 9476.42
3/31/99 10530 9741.15
4/30/99 12150 10509.5
5/31/99 12220 10555.1
6/30/99 12530 11120.2
7/31/99 12510 10883.9
8/31/99 11420 10510.9
9/30/99 11410 10186.3
10/31/99 12250 10705.4
11/30/99 12510 11267.2
12/31/99 13430 11936.9
1/31/00 13090 11600.7
2/29/00 13100 12412.6
3/31/00 13696.7 13451.5
4/30/00 13049.5 12981.8
5/31/00 12694.5 12819.8
6/30/00 13822 13008.1
7/31/00 13404.4 13213.6
8/31/00 14782.4 14688.9
9/30/00 15064.3 14588.3
10/31/00 15126.9 14093.6
11/30/00 13748.9 13029.8
12/31/00 14698.9 14026.6
1/31/01 15231.3 14339
2/28/01 14312.7 13520.7
3/31/01 13790.7 12515.5
4/30/01 14761.6 13896.1
5/31/01 15555 14219.7
6/30/01 15220.9 14162.3
7/31/01 15053.9 13951.3
8/31/01 14427.5 13495
9/30/01 13592.3 11816.4
10/31/01 13895.1 12339.1
11/30/01 15387.9 13257
12/31/01 16035.2 13941.9
1/31/02 15763.8 13869.5
2/28/02 15398.4 13886.5
3/31/02 15920.3 14879.2
4/30/02 15043.4 14809.6
5/31/02 15481.9 14559.9
6/30/02 15210.5 13494.2
7/31/02 14302.2 12187.1
8/31/02 14698.9 12248.4
9/30/02 13978.6 11261.6
10/31/02 14813.7 11749.6
11/30/02 15450.6 12429.3
12/31/02 14813.7 11918.6
1/31/03 14709.4 11570.3
2/28/03 14751.1 11294.7
3/31/03 15022.5 11389.9
4/30/03 15889 12216.9
5/31/03 16786.8 13229.3
6/30/03 17277.5 13397.9
7/31/03 17997.8 13873.3
8/31/03 18718.1 14502.6
9/30/03 18311 14280.6
10/31/03 19083.5 15360.4
11/30/03 18979.1 15895.6
12/31/03 19365.4 16163.8
1/31/04 19908.3 16514.1
2/29/04 20472 16910.6
3/31/04 20481.1 16982.4
4/30/04 19906.4 16425
5/31/04 20219.9 16765.7
6/30/04 20961.8 17147.3
7/31/04 20000.5 16347.2
8/31/04 19749.7 16304.4
9/30/04 20167.6 16787.2
10/31/04 21035 17055.8
11/30/04 22362.1 18071.5
12/31/04 23104 18828.2
1/31/05 22278.5 18347.6
2/29/05 21965 18963.1
3/31/05 21843.5 18753.2
4/30/05 20987.3 18024.4
5/31/05 21933.6 19109.8
6/30/05 22913.7 19552.9
7/31/05 23938.9 20579.9
8/31/05 23465.7 20350.5
9/30/05 23961.4 20507
10/31/05 23837.5 20066.3
11/30/05 25234.4 21046.8
12/31/05 25527.3 21192.3
This graph compares the results of $10,000 invested in Wanger Select on February
1, 1999 (the date the Fund began operations) through December 31, 2005, to the
S&P MidCap 400 Index, with dividends and capital gains reinvested. DUE TO
ONGOING MARKET VOLATILITY, PERFORMANCE IS SUBJECT TO SUBSTANTIAL SHORT-TERM
FLUCTUATIONS. Part of the performance shown is due to the Fund's purchase of
securities in IPOs. The impact of IPO purchases declines as a Fund grows large.
Wanger Select is a non-diversified fund that invests primarily in the stocks of
medium- to larger-size U.S. companies. Each stock may represent a significant
part of its overall portfolio. The performance of each of these larger holdings
will have a greater impact on Wanger Select's total return and may make the
Fund's returns more volatile than a more diversified fund. Mid-cap stocks are
more volatile and may be less liquid than large-cap stocks. Performance results
reflect any voluntary waivers or reimbursements of Fund expenses by the Advisor
or its affiliates. Absent these waivers or reimbursement arrangements,
performance results would have been lower.
PERFORMANCE SHOWN HERE IS PAST PERFORMANCE, WHICH CANNOT GUARANTEE FUTURE
RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT IN THE FUND WILL FLUCTUATE SO THAT FUND SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE
CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT
SHOWN. FOR MONTHLY PERFORMANCE UPDATES, PLEASE CONTACT US AT 1-888-4-WANGER.
- --------------------------------------------------------------------------------
RESULTS TO DECEMBER 31, 2005
4th quarter 1 year
WANGER SELECT 6.54% 10.49%
S&P MidCap 400 3.34 12.56
S&P 500 2.09 4.91
Lipper Mid-Cap Growth Index 3.11 9.58
NAV AS OF 12/31/05: $22.66
PERFORMANCE NUMBERS REFLECT ALL FUND EXPENSES BUT DO NOT INCLUDE ANY INSURANCE
CHARGE IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNTS. IF PERFORMANCE
INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, IT WOULD BE LOWER.
The S&P MidCap 400 is a market value-weighted index of 400 U.S. stocks that are
in the next tier down from the S&P 500. The S&P 500 is a broad market-weighted
average of blue-chip U.S. companies. The Lipper Mid-Cap Growth Index measures
the performance of the 30 largest mid-cap growth funds tracked by Lipper. All
indexes are unmanaged and include reinvested dividends. It is not possible to
invest directly in an index.
- --------------------------------------------------------------------------------
TOP 5 INDUSTRIES
As a % of net assets, as of 12/31/05
Information 27.7%
Consumer Goods/Services 27.3
Finance 13.8
Industrial Goods 9.4
Energy /Minerals 8.6
- --------------------------------------------------------------------------------
TOP 10 HOLDINGS
As a % of net assets, as of 12/31/05
1. Tellabs 5.8%
Telecommunications Equipment
2. ITT Educational Services 5.4%
Postsecondary Degree Programs
3. Abercrombie & Fitch 5.0%
Teen Apparel Retailer
4. Safeway 4.6%
Retail Food & Drug Stores
5. American Tower 3.7%
Communication Towers in USA & Mexico
6. UrAsia Energy 3.5%
Uranium Mining in Kazakhstan
7. Pride International 3.2%
Offshore Drilling Contractor
8. Skillsoft Publishing 3.2%
Provider of Web-based Learning Solutions (E-Learning)
9. Avid Technology 3.0%
Digital Nonlinear Editing Software & Systems
10. TCF Financial 3.0%
Great Lakes Bank
5
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER SELECT STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- ----------------------------------------------------------------
Number of Value
Shares
COMMON STOCKS - 93.6%
INFORMATION - 27.7%
- -----------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT - 5.8%
550,000 Tellabs (b) $5,995,000
Telecommunications Equipment
- -----------------------------------------------------------------
BUSINESS/CONSUMER SOFTWARE - 5.5%
57,000 Avid Technology (b) 3,121,320
Digital Nonlinear Editing Software & Systems
291,000 Novell (b) 2,569,530
Directory, Operating System & Identity
Management Software
- -----------------------------------------------------------------
5,690,850
- -----------------------------------------------------------------
TELEVISION PROGRAMMING/CATV - 4.6%
130,000 Discovery Holding (b) 1,969,500
CATV Programming
70,000 Liberty Global, Series C (b) 1,484,000
56,000 Liberty Global, Series A (b) 1,260,000
CATV Holding Company
- -----------------------------------------------------------------
4,713,500
- -----------------------------------------------------------------
INTERNET - 4.1%
600,000 Skillsoft Publishing (b) 3,300,000
Provider of Web-based Learning Solutions (E-Learning)
31,000 IAC/Interactive Corp (b) 877,610
Dominate Internet Middleman
- -----------------------------------------------------------------
4,177,610
- -----------------------------------------------------------------
MOBILE COMMUNICATIONS - 3.7%
140,000 American Tower (b) 3,794,000
Communication Towers in USA & Mexico
- -----------------------------------------------------------------
INSTRUMENTATION - 2.1%
78,000 Tektronix 2,200,380
Analytical Instruments
- -----------------------------------------------------------------
PUBLISHING - 1.5%
51,000 Tribune Company 1,543,260
Newspapers & TV Stations
- -----------------------------------------------------------------
COMPUTER SERVICES - 0.4%
86,500 AnswerThink Consulting (b) 367,625
I/T Integration & Best Practice Research
- -----------------------------------------------------------------
INFORMATION - TOTAL 28,482,225
- -----------------------------------------------------------------
Number of Value
Shares
CONSUMER GOODS/SERVICES - 27.3%
- -----------------------------------------------------------------
RETAIL - 12.0%
78,000 Abercrombie & Fitch $5,084,040
Teen Apparel Retailer
200,000 Safeway 4,732,000
Retail Food & Drug Stores
51,000 CostCo 2,522,970
Warehouse Superstores
- -----------------------------------------------------------------
12,339,010
- -----------------------------------------------------------------
CONSUMER SERVICES - 7.4%
94,000 ITT Educational Services (b) 5,556,340
Postsecondary Degree Programs
40,600 Weight Watchers (b) 2,006,858
Weight Loss Program
- -----------------------------------------------------------------
7,563,198
- -----------------------------------------------------------------
LEISURE VEHICLES - 2.9%
58,000 Harley Davidson 2,986,420
Motorcycles & Related Merchandise
- -----------------------------------------------------------------
APPAREL - 2.5%
78,000 Coach (b) 2,600,520
Designer & Retailer of Branded Leather Accessories
- -----------------------------------------------------------------
ENTERTAINMENT - 1.8%
38,000 International Speedway Motors 1,820,200
Largest Motorsport Racetrack Owner & Operator
- -----------------------------------------------------------------
TRAVEL - 0.7%
31,000 Expedia (b) 742,760
Online Travel Services Company
- -----------------------------------------------------------------
CONSUMER GOODS/SERVICES - TOTAL 28,052,108
FINANCE - 13.8%
- -----------------------------------------------------------------
INSURANCE - 4.8%
114,900 Conseco (b) 2,662,233
Life, Long Term Care & Medical Supplement Insurance
7,100 Markel (b) 2,251,055
Specialty Insurance
- -----------------------------------------------------------------
4,913,288
See accompanying notes to financial statements.
6
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER SELECT STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
MONEY MANAGEMENT - 4.6%
48,100 SEI Investments $1,779,700
Mutual Fund Administration & Investment Management
89,000 Janus Capital 1,658,070
Manages Mutual Funds
30,000 Nuveen Investments 1,278,600
Specialty Mutual Funds
- -----------------------------------------------------------------
4,716,370
- -----------------------------------------------------------------
BANKS - 4.4%
115,000 TCF Financial 3,121,100
Great Lakes Bank
43,000 Associated Banc-Corp 1,399,650
Midwest Bank
- -----------------------------------------------------------------
4,520,750
- -----------------------------------------------------------------
FINANCE - TOTAL 14,150,408
INDUSTRIAL GOODS/SERVICES - 9.4%
- -----------------------------------------------------------------
LOGISTICS - 2.8%
43,000 Expeditors International of Washington 2,902,930
International Freight Forwarder
- -----------------------------------------------------------------
STEEL - 2.3%
122,000 Worthington Industries 2,343,620
Steel Processing
- -----------------------------------------------------------------
INDUSTRIAL GOODS - 2.2%
62,000 Mine Safety Appliances 2,245,020
Safety Equipment
- -----------------------------------------------------------------
OUTSOURCING SERVICES & TRAINING - 2.1%
161,000 Quanta Services (b) 2,120,370
Electrical & Telecom Construction Services
- -----------------------------------------------------------------
INDUSTRIAL GOODS/SERVICES - TOTAL 9,611,940
- -----------------------------------------------------------------
Number of Value
Shares
ENERGY & MINERALS - 8.6%
- -----------------------------------------------------------------
MINING - 4.4%
1,900,000 UrAsia Energy (Canada) (b) $3,546,820
Uranium Mining in Kazakhstan
12,000 Potash of Saskatchewan 962,640
World's Largest Producer of Potash
- -----------------------------------------------------------------
4,509,460
- -----------------------------------------------------------------
OIL SERVICES - 4.2%
108,000 Pride International (b) 3,321,000
Offshore Drilling Contractor
24,000 FMC Technologies (b) 1,030,080
Oil & Gas Well Head Manufacturer
- -----------------------------------------------------------------
4,351,080
- -----------------------------------------------------------------
ENERGY & MINERALS - TOTAL 8,860,540
HEALTH CARE - 4.9%
- -----------------------------------------------------------------
SERVICES - 4.9%
50,460 Coventry Health Care (b) 2,874,201
PPO Network
50,000 Lincare Holdings (b) 2,095,500
Home Health Care Services
- -----------------------------------------------------------------
4,969,701
- -----------------------------------------------------------------
HEALTH CARE - TOTAL 4,969,701
OTHER INDUSTRIES - 1.9%
- -----------------------------------------------------------------
WASTE MANAGEMENT - 1.9%
65,000 Waste Management 1,972,750
US Garbage Collection & Disposal
- -----------------------------------------------------------------
OTHER INDUSTRIES - TOTAL 1,972,750
TOTAL COMMON STOCKS (COST: $72,526,435) - 93.6% 96,099,672
- -----------------------------------------------------------------
See accompanying notes to financial statements.
7
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER SELECT STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Principal Value
Amount
SHORT-TERM OBLIGATION - 6.5%
- -----------------------------------------------------------------
$ 6,654,000 Repurchase Agreement with State
Street Bank & Trust dated 12/30/05,
due 1/03/06 at 3.75% collateralized by
Federal Home Loan Mortgage Discount
Notes, maturing 5/2/06
market value $6,790,403
(repurchase proceeds: $6,656,772) $6,654,000
- -----------------------------------------------------------------
(COST: $6,654,000) 6,654,000
TOTAL INVESTMENTS (COST: $79,180,435) - 100.1% (a) 102,753,672
- -----------------------------------------------------------------
CASH AND OTHER ASSETS LESS LIABILITIES - (0.1%) (79,981)
- -----------------------------------------------------------------
TOTAL NET ASSETS - 100% $102,673,691
- -----------------------------------------------------------------
NOTES TO STATEMENT OF INVESTMENTS:
(a) At December 31, 2005, cost for federal income tax purposes is $79,826,796.
The net unrealized appreciation was $22,926,876 consisting of gross
unrealized appreciation of $24,066,026 and gross unrealized depreciation of
$1,139,150.
(b) Non-income producing security.
At December 31, 2005, the Fund held investments in the following sectors:
% OF
SECTOR NET ASSETS
- -------------------------------------------------------------------
Information 27.7%
Consumer Goods/Services 27.3
Finance 13.8
Industrial Goods/Services 9.4
Energy & Minerals 8.6
Health Care 4.9
Other Industries 1.9
Short-Term Obligations 6.5
Cash and Other Assets Less Liabilities (0.1)
--------
100.0%
========
8
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2005
================================================================
ASSETS:
Investments, at cost $79,180,435
- ----------------------------------------------------------------
Investments, at value $102,753,672
Cash 477
Receivable for:
Fund shares sold 160,782
Interest 1,386
Dividends 15,291
Fee reimbursed due from Investment
Adviser 2,098
- ----------------------------------------------------------------
Total Assets 102,933,706
LIABILITIES:
Payable for:
Fund shares repurchased 223,058
Transfer agent fee 31
Trustees' fees 329
Audit fee 13,550
Custody fee 1,083
Reports to shareholders 19,590
Other liabilities 2,374
- ----------------------------------------------------------------
Total Liabilities 260,015
- ----------------------------------------------------------------
Net Assets $102,673,691
================================================================
COMPOSITION OF NET ASSETS:
Paid-in capital $75,419,282
Accumulated net investment loss (184,962)
Accumulated net realized gain 3,866,134
Net unrealized appreciation on investments 23,573,237
- ----------------------------------------------------------------
Net Assets $102,673,691
================================================================
Fund Shares outstanding 4,530,342
================================================================
Net asset value, offering price and redemption
price per share $22.66
================================================================
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
================================================================
INVESTMENT INCOME:
Dividend income $499,504
Interest income 160,918
- ----------------------------------------------------------------
Total Investment Income 660,422
EXPENSES:
Investment advisory fee 745,156
Transfer agent fee 234
Trustees' fees 9,604
Custody fee 7,881
Audit fee 24,626
Legal fees 14,042
Reports to shareholders 39,944
Compliance fees (See Note 4) 2,601
Non-recurring costs (See Note 9) 15,593
Other expenses 7,009
- ----------------------------------------------------------------
Total Expenses 866,690
Fees waived by Investment Adviser (See Note 4) (14,597)
Non-recurring costs assumed by Investment
Adviser (See Note 9) (15,593)
Custody earnings credit (1,434)
- ----------------------------------------------------------------
Net Expenses 835,066
- ----------------------------------------------------------------
Net Investment Loss (174,644)
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON PORTFOLIO POSITIONS AND FOREIGN CURRENCY:
Net realized gain (loss) on:
Investments 3,984,654
Foreign currency transactions (10,318)
- ----------------------------------------------------------------
Net realized gain 3,974,336
Net change in unrealized appreciation
(depreciation) on investments 5,887,592
- ----------------------------------------------------------------
Net Gain 9,861,928
- ----------------------------------------------------------------
Net Increase in Net Assets from Operations $9,687,284
================================================================
See accompanying notes to financial statements.
9
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS: 2005 2004
==================================================================================================================
FROM OPERATIONS:
Net investment loss $(174,644) $(311,671)
Net realized gain on investments and foreign currency transactions 3,974,336 5,987,773
Net change in unrealized appreciation (depreciation)
on investments 5,887,592 6,113,815
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets from Operations 9,687,284 11,789,917
DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net realized gains (5,786,576) (56,308)
- ------------------------------------------------------------------------------------------------------------------
Total Distributions Declared to Shareholders (5,786,576) (56,308)
SHARE TRANSACTIONS:
Subscriptions 25,483,902 29,505,736
Distributions reinvested 5,786,576 56,308
Redemptions (14,962,504) (10,942,589)
- ------------------------------------------------------------------------------------------------------------------
Net Increase from Share Transactions 16,307,974 18,619,455
- ------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 20,208,682 30,353,064
NET ASSETS:
Beginning of period 82,465,009 52,111,945
- ------------------------------------------------------------------------------------------------------------------
End of period $102,673,691 $82,465,009
- ------------------------------------------------------------------------------------------------------------------
ACCUMULATED NET INVESTMENT LOSS $(184,962) --
==================================================================================================================
See accompanying notes to financial statements.
10
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended December 31,
Selected data for a share outstanding throughout each period 2005 2004 2003 2002 2001
====================================================================================================================================
NET ASSET VALUE, BEGINNING OF PERIOD $22.11 $18.55 $14.19 $15.36 $14.08
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (a) (0.04) (0.10) (0.11) (0.09) (0.05)
Net realized and unrealized gain (loss) on investments 2.12 3.68 4.47 (1.08) 1.33
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.08 3.58 4.36 (1.17) 1.28
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net realized capital gains (1.53) (0.02) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions Declared to Shareholders (1.53) (0.02) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $22.66 $22.11 $18.55 $14.19 $15.36
====================================================================================================================================
Total Return (b) 10.49%(c) 19.31% 30.73% (7.62)% 9.09%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Expenses (d) 0.96% 1.10% 1.15% 1.18% 1.33%
Net investment loss (d) (0.20)% (0.49)% (0.65)% (0.62)% (0.34)%
Waiver 0.02% -- -- -- --
Portfolio turnover rate 26% 36% 21% 45% 76%
Net assets, end of period (000's) $102,674 $82,465 $52,112 $26,124 $21,429
- --------------------------------------------------------------------------------
(a) Net investment loss per share was based upon the average shares outstanding
during the period.
(b) Total return at net asset value assuming all distributions reinvested.
(c) Had the Investment Adviser not waived a portion of expenses, total return
would have been reduced.
(d) The benefits derived from custody fees paid indirectly had no impact.
See accompanying notes to financial statements.
11
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Wanger Select (known prior to May 1, 2004 as Wanger Twenty), (the "Fund"), is a
series of Wanger Advisors Trust (the "Trust"), an open-end management investment
company organized as a Massachusetts business trust. The investment objective of
the Fund is to seek long-term growth of capital. The Fund is available only for
allocation to certain life insurance company separate accounts established for
the purpose of funding qualified and non-qualified variable annuity contracts,
and variable life insurance policies and may also be offered directly to certain
types of pension plans and retirement arrangements.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Securities of the Fund are valued at market value or, if a market quotation for
a security is not readily available or is deemed not to be reliable because of
events or circumstances that have occurred between the market quotation and the
time as of which the security is to be valued, the security is valued at a fair
value determined in accordance with procedures established by the Board of
Trustees. Securities traded on securities exchanges or in over-the-counter
markets in which transaction prices are reported are valued at the last sales
price at the time of valuation. If a security is traded principally on the
Nasdaq Stock Market Inc., the Nasdaq Official Closing Price will be applied.
Securities for which there are no reported sales on the valuation date are
valued at the latest bid quotation. Short-term debt obligations having a
maturity of 60 days or less from the valuation date are valued on an amortized
cost basis, which approximates fair value. Securities for which quotations are
not readily available and any other assets are valued as determined in good
faith under consistently applied procedures established by and under the general
supervision of the Board of Trustees. The Trust has retained an independent
statistical fair value pricing service to assist in the fair valuation process
for securities principally traded in a foreign market in order to adjust for
possible changes in value that may occur between the close of the foreign
exchange and the time at which fund shares are priced. If a security is valued
at a "fair value", that value may be different from the last quoted market price
for the security.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreement transactions. The Fund, through its
custodians, receives delivery of underlying securities collateralizing each
repurchase agreement. The Fund's investment advisor determines that the value of
the underlying securities is at all times at least equal to the repurchase price
including interest. In the event of default or bankruptcy by the other party to
the agreement, realization and/or retention of the collateral may be subject to
legal proceedings.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed) and dividend income is recorded on the ex-dividend date,
except that certain dividends from foreign securities are recorded as soon as
the information is available to the Fund. Interest income is recorded on an
accrual basis and includes amortization of discounts on short-term debt
obligations and on long-term debt obligations when required for federal income
tax purposes. Realized gains and losses from security transactions are reported
on an identified cost basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results may differ from
those estimated.
FUND SHARE VALUATION
Fund shares are sold and redeemed on a continuing basis at net asset value. Net
asset value per share is determined daily as of the close of trading on the New
York Stock Exchange ("the Exchange") on each day the Exchange is open for
trading by dividing the total value of the Fund's investments and other assets,
less liabilities, by the number of Fund shares outstanding.
INDEMNIFICATION
In the normal course of business, the Fund enters into contracts that contain a
variety of representations and warranties and which provide general indemnities.
The Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims against the Fund. Also, under the Trust's organizational
documents, the Trustees and Officers of the Trust are indemnified against
certain liabilities that may arise out of their duties to the Trust. However,
based on experience, the Fund expects the risk of loss due to these warranties
and indemnities to be minimal.
CUSTODY FEES/CREDITS
Custody fees are reduced based on the Fund's cash balances maintained with the
custodian. The Fund could have invested a portion of the assets utilized in
connection with the expense offset arrangement in an income-producing asset if
it had not entered into such agreement. The amount is disclosed as a reduction
of total expenses in the Statement of Operations.
FEDERAL INCOME TAXES
The Fund has complied with the provisions of the Internal Revenue Code available
to regulated investment companies and, in the manner provided therein,
distributes all their taxable income, as well as any net realized gain on sales
of investments and foreign currency transactions reportable for federal income
tax purposes. Accordingly, the Fund paid no federal income taxes and no federal
income tax provision was required.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-date.
3. FEDERAL TAX INFORMATION
The timing and character of income and capital gain distributions are determined
in accordance with income tax regulations, which may differ from GAAP.
Reclassifications are made to the Fund's capital accounts for permanent tax
differences to reflect income and gains available for distribution (or available
capital loss carryforwards) under income tax regulations.
For the year ended December 31, 2005, permanent book and tax basis
differences resulting primarily from differing treatments for foreign currency
transactions, were identified and reclassified among the components of the
Fund's net assets as follows:
ACCUMULATED ACCUMULATED PAID IN
NET INVESTMENT LOSS NET REALIZED GAIN CAPITAL
- ----------------------------------------------------------------
$(10,318) $10,318 $--
Net investment income and net realized gains (losses), as disclosed on the
Statement of Operations, and net assets were not affected by this
reclassification.
12
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
The tax character of distributions paid during the year ended December 31, 2005
was as follows:
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
Distributions paid from:
Ordinary Income* $ 557,324 $ --
Long-Term Capital Gain 5,229,252 56,308
* For tax purposes short-term capital gains distributions, if any, are
considered ordinary income distributions.
As of December 31, 2005, the components of distributable earnings on a tax basis
were as follows:
UNDISTRIBUTED UNDISTRIBUTED NET UNREALIZED
ORDINARY LONG-TERM APPRECIATION
INCOME CAPITAL GAINS (DEPRECIATION)*
--------------- --------------- ---------------
$962,547 $3,364,986 $22,926,876
* The differences between book-basis and tax-basis net unrealized
appreciation/depreciation are primarily due to passive foreign investment
company ("PFIC") adjustments.
4. TRANSACTIONS WITH AFFILIATES
Columbia Wanger Asset Management, L.P., ("Columbia WAM") a wholly owned
subsidiary of Columbia Management, Inc., (CM), which in turn is an indirect
wholly owned subsidiary of Bank of America Corporation ("BOA"), furnishes
continuing investment supervision to each Fund and is responsible for the
overall management of each Fund's business affairs.
Effective March 8, 2005, under the Fund's investment management agreement,
fees are accrued daily and paid monthly to Columbia WAM at the annual rate of
0.85% of average daily net assets.
Prior to March 8, 2005, under the Fund's investment management agreement,
fees are accrued daily and paid monthly to Columbia WAM at the annual rate of
0.95% of average daily net assets.
In accordance with the terms of the Assurance of Discontinuance with the New
York Attorney General, Columbia WAM waived a portion of the fees payable under
the Fund's investment management agreement so that those fees are retained at
0.85% of average daily net assets. The fee waiver was effective from January 1,
2005 through March 8, 2005, but applied as if it had gone into effect on
December 1, 2004.
Fees waived by Columbia WAM amounted to $14,597 for the year ended December
31, 2005.
The investment advisory agreement also provides that through April 30, 2006
Columbia WAM will reimburse the Fund to the extent that ordinary operating
expenses (computed based on net custodian fees) exceed an annual percentage of
1.35% of average daily net assets. There was no reimbursement for the year ended
December 31, 2005.
Certain officers and trustees of the Trust are also officers of Columbia WAM.
The Trust makes no direct payments to its officers and trustees who are
affiliated with Columbia WAM. For the year ended December 31, 2005, the Fund
paid $9,604 to trustees not affiliated with Columbia WAM. The Board of Trustees
appointed a Chief Compliance Officer to the Fund in accordance with federal
securities regulations. The Fund will pay its pro-rata share of the expenses
associated with the Office of the Chief Compliance Officer. These expenses are
disclosed separately as "Compliance fees" on the Statement of Operations.
Columbia Management Distributors, Inc. (formerly Columbia Funds Distributor,
Inc.), a wholly owned subsidiary of BOA, serves as the principal underwriter of
the Trust and receives no compensation for its services.
Columbia Management Services, Inc. (formerly Columbia Funds Services, Inc.)
(the "Transfer Agent"), a wholly-owned subsidiary of BOA, provides shareholder
services to the Fund and has subcontracted with Boston Financial Data Services
("BFDS") to serve as subtransfer agent. For such services, the Transfer Agent
receives a fee, paid monthly, at the annual rate of $21.00 per open account. The
Transfer Agent also receives reimbursement for certain out-of-pocket expenses.
During the year ended December 31, 2005, the Fund engaged in purchase and
sales transactions with funds that have a common investment advisor (or
affiliated investment advisors), common Directors/Trustees, and/or common
Officers. These purchase and sale transactions complied with the provisions of
Rule 17a-7 under the Investment Company Act of 1940 and were $0 and $72,621,
respectively.
5. BORROWING ARRANGEMENTS
The Trust participates in a $150,000,000 credit facility, which was entered into
to facilitate portfolio liquidity. Interest is charged to each participating
fund based on its borrowings at rate per annual equal to the Federal Funds rate
plus 0.50%. In addition, a commitment fee of 0.10% per annum is accrued and
apportioned among the participating funds based on their pro-rata portion of the
unutilized line of credit. The commitment fee is included in "Other expenses" on
the Statement of Operations. No amounts were borrowed under this facility for
the year ended December 31, 2005.
6. FUND SHARE TRANSACTIONS
Proceeds and payments on Fund shares as shown in the statement of changes in net
assets are in respect of the following numbers of shares:
Year ended Year ended
December 31, 2005 December 31, 2004
- --------------------------------------------------------------------------------
Shares sold 1,226,585 1,465,607
Shares-issued-in-reinvestment
of dividend distributions 294,782 2,911
Less shares redeemed 720,738 547,475
Net increase in shares outstanding 800,629 921,043
7. INVESTMENT TRANSACTIONS
The aggregate cost of purchases and proceeds from sales other than
short-term obligations for the year ended December 31, 2005 were $36,552,742 and
$21,169,806.
8. OTHER
During the year ended December 31, 2005 and as a result of an error, the Fund
purchased shares of AnswerThink that were subsequently sold at a loss of
$14,286. The Fund was reimbursed by Columbia WAM for the full amount of the
loss.
9. LEGAL PROCEEDINGS
Columbia WAM, Columbia Acorn Trust, another mutual fund family advised by
Columbia WAM, and the trustees of Colombia Acorn Trust, are named as defendants
in class and derivative complaints which have been consolidated in a
Multi-District Action in the federal district court for the District of
Maryland. These lawsuits contend that defendants permitted certain investors to
market time their trades in certain Columbia Acorn Funds. The Multi-District
Action is ongoing. However, all claims against Columbia Acorn Trust, and the
independent trustees of Columbia Acorn Trust have been dismissed.
Columbia WAM, the Columbia Acorn Funds and the trustees of Columbia Acorn
Trust are defendants in a consolidated lawsuit filed in the federal district
court of Massachusetts alleging that Columbia WAM used Fund assets to make
undisclosed payments to brokers as an incentive for the brokers to market the
Columbia Acorn Funds over the other mutual funds to investors. The complaint
alleges Columbia WAM and the Trustees of the Trust breached certain common laws
duties and federal laws. All claims against all
13
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
defendants in this lawsuit have been dismissed. However the plaintiffs have
filed a notice of appeal with the First Circuit Court of Appeals.
The Columbia Acorn Trust and Columbia WAM are also defendants in a class
action lawsuit that alleges, in summary, that the Columbia Acorn Trust and
Columbia WAM exposed shareholders of Columbia Acorn International to trading by
market timers by allegedly (a) failing to properly evaluate daily whether a
significant event affecting the value of that Fund's securities had occurred
after foreign markets had closed but before the calculation of the Funds' net
asset value ("NAV"); (b) failing to implement the Fund's portfolio valuation and
share pricing policies and procedures; and (c) failing to know and implement
applicable rules and regulations concerning the calculation of NAV (the "Fair
Valuation Lawsuit"). The Seventh Circuit ruled that the plaintiffs' state law
claims were preempted under federal law resulting in the dismissal of
plaintiffs' complaint. However, plaintiffs are in the process of appealing that
decision before the United States Supreme Court.
On March 21, 2005, a class action complaint was filed against the Columbia
Acorn Trust and Columbia WAM seeking to rescind the Contingent Deferred Sales
Charges assessed upon redemption of Class B shares of Columbia Acorn Funds due
to the alleged market timing of the Columbia Acorn Funds. In addition to the
rescission of sales charges, plaintiffs seek recovery of actual damages,
attorneys' fees and costs. The case has been transferred to the Multi-District
Action in the federal district court of Maryland.
The Columbia Acorn Trust and Columbia WAM intend to defend these suits
vigorously.
As a result of these matters or any adverse publicity or other developments
resulting from them, there may be increased redemptions or reduced sales of Fund
shares, which could increase transaction costs or operating expenses, or have
other adverse consequences for the Funds.
In connection with the events described in detail above, various parties have
filed suit against certain funds, their Boards and/or BOA (and affiliated
entities). These suits are ongoing. However, based on currently available
information, the Columbia Acorn Trust believes that the likelihood that these
lawsuits will have a material adverse impact on any fund is remote, and Columbia
WAM believes that the lawsuits are not likely to materially affect its ability
to provide investment management services to the Funds.
For the year ended December 31, 2005, CM has assumed $15,593 in consulting
services and legal fees incurred by the Fund in connection with these matters.
14
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of Wanger Select Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Wanger Select Fund (a series of the
Wanger Advisors Trust, hereinafter referred to as the "Fund") at December 31,
2005, the results of its operations for the year then ended, the changes in its
net assets and the financial highlights for each of the two years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audit of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at December
31, 2005 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion. The financial highlights of the Fund for the periods
ended December 31, 2003 and prior were audited by other independent auditors
whose report dated February 6, 2004 expressed an unqualified opinion on those
financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 14, 2006
15
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
UNAUDITED INFORMATION
FEDERAL INCOME TAX INFORMATION
For the fiscal year ended December 31, 2005, the Fund designated long-term
capital gains of $3,370,898.
16
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
[EXCERPTS FROM:]
Wanger Advisors Trust
Management Fee Evaluation of the Senior Officer
Prepared Pursuant to the New York Attorney General's
Assurance of Discontinuance
July 2005
17
Wanger Select 2005 Annual Report
- --------------------------------------------------------------------------------
Introduction
The New York Attorney General's Assurance of Discontinuance ("Order") entered
into by Columbia Management Advisors, Inc. ("CMAI") and Columbia Funds
Distributor, Inc., ("CFDI" and collectively with "CMAI," "CMG") in February
2005, allows CMAI to manage or advise a mutual fund, including the Wanger
Advisors Trust's family of funds (the "WAT Funds" or "WAT" or "Trust"), only if
the trustees of the WAT Funds appoint a "Senior Officer" to perform specified
duties and responsibilities. One of these responsibilities includes "managing
the process by which proposed management fees (including but not limited to,
advisory fees) to be charged the WAT Fund[s] are negotiated so that they are
negotiated in a manner which is at arms' length and reasonable and consistent
with this Assurance of Discontinuance."
The Order also provides that the Board of Trustees of the WAT Funds ("Board")
must determine the reasonableness of proposed "management fees" by using either
an annual competitive bidding process supervised by the Senior Officer or
Independent Fee Consultant, or by obtaining "an annual independent written
evaluation prepared by or under the direction of the Senior Officer or the
Independent Fee Consultant."
"Management fees" are only part of the costs and expenses paid by mutual fund
shareholders. The expenses can vary depending upon the class of shares held but
usually include: (1) investment management or advisory fees to compensate
analysts and portfolio managers for stock research and portfolio management, as
well as the cost of operating a trading desk; (2) administrative expenses
incurred to prepare registration statements and tax returns, calculate the
Funds' net asset values, maintain effective compliance procedures and perform
recordkeeping services; (3) transfer agency costs for establishing accounts,
accepting and disbursing funds, as well as overseeing trading in Fund shares;
(4) custodial expenses incurred to hold the securities purchased by the Funds;
and (5) distribution expenses, including commissions paid to brokers that sell
the Fund shares to investors.
Columbia Wanger Asset Management, L.P. ("CWAM"), the adviser to the WAT Funds,
has proposed that the Trust enter into an agreement that "bundles" the first two
categories listed above: advisory and administrative services. The fees paid
under this agreement are referred to as "management fees." Other fund expenses
are governed by separate agreements, in particular agreements with two CWAM
affiliates: CFDI, the broker-dealer that underwrites and distributes the WAT
Funds' shares, and Columbia Funds Services, Inc. ("CFSI"), the Funds' transfer
agent. In conformity with the terms of the Order, this evaluation, therefore,
addresses only the advisory and administrative contract between CWAM and the
Trust, and does not extend to the other agreements.
According to the Order, the Senior Officer's evaluation must consider at least
the following:
(1) Management fees (including components thereof) charged to
institutional and other clients of CWAM for like services;
(2) Management fees (including any components thereof) charged by other
mutual fund companies for like services;
(3) Costs to CWAM and its affiliates of supplying services pursuant to the
management fee agreements, excluding any intra-corporate profit;
(4) Profit margins of CWAM and its affiliates from supplying such
services;
(5) Possible economies of scale as the WAT Funds grow larger; and
(6) The nature and quality of CWAM's services, including the performance
of each WAT Fund.
On November 17, 2004, the Board appointed me, Robert Scales, Senior Officer
under the Order. The Board also determined not to pursue a competitive bidding
process and instead, charged me with the responsibility of evaluating the WAT
Funds' proposed advisory and administrative fee contract with CWAM in conformity
with the requirements of the Order. This Report is an annual evaluation required
under the Order. In discharging their responsibilities, the independent Trustees
have also consulted independent, outside counsel.
* * *
This evaluation was performed in cooperation and regular communication with the
Compliance/Contract Renewal Committee of the Board.
Process and Independence
The objectives of the Order are to ensure the independent evaluation of the
advisory fees paid by the WAT Funds as well as to ensure that all relevant
factors are considered. In my view, the contract renewal process has been
conducted at arms-length and with independence in gathering, considering and
evaluating relevant data. For example, the selection of fund peer groups is
critical in assessing a fund's relative performance and cost. I have required
Lipper and Morningstar, Inc. to prepare their reports without input or
commentary from CWAM; the engagement letters with them reflect this requirement.
As a result, the peer groups reflected in the Morningstar, Inc. and Lipper
reports were determined independently. After submission of the reports, I asked
CWAM to comment on them to avoid errors and to establish a clear record of
CWAM's views on which funds, in its judgment, constitute an appropriate peer
group.
Similarly, I discussed CWAM's profitability analysis with its management but
also sought the independent views of Ernst &Young on the reasonableness of
CWAM's cost allocation methodology and on the adequacy of the financial data it
provided. The evaluation of CWAM's profitability was performed in the context of
the limited industry data available.
My evaluation of the advisory contract was shaped by my experience as WAT's
Chief Compliance Officer ("CCO"). As CCO, I report solely to the Board and have
no reporting obligation to or employment relationship with CMG or its
affiliates, except for administrative purposes. This too contributes to the
independence of this evaluation. I have made several comments on compliance
matters in evaluating the quality of service provided by CWAM and CMG.
18
Wanger Select 2005 Annual Report
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Finally, this Report, its supporting materials and the data contained in other
materials submitted to the Compliance/Contract Renewal Committee of the Board,
in my view, provide a thorough factual basis upon which the Board, in
consultation with independent counsel as it deems appropriate, may conduct
management fee negotiations that are in the best interests of the WAT Funds'
shareholders.
* * *
VI. Conclusions
My review of the data and other material above leads to the following
conclusions with respect to the factors identified in the Order.
1. Performance. The WAT Funds generally have achieved outstanding
performance and rank very favorably against their peers. The
international funds have good recent performance records, but weaker
long-term performance relative to the domestic WAT Funds. Recent
management changes have been followed by improved performance. The
domestic WAT Funds and International Select typically achieve their
performance with less risk than their competitors; relative risks are
greater for International Small Cap.
2. Management Fees relative to Peers. The management fee rankings of the
Funds are generally well below the respective medians and, hence, less
favorable to shareholders than their peer group funds.
3. Administrative Fees. The WAT Funds pay a bundled fee that combines
advisory fees and administrative expense, so ranking these fees
separately was not possible.
4. Management Fees relative to Other Accounts. CWAM's focus is its mutual
funds. It does not actively seek to manage separate or institutional
accounts. The few institutional accounts it does manage vary in rate
structures. Some pay advisory fees commensurate with or higher than
the WAT Funds. In a few instances, however, sub-advised accounts pay
lower management fees than do the WAT Funds.
5. Costs to CWAM and its Affiliates. CWAM's costs do not appear
excessive, and, in my view, it uses appropriate methodologies to
allocate overhead costs. CWAM's affiliates do not appear to profit
indirectly from CWAM's management agreement with the WAT Funds.
6. Profit Margins. CWAM's firm-wide profit margins are at the upper end
of the industry, though these comparisons are hampered by limited
industry data. High profit margins are not unexpected for firms that
manage large, successful funds and have provided outstanding
investment performance for investors. Profit margins for the WAT Funds
are lower than the margins for other accounts managed by CWAM because
of payments made to intermediaries that offer the WAT Funds through
variable annuity products. CMAI, the Funds' administrator, currently
experiences losses rather than profits, in connection with its
activities relating to the WAT Funds.
7. Economies of Scale. Economies of scale do exist at CWAM and will
expand, if the assets of the WAT Funds get larger. They are, however,
only partially reflected in the management fee schedule for two of the
four WAT Funds. If the Funds' assets continue to grow, under the
Funds' current fee schedules, shareholders might not benefit in a
manner generally commensurate with CWAM's increased profits
8. Nature and quality of services. This category includes a variety of
considerations that are difficult to quantify, yet can have a
significant bearing on the performance of the WAT Funds. Several areas
merit comment.
a. Continuity of Management. It is critical that capable and
experienced portfolio managers remain committed to the Funds and
are able to hire and retain analysts to assist them. CWAM must
have in place appropriate incentive plans that align its
management's interests with those of investors. Further, CWAM
must maintain the independence of its investment process. It
should also be supported by effective information technology.
b. Compliance. CWAM has an effective compliance program and a
variety of related services that are valuable to shareholders,
such as, systems to ensure best execution of portfolio
transactions and the daily review of security prices to ensure
accuracy of the WAT Funds' NAV.
c. Administration Services. The WAT Funds benefit from a variety of
administrative services that are performed by CWAM and CMAI,
including preparation of registration statements, calculation of
Fund NAV's, accounting services, shareholder services, and other
functions
In my opinion, these conclusions, taken together, generally support the
reasonableness of the proposed management agreement. In reaching this
conclusion, I weighed heavily the outstanding performance of the WAT Funds
relative to their peers. Performance is an investor's first concern. The expense
incurred by shareholders to enjoy this performance is, however, high relative to
competing funds, though expenses for the WAT Funds are (with one exception)
comparable to the parallel Acorn Funds. Nonetheless, a more complete breakpoint
schedule could address this issue as well as share with investors more fully the
benefits of economies of scale.
19
Wanger Select 2005 Annual Report
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VII. Recommendations
The Trustees should consider the following proposals to address the issues
identified in this Report. Some of these recommendations require the collection
and evaluation of more data. This work cannot be accomplished effectively before
the expiration of the existing advisory contract on July 31, 2005. Therefore, I
recommend that the Trustees consider extending the existing contract pending
consideration of these recommendations.
These recommendations do not purport to offer the only avenues to address the
opinions and conclusions I have expressed in this Report. Economies of scale,
for example, can be addressed in a variety of ways in a management contract.
Sound business judgment will guide how any particular area is addressed with due
consideration given to all the factors that must be weighed in reaching a
management agreement that best serves the WAT Fund shareholders.
I believe the Trustees should consider the following:
1. Restructure the management fee schedule beyond the current breakpoints
to reflect more fully economies of scale. The Trustees might consider
several ways to accomplish this objective, including instituting a
two-tier fee structure that incorporates a complex- or CWAM-wide fee
(including assets held in separate accounts) and a fund specific fee,
with each containing breakpoints to reflect their separate economies
of scale. Another approach is to consider uniform breakpoints for all
WAT Funds, including breakpoints above and below current asset levels.
2. Conduct further study to ensure that the costs paid to insurance
company intermediaries are transparent. The Trustees could consider
forming an ad hoc committee to gather and evaluate data regarding
CWAM's payments to intermediaries and the services provided by those
intermediaries. Such a committee might also seek the assistance of a
consultant such as Ernst & Young.
3. Administrative Fees. Administrative and advisory fees could be
unbundled to allow greater transparency and to permit distinct
comparisons among peers. An administrative fee could also be
formulated with a breakpoint schedule that shares the economies of
scale available with shareholders.
4. Condition contract renewal on submission of an employment agreements
or a management incentive plan designed to ensure the continued
employment of senior management, under terms that align management's
incentives with the interests of the WAT Funds' shareholders. Any
incentive plan should be designed to permit CWAM to attract and retain
the highest caliber investment professionals and support them with
effective and reliable information technology systems.
5. Review with CWAM its anticipated capacity limitations and the degree
to which increased staffing and effective incentives may address those
issues.
Robert P. Scales
Chief Compliance Officer, Senior Vice President and General Counsel
July 25, 2005
20
Wanger Select 2005 Annual Report
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BOARD APPROVAL OF THE EXISTING ADVISORY AGREEMENT
The Compliance/Contract Review Committee (the "Committee") of the board of
trustees meets on a regular basis and holds special meetings as otherwise
necessary or advisable to review the advisory agreement (the "Agreement") of
Wanger Advisors Trust (the "Trust") and each series thereof (the "Funds") and
determines whether to recommend that the full board approve the continuation of
the Agreement for an additional term. The Committee is comprised of three or
more trustees, each of whom is an independent trustee, and the Trust's Chief
Compliance Officer ("CCO"), who is a non-voting member of the Committee. After
the Committee has made its recommendation, the full board, including the
independent trustees, determines whether to approve the continuation of the
Agreement. In addition, the board, including the independent trustees, considers
matters bearing on the Agreement at most of their other meetings throughout the
year and meets at least quarterly with the portfolio managers employed by
Columbia Wanger Asset Management, L.P. ("CWAM"), the Funds' investment adviser.
The trustees receive all materials that they and CWAM believe to be
reasonably necessary for them to evaluate the Agreement and determine whether to
approve the continuation of the Agreement. Those materials generally include,
among other items, (i) information on the investment performance of the Funds
and the performance of peer groups of funds and of the Funds' performance
benchmarks, (ii) information on the Funds' advisory fees and other expenses,
including information comparing the Funds' expenses to those of peer groups of
funds and information about any applicable expense caps and fee "breakpoints,"
(iii) share sales and redemption data, (iv) information about the profitability
to CWAM and its affiliates of their relationships with the Funds and potential
"fall-out" or ancillary benefits that CWAM and its affiliates may receive as a
result of their relationships with the Funds and (v) information obtained
through CWAM's response to a questionnaire prepared at the request of the
trustees by Bell, Boyd & Lloyd LLC, independent counsel to the Trust and to the
independent trustees. The trustees may also consider other information such as
(i) CWAM's financial results and financial condition, (ii) each Fund's
investment objective and strategies and the size, education and experience of
CWAM's investment staffs and their use of technology, external research and
trading cost measurement tools, (iii) the allocation of the Funds' brokerage, if
any, including allocations to brokers affiliated with CWAM, and the use of
"soft" commission dollars to pay Fund expenses or to pay for research products
and services, (iv) the resources devoted to, and the record of compliance with,
the Funds' investment policies and restrictions, policies on personal securities
transactions and other compliance policies, (v) the response of CWAM and its
affiliates to various legal and regulatory proceedings since 2003 and (vi) the
economic outlook generally and for the mutual fund industry in particular. In
addition, the trustees conferred with, and reviewed the Management Fee
Evaluation prepared by, the Trust's Senior Officer, who was appointed by the
trustees as contemplated by the Assurance of Discontinuance dated February 9,
2005 among affiliates of CWAM and the Office of the New York Attorney General. A
summary of the Management Fee Evaluation is included in this report. Throughout
the process, the trustees have the opportunity to ask questions of and request
additional materials from CWAM.
On July 25, 2005 the board of trustees most recently approved the
continuation of the Agreement through October 31, 2005, and on September 28,
2005 the board approved an amended and restated Agreement (the "Amended
Agreement") for an initial term ending on July 31, 2006. The board actions
followed Committee meetings held in June, July and September 2005. The board
determined in the first instance to continue the Agreement through October
(rather than for a full year period) pending the resolution of the compensation
and incentive plan for key CWAM employees, whose employment agreements were to
terminate in December, 2005. Those matters were resolved prior to September 28,
2005.
In considering whether to approve the continuation of the Agreement and to
approve the Amended Agreement, the trustees, including the independent trustees,
did not identify any single factor as determinative, and each weighed the
various factors as he or she deemed appropriate. The trustees considered the
following matters in connection with their continuation of the Agreement and,
except as noted in connection with their approval of the Amended Agreement
(collectively with the Agreement, the "Agreements").
Nature, quality and extent of services. The trustees reviewed the nature,
quality and extent of CWAM's services to the Funds, taking into account the
investment objective and strategy of each Fund and the knowledge gained from the
board's regular meetings with management. In addition, the trustees reviewed
CWAM's resources and key personnel, especially those who provide investment
management services to the Funds. The trustees considered the importance of the
continuity of management. At the September 28, 2005 meeting, the trustees
considered the fact that Columbia Management, Inc. ("CM") and CWAM had agreed on
a new compensation and incentive plan for key CWAM employees. The trustees also
considered other services provided to the Funds by CWAM, such as managing the
execution of portfolio transactions and the selection of broker-dealers for
those transactions, providing support services for the board and board
committees, communicating with shareholders and overseeing the activities of
other service providers, including monitoring compliance with various Fund
policies and procedures and with applicable securities laws and regulations.
The trustees concluded that the nature and extent of the services provided by
CWAM to each Fund were appropriate and consistent with the terms of the
Agreements, that the quality of those services had been consistent with or
superior to quality norms in the industry and that the Funds were likely to
benefit from the continued provision of those services. They also concluded that
CWAM had sufficient personnel, with the appropriate education and experience, to
serve the Funds effectively and had demonstrated its continuing ability to
attract and retain well qualified personnel.
Performance of the Funds. The trustees considered the short-term and
longer-term performance of each Fund. They reviewed information comparing each
Fund's performance with the performance of the Fund's benchmark and with the
performance of comparable funds and peer groups identified by Lipper Inc.
("Lipper") and Morningstar Associates, LLC ("Morningstar"). They noted that the
two domestic Funds, Wanger U.S. Smaller Companies and Wanger Select, have each
outperformed their respective benchmarks and Lipper and Morningstar peers. The
trustees considered that Lipper and Morningstar ranked Wanger U.S. Smaller
Companies first in its peer group for the past five years and Wanger Select
first in its peer group for the three and five-year periods. The trustees
discussed the performance of the two international Funds, Wanger International
Small Cap and Wanger International Select, noting that each Fund's performance
had improved over the past two years. They considered that Morningstar ranked
Wanger International Small Cap first in its peer group for the one-year period
and Lipper ranked it first in its peer group for the three-year period. They
also considered that Lipper ranked Wanger International Select first in its peer
group for the one-year period and second in its peer group for the three and
five-year periods. The trustees concluded that although past performance is not
necessarily indicative of future results, the Funds' improving performance
record and investment process enhancements were important factors in the
trustees' evaluation of the quality of services provided by CWAM under the
Agreement.
Costs of Services and Profits Realized by CWAM. The trustees examined
information on fees and expenses of each Fund in comparison to information for
other comparable funds as provided by Lipper and Morningstar. They considered
that both the contractual rates of advisory fees and the actual advisory fees
for most of the Funds were higher than the median advisory fees of the
respective peer groups. The trustees also considered that the expense ratios of
each Fund were also higher than the median expense ratios of the respective peer
groups. At the July 25, 2005 meeting, at the recommendation
21
Wanger Select 2005 Annual Report
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BOARD APPROVAL OF THE EXISTING ADVISORY AGREEMENT
of the Committee, the board approved a new breakpoint for Wanger International
Small Cap's fee schedule, reducing fees by 0.10% on net assets of $500 million
and above, effective August 1, 2005.
The trustees reviewed information on the profitability of CWAM in serving as
each Fund's investment adviser and of CWAM and its affiliates in all of their
relationships with each Fund, as well as an explanation of the methodology
utilized in allocating various expenses among the Funds and other business
units. The trustees considered the methodology used by CWAM in determining
compensation payable to portfolio managers and the very competitive environment
for investment management talent. The trustees recognized that profitability
comparisons among fund managers are difficult because very little comparative
information is publicly available and profitability of any manager is affected
by numerous factors, including the organizational structure of the particular
manager, the types of funds and other accounts it manages, possible other lines
of business, the methodology for allocating expenses and the manager's capital
structure and cost of capital. However, based on the information available and
taking those factors into account, the trustees concluded that the profitability
of CWAM regarding each Fund in relation to the services rendered was not
unreasonable.
The trustees also reviewed CWAM's advisory fees for its institutional
separate accounts. Although in most instances its institutional separate account
fees for various investment strategies were lower than the advisory fees charged
to the Funds with corresponding strategies, the trustees noted that CWAM
performs significant additional services for the Funds that it does not provide
to those other clients, including administrative services, oversight of the
Funds' other service providers, trustee support, regulatory compliance and
numerous other services. Finally, the trustees considered the financial
condition of CWAM, which they found to be sound.
The trustees concluded that the advisory fees (including the additional
breakpoint for Wanger International Small Cap) and other compensation payable by
the Funds to CWAM and its affiliates were reasonable in relation to the nature
and quality of the services to be provided, taking into account the fees charged
by other advisers for managing comparable mutual funds with similar strategies
and the fees CWAM charges to other clients. The trustees noted, however, that
they would continue to evaluate the Funds' investment advisory fee rates. The
trustees also concluded that the Funds' estimated overall expense ratios, taking
into account quality of services provided by CWAM and the investment performance
of the Funds, were also reasonable.
Economies of Scale. The trustees noted that the advisory fee schedule for
each of Wanger U.S. Smaller Companies and Wanger International Small Cap
contains two breakpoints that reduce the fee rate on assets above specified
levels. They also noted that they had agreed to establish a new breakpoint for
Wanger International Small Cap. The trustees concluded that with the additional
breakpoint for Wanger International Small Cap, the fee schedule for each Fund
would represent a sharing of economies of scale at current asset levels. They
agreed, however, to continue their periodic consideration of the Funds' fee
structures and economies of scale.
Other Benefits to CWAM. The trustees also considered benefits that accrue to
CWAM and its affiliates from their relationship with the Funds. The trustees
concluded that, other than the services to be provided by CWAM and its
affiliates pursuant to the Agreement and the fees payable by the Funds therefor,
the Funds and CWAM may potentially benefit from their relationship with each
other in other ways. Recognizing that an affiliate of CWAM serves the Funds as
transfer agent and receives compensation from the Funds for those services, the
trustees determined that such compensation was not unreasonable. They noted that
the Funds' transfer agent reported that it made a small profit on its work for
the Funds. The trustees also considered CWAM's use of commissions to be paid by
the Funds on their portfolio brokerage transactions to obtain proprietary
research products and services benefiting the Funds and/or other clients of
CWAM. The trustees concluded that CWAM's use of "soft" commission dollars to
obtain research products and services was consistent with regulatory
requirements and is beneficial to the Funds. They concluded that, although CWAM
derives or may derive additional benefits through the use of soft dollars from
the Funds' portfolio transactions, the Funds also benefit from the receipt of
research products and services to be acquired through commissions paid on the
portfolio transactions of other clients of CWAM.
New Terms of the Amended Agreement. As previously mentioned, the trustees
negotiated a new breakpoint for Wanger International Small Cap's fee schedule,
reducing fees by 0.10% on net assets of $500 million and above. That new
breakpoint is reflected in the Amended Agreement.
In addition, the Amended Agreement includes representations by CWAM that are
substantially similar to those contained in a letter agreement between the Trust
and CMG that expired on October 31, 2005. The Amended Agreement provides that:
(1) CWAM will endeavor to preserve the autonomy of the Trust; (2) CWAM remain a
wholly-owned subsidiary of CMG (or any successor company) as a Chicago-based
management firm; (3) CWAM will maintain the investment philosophy and research
that the Chicago-based management deems appropriate, research activities
separate and dedicated solely to CWAM and its own domestic and international
trading activities; (4) CWAM will use its best efforts to maintain information
systems that will provide timely and uninterrupted operating information and
data consistent with all regulatory and compliance requirements; (5) CWAM's
Chicago-based management will have the responsibility and considerable latitude
to recruit and compensate (on a competitive basis) investment management
personnel and to control travel budgets for analysts consistent with its
operational and strategic plans while subject to the approval of CM; and (6)
CWAM acknowledges the importance that the Board and its compliance/contract
review committee place on full legal and regulatory compliance by CMG, CWAM, and
all other Trust service providers and their personnel (collectively,
"Providers") and agrees to (i) cooperate fully with the Board, the
compliance/contract review committee and the CCO of the Trust with all inquiries
by the Trust concerning such compliance by the Providers and (ii) communicate
proactively with the Board, the compliance/contract review committee and the CCO
of the Trust concerning material compliance matters and any instance of legal or
regulatory non-compliance by the Providers of which CWAM is aware and that CWAM
deems to be material. Such cooperation and communication by CWAM will be done
after receipt of an inquiry or upon learning of any such legal or regulatory
non-compliance. Lastly, the Amended Agreement provides that the principal
investment management focus and responsibilities of CWAM's portfolio managers
and analysts will be dedicated to the Trust and Columbia Acorn Trust.
After full consideration of the above factors as well as other factors that
were instructive in analyzing the Agreement, the trustees, including all of the
independent trustees, concluded that the continuation of the Agreement was in
the best interest of each Fund. On July 25, 2005, the trustees continued the
Agreement, as revised to include an additional breakpoint for Wanger
International Small Cap, through October 31, 2005, and on September 28, 2005,
the trustees approved the Amended Agreement.
22
Wanger Select 2005 Annual Report
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SPECIAL NOTICE
A special meeting of the shareholders was held on November 30, 2005 for the
purpose of electing nine trustees. A Proxy Statement that described the proposal
had been mailed to shareholders of record as of September 28, 2005. The holders
of the majority of the shares of the Trust entitled to vote at the meeting
elected the following five trustees, by the votes shown below:
NOMINEE FOR AGAINST ABSTAIN/BNV*
- --------------------------------------------------------------------------------
Jerome L. Duffy 73,936,669.461 1,967,029.183 0
Fred D. Hasselbring 73,923,911.414 1,979,787.230 0
Kathryn A. Krueger 74,060,051.086 1,843,647.558 0
Ralph Wanger 73,916,921.587 1,986,777.057 0
Patricia H. Werhane 73,960,075.551 1,943,623.093 0
* "BNVs" or "broker non-votes" are shares held by brokers or nominees as to
which (i) the broker or nominee does not have discretionary voting power,
and (ii) the broker or nominee has not received instructions from the
beneficial owner or other person who is entitled to instruct how the shares
will be voted.
23
Wanger Select 2005 Annual Report
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BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST
The Board of Trustees of the Trust has overall management responsibility for the
Trust and the Funds. Each trustee serves a term of unlimited duration, provided
that a majority of trustees always has been elected by shareholders. The
trustees appoint their own successors, provided that at least two-thirds of the
trustees, after such appointment, have been elected by shareholders.
Shareholders may remove a trustee, with or without cause, upon the vote of
two-thirds of the Trust's outstanding shares at any meeting called for that
purpose. A trustee may be removed, with or without cause, upon the vote of a
majority of the trustees.
The names of the trustees and officers of the Trust, the date each was first
elected or appointed to office, their principal business occupations during at
least the last five years, number of portfolios in the fund complex they oversee
and other directorships they hold are shown below. Each trustee serves in such
capacity for each of the four series of the Trust.
The business address of each trustee and officer of the Trust is Columbia
Wanger Asset Management, L.P., 227 West Monroe, Suite 3000, Chicago, Illinois
60606, except for Messrs. Clarke, Connaughton, and Pietropaolo, whose address is
Columbia Management Group, Inc., 245 Summer Street, Boston, Massachusetts,
02210. The Trust's Statement of Additional Information includes additional
information about Wanger's trustees and officers. You may obtain a free copy of
the Statement of Additional Information on our website, www.columbiafunds.com,
or by writing or calling toll-free:
Columbia Wanger Asset Management, L.P.
Shareholder Services Group
227 W. Monroe, Suite 3000
Chicago, IL 60606
888-4-Wanger (888-492-6437)
NUMBER OF
NAME, POSITION(S) WITH YEAR FIRST PORTFOLIOS IN
WANGER ADVISORS TRUST ELECTED OR FUND COMPLEX
AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER
DECEMBER 31, 2005 TO OFFICE PAST FIVE YEARS BY TRUSTEE DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
TRUSTEES WHO ARE NOT INTERESTED PERSONS OF WANGER ADVISORS TRUST:
Jerome L. Duffy, 69, 2003 Retired since December 1997; prior thereto, senior vice 4 None.
Trustee president, Kemper Financial Services and treasurer,
Kemper Funds.
Fred D. Hasselbring, 64, 1994 Retail industry, general project development and business 4 None.
Trustee computer systems consultant; voice over specialist for
industrial and institutional applications; former chairman
of the board of the Trust (September 2004 to November 2004);
former lead independent trustee (August 2003 to
September 2004).
Kathryn A. Krueger, M.D., 48, 2003 Medical Fellow I, Cardiovascular Therapeutic Area, Lilly 4 None.
Trustee Research Laboratories (May 2004 to present); Medical
Advisor, Cardiovascular Therapeutic Area, Lilly Research
Laboratories (January 2003 to April 2004); Medical Director,
Cardiovascular Therapeutic Area, Lilly Research Laboratories
(October 2002 to December 2002); Medical Director, Neptune
Product Team, Lilly Research Laboratories (October 2001 to
October 2002); Acting Director and Senior Clinical Research
Physician, Lilly Research Laboratories (April 2001 to
September 2001); Senior Clinical Research Physician, Lilly
Research Laboratories (January 2000 to March 2001); Clinical
Research Physician, Lilly Research Laboratories (June 1996
to December 1999).
Patricia H. Werhane, 70, 1998 Ruffin Professor of Business Ethics, Darden Graduate School 4 None.
Chair of the Board and Trustee of Business Administration, University of Virginia, since
1993; Senior Fellow of the Olsson Center for Applied
Ethics, Darden Graduate School of Business Administration,
University of Virginia, from 2001 to present; and
Wicklander Chair of Business Ethics and Director of
the Institute for Business and Professional Ethics,
DePaul University (since September 2003).
TRUSTEE WHO IS AN INTERESTED PERSON OF WANGER ADVISORS TRUST:
Ralph Wanger, 71, (1) 1994 Founder, former president, chief investment officer and 10 Columbia
Trustee portfolio manager, Columbia Wanger Asset Acorn
Management, L.P. (CWAM) from July 1992 until Trust.
September 2003; Former president, Columbia Acorn
Trust from April 1992 through September 2003;
Former president, Wanger Advisors Trust (1994 through
September 2003); principal, Wanger Asset Management,
L.P. (WAM) from July 1992 until September 2000;
president, WAM Ltd. from July 1992 to September 2000;
director, Wanger Investment Company plc.
24
Wanger Select 2005 Annual Report
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BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST
NUMBER OF
PORTFOLIOS IN
NAME, POSITION(S) WITH YEAR FIRST FUND COMPLEX
WANGER ADVISORS TRUST ELECTED OR FOR WHICH
AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OFFICER ACTS IN OTHER
DECEMBER 31, 2005 TO OFFICE PAST FIVE YEARS SAME CAPACITY DIRECTORSHIPS
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF WANGER ADVISORS TRUST:
Ben Andrews, 39, 2004 Analyst and portfolio manager, CWAM since 1998; 10 None.
Vice President vice president, Columbia Acorn Trust.
J. Kevin Connaughton, 41, 2001 Treasurer and CFO of the Columbia Funds and of the 10 Nations
Assistant Treasurer Liberty All-Star Funds since December 2000 Offshore Offshore
(formerly chief accounting officer and controller of Funds
the Columbia Funds and of the Liberty All-Star Funds
from February 1998 to October 2000); treasurer of the Bank of
Galaxy Funds from September 2002 through November 2005; America
treasurer, Columbia Management Multi-Strategy Hedge Fund, Global
LLC from December 2002 through December 2004. Liquidity
Funds, PLC
Banc of
America
Capital
Management
(Ireland),
Limited
Michael G. Clarke, 35, 2004 Chief accounting officer of the Columbia Funds, Liberty 10 None.
Assistant Treasurer Funds, Stein Roe Funds and All-Star Funds since October
2004; Controller of the Columbia Funds, Liberty Funds,
Stein Roe Funds and All-Star Funds from May 2004 to
October 2004; Assistant Treasurer from June 2002 to May
2004; Vice President, Product Strategy & Development
of the Liberty Funds and Stein Roe Funds from February
2001 to June 2002; Assistant Treasurer of the Liberty
Funds, Stein Roe Funds and the All-Star Funds from August
1999 to February 2001.
Bruce H. Lauer, 48, 1995 Chief operating officer, CWAM since April 1995; principal, 10 Banc of
Vice President, Secretary WAM from January 2000 to September 2000; vice president, America
and Treasurer treasurer and secretary, Columbia Acorn Trust; director, Capital
Wanger Investment Company plc and New Americas Small Cap Fund. Management
(Ireland),
Limited
Charles P. McQuaid, 52, 1994 President, CWAM since October 2003; Chief Investment Officer 10 Columbia
President of CWAM since September 2003; senior vice president of the Acorn
Trust from 1994 through September 2003; Portfolio Trust.
manager since 1995 and director of research,
CWAM from July 1992 through December 2003; Interim
director of international research, CWAM from December
2003 until December 2004; principal, WAM from July
1995 to September 2000; Trustee since 1992 and
president since 2003, Columbia Acorn Trust.
Robert A. Mohn, 44, 1997 Analyst and portfolio manager, CWAM since August 1992; 10 None.
Vice President director of domestic research, CWAM since March 2004;
principal, WAM from 1995 to September 2000; vice president,
Columbia Acorn Trust.
Christopher Olson, 41, 2001 Analyst and portfolio manager, CWAM since January 2001; vice 10 None.
Vice President president, Columbia Acorn Trust; prior thereto, director
and portfolio strategy analyst with UBS Asset Management/
Brinson Partners.
Vincent P. Pietropaolo, 40, 2001 Assistant General Counsel, Bank of America (and its 10 None.
Assistant Secretary predecessors), since December 1999.
Robert Scales, 53, 2004 Associate General Counsel, Grant Thornton LLP (2002-2004); 10 None.
Chief Compliance Officer, Senior prior thereto Associate General Counsel, UBS PaineWebber
Vice President and General Counsel (broker-dealer)
Zach Egan, 37, 2004 Director of International Research since December 2004;
Director of International Research Co-manager of Columbia Acorn International Fund since
May 2003; International Analyst, CWAM, 1999-2003.
- -------------------------
(1) Trustee who is an "interested person" of the Trust and of CWAM, as defined
in the Investment Company Act of 1940, because he is a former officer of
the Trust and former employee of CWAM.
25
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Wanger Select 2005 Annual Report
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27
Wanger Select 2005 Annual Report
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WANGER ADVISORS TRUST
TRANSFER AGENT,
DIVIDEND DISBURSING AGENT
Columbia Management Services, Inc.
P.O. Box 8081
Boston, Massachusetts
02266-8081
DISTRIBUTOR
Columbia Management Distributors, Inc.
One Financial Center
Boston, Massachusetts
02111-2621
INVESTMENT ADVISER
Columbia Wanger Asset
Management, L.P.
227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
1-888-4-WANGER
(1-888-492-6437)
LEGAL COUNSEL
Bell, Boyd & Lloyd LLC
Chicago, Illinois
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
Chicago, Illinois
This report, including the schedules of investments and financial statements, is
submitted for the general information of the shareholders of the Wanger Advisors
Trust. This report is not authorized for distribution unless preceded or
accompanied by a prospectus.
A description of the fund's proxy voting policies and procedures is available
(i) on the fund's website, www.columbiafunds.com; (ii) on the Securities and
Exchange Commission's website at www.sec.gov, and (iii) without charge, upon
request, by calling 888-492-6437. Information regarding how the fund voted
proxies relating to portfolio securities during the 12-month period ended June
30 is available from the SEC's website.
The fund files a complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is
available on the SEC's website at www.sec.gov and may be reviewed and copied at
the SEC's Public Reference Room in Washington, D.C. Information on the operation
of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
28
WANGER ADVISORS TRUST
SHC-42/106121-1205 0206 06/9826
WANGER INTERNATIONAL SELECT
2005 Annual Report
[Graphic: Squirrel]
WANGER ADVISORS FUNDS
managed by Columbia Wanger Asset Management, L.P.
[Graphic: Squirrel]
WANGER INTERNATIONAL SELECT
2005 ANNUAL REPORT
Table of Contents
1 Understanding Your Expenses
2 No Ordinary Portfolio Managers
4 Performance Review
6 Statement of Investments
9 Statement of Assets and Liabilities
9 Statement of Operations
10 Statements of Changes in Net Assets
11 Financial Highlights
12 Notes to Financial Statements
15 Report of Independent Registered Public Accounting Firm
16 Management Fee Evaluation of the Senior Officer
20 Board Approval of the Existing Advisory Agreement
22 Special Notice
23 Board of Trustees and Management of Wanger Advisors Trust
COLUMBIA WANGER ASSET MANAGEMENT, L.P. ("COLUMBIA WAM") IS ONE OF THE LEADING
GLOBAL SMALL-CAP EQUITY MANAGERS IN THE UNITED STATES WITH MORE THAN 30 YEARS OF
SMALL-CAP INVESTMENT EXPERIENCE. COLUMBIA WAM MANAGES MORE THAN $27 BILLION IN
EQUITIES AND IS THE INVESTMENT ADVISER TO WANGER U.S. SMALLER COMPANIES, WANGER
INTERNATIONAL SMALL CAP, WANGER SELECT, WANGER INTERNATIONAL SELECT AND THE
COLUMBIA ACORN FAMILY OF FUNDS.
FOR MORE COMPLETE INFORMATION ABOUT OUR FUNDS, INCLUDING THE COLUMBIA ACORN
FUNDS, OUR FEES, RISKS ASSOCIATED WITH INVESTING, OR EXPENSES, CALL
1-888-4-WANGER FOR A PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND
MONEY. THIS REPORT IS NOT AN OFFER OF THE SHARES OF THE COLUMBIA ACORN FUND
FAMILY.
THE DISCUSSION IN THE REPORT OF PORTFOLIO COMPANIES IS FOR ILLUSTRATION ONLY
AND IS NOT A RECOMMENDATION OF INDIVIDUAL STOCKS. THE INFORMATION IS BELIEVED TO
BE ACCURATE, BUT THE INFORMATION AND THE VIEWS OF THE PORTFOLIO MANAGERS MAY
CHANGE AT ANY TIME WITHOUT NOTICE AND THE PORTFOLIO MANAGERS MAY ALTER A FUND'S
PORTFOLIO HOLDINGS BASED ON THESE VIEWS AND THE FUND'S CIRCUMSTANCES AT THAT
TIME.
Wanger International Select 2005 Annual Report
- --------------------------------------------------------------------------------
UNDERSTANDING YOUR EXPENSES
As a fund shareholder, you incur two types of costs. There are transaction
costs, which generally include sales charges on purchases and may include
redemption or exchange fees. There are also ongoing costs, which generally
include investment advisory and other fund expenses. The information on this
page is intended to help you understand your ongoing costs of investing in the
fund and to compare these costs with the ongoing costs of investing in other
mutual funds.
ANALYZING YOUR FUND'S EXPENSES
To illustrate these ongoing costs, we have provided an example and calculated
the expenses paid by investors in the fund during the reporting period. The
information in the following table is based on an initial investment of
$1,000.00, which is invested at the beginning of the reporting period and held
for the entire period. Expense information is calculated two ways and each
method provides you with different information. The amount listed in the
"actual" column is calculated using actual operating expenses and total return
for the fund. The amount listed in the "hypothetical" column assumes that the
return each year is 5% before expenses and then applies each Fund's actual
expense ratio for the period to the hypothetical return. You should not use the
hypothetical account values and expenses to estimate either your actual account
balance at the end of the period or the expenses you paid during the reporting
period. See the "Compare with other funds" information for details on using the
hypothetical data.
ESTIMATING YOUR ACTUAL EXPENSES
To estimate the expenses that you paid over the period, first you will need your
account balance at the end of the period.
1. Divide your ending account balance by $1,000.00. For example, if an
account balance was $8,600.00 at the end of the period, the result
would be 8.6.
2. In the section of the table below titled "Expenses paid during the
period," locate the amount for your fund. You will find this number is
in the column labeled "actual." Multiply this number by the result
from step 1. Your answer is an estimate of the expenses you paid on
your account during the period.
July 1, 2005 - December 31, 2005
Account value at the Account value at the Expenses paid during Fund's annualized
beginning of the period ($) end of the period ($) the period ($) expense ratio (%)*
- ------------------------------------------------------------------------------------------------------------------------------------
Actual Hypothetical Actual Hypothetical Actual Hypothetical
- ------------------------------------------------------------------------------------------------------------------------------------
Wanger International
Select 1,000.00 1,000.00 1,158.09 1,018.50 7.23 6.77 1.33
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses paid during the period are equal to the fund's annualized expense
ratio, multiplied by the average account value over the period, then multiplied
by the number of days in the fund's most recent fiscal half-year and divided by
365.
Had the investment adviser not waived or reimbursed a portion of expenses, total
return would have been reduced.
It is important to note that the expense amounts shown in the table are meant to
highlight only ongoing costs of investing in the fund. As a shareholder of the
fund, you do not incur any transaction costs, such as sales charges, redemption
or exchange fees. Expenses paid during the period do not include any insurance
charges imposed by your insurance company's separate accounts. The hypothetical
example provided is useful in comparing ongoing costs only and will not help you
determine the relative total costs of owning different funds whose shareholders
may incur transaction costs.
*For the six months ended 12/31/05.
COMPARE WITH OTHER FUNDS
Since all mutual funds are required to include the same hypothetical
calculations about expenses in shareholder reports, you can use this information
to compare the ongoing cost of investing in the fund with other funds. To do so,
compare the 5% hypothetical example with the 5% hypothetical examples of other
funds. As you compare hypothetical examples of other funds, it is important to
note that hypothetical examples are meant to highlight the continuing cost of
investing in a fund and do not reflect any transactional costs, such as sales
charges or redemption or exchange fees, that may be incurred by shareholders of
other funds. Expenses paid during the period do not include any insurance
charges imposed by your insurance company's separate accounts.
1
Wanger International Select 2005 Annual Report
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NO ORDINARY PORTFOLIO MANAGERS
I began working with Ralph Wanger, founder of Columbia Wanger Asset Management,
in 1978. Shortly thereafter he issued the third quarter shareholder report for
one of our retail funds. In it he wrote: "...hedonism is in... Let us explore
the possibility that we have been going through the oldest cycle of all--from
Good to Bad." In order to prove that badness was more profitable than goodness,
Ralph tested two portfolios for 36-month price changes. The virtuous portfolio
included Angelica, up 45%, and Church's Fried Chicken, up 520%. The wicked
portfolio included Playboy, up 600%, and DeBeers Mines, up 59%.1 The wicked
portfolio won. Ralph's footnote to his essay read: "This study was done by the
usual techniques of Financial Analysis: (A) The stocks chosen had nothing to do
with the subject, and (B) The portfolios were readjusted until the answer
affirmed the hypothesis." At that point it became very clear to me that Ralph
Wanger was no ordinary portfolio manager!
Ralph parlayed his legendary shareholder reports into his book, A Zebra in Lion
Country.2 The book could have been titled, The Wit and Wisdom of Ralph Wanger.
In it Ralph admits that his first quarterly newsletters were serious and stuffy.
He said that he gave market and economic forecasts that quickly became outdated.
Then he decided, "If most mutual fund communications are both boring and wrong,
well then, I figured, I'd rather be lively and wrong."
There's a lot of Wisdom in A Zebra in Lion Country. Examples include: "Look for
stocks that have basic value but are out of fashion." Ralph also wrote, "The
greatest investment profit comes when an ugly duckling becomes a swan." And, "If
a company's earnings beat the Merrill Lynch analyst's forecast by 2 cents, that
doesn't excite me. I need a long-term reason to own a stock."
And Ralph meant long term. "...you can't make five or ten or twenty times your
money if you don't hold on to your stocks. Most people are delighted when a
stock doubles, and quickly sell to lock in their gain," he wrote in his book.
Ralph's long-term thinking was driven home in a report essay he wrote in June
1992: "What really makes for successful investing is having a few enormous hits.
In 22 years, I've really had three Super Stocks." Houston Oil & Minerals was
one. Houston Oil cost $220,000 in 1973 and went to $5.3 million in 1977. Another
was Cray Research, which cost $1.5 million in 1978 and was worth $20 million in
1985. International Game Technology, a maker of slot machines, cost $5 million
in 1988 and was worth $80 million by June 1992.3
Ralph also had his share of disasters. He wrote in that 1992 report, "There is
one stock we tried to sell for two years and never got a bid on any of it. A
stock like that just slides from 4 to 3 to 2 to 1 and finally disappears..."
Ralph said, "It's kind of like a doctor saying don't worry about it, it's just
going to shrivel up and fall off." Atchison Casting, an owner of steel
foundries, was a painful example of this. Ralph began purchasing the stock in
1994 and it ended up being nearly worthless when it was sold in 2003.
The wisdom here is that small-cap investing can be a winner's game. Let your
winners run. On any individual stock, one can possibly make several thousand
percent, but the most that one can lose is 100%. Small-cap investors will have
some big percentage losers, but damage to portfolios can be minor as long as
investors don't keep throwing money at them and if they maintain a
well-diversified portfolio.
How did Ralph use his genius and wisdom to build a successful firm? A few years
after I joined Ralph we had a heated discussion about a stock. The next day I
asked him if I had crossed the line during our debate. He looked at me kind of
puzzled and said, course not, if we always agreed, why would I need you?" Ralph
always respected differing opinions and created a culture of intellectual
freedom.
In an investment world full of wishful thinking, Ralph also demanded
intellectual honesty. The ability to ask tough questions, get sound answers,
discover good businesses, detect strong managers and then value stocks
appropriately, requires intellectual honesty. Then it's time to act. I remember
an analyst saying that a stock trades by appointment and Ralph responding, "Then
make an appointment and buy it!" The culture that Ralph fostered allowed
Columbia Wanger Asset Management to grow and helped its shareholders to prosper.
Leah Zell's contribution to Columbia Wanger Asset Management has also been huge
and complementary to Ralph's. Leah seemed to have the ability to see around
corners strategically and make quick, good decisions. When Leah joined our team
in 1984, she began as a domestic analyst following mostly real estate and retail
stocks. Leah then became our first foreign analyst. She successfully launched
our first international retail mutual fund, Acorn International, realizing great
investment results, and taking the Fund from zero to one billion dollars in
assets under management in 14 months. Of course, she could not have done it
without a team. Leah built the international area at Columbia Wanger Asset
Management. International investing requires all the skills needed for domestic
investing, and more. At Columbia Wanger, we like to hire international analysts
who also have language skills and cultural
2
Wanger International Select 2005 Annual Report
- --------------------------------------------------------------------------------
knowledge. In a number of cases, Leah successfully mentored new analysts who had
these traits and fine financial skills but had a lot to learn about security
analysis.
We at Columbia Wanger Asset Management are happy that Ralph and Leah kept their
offices with us and have been advisors over the last two years. We've gotten
good advice, but Ralph and Leah made it clear that the decisions were ours. In
our semiannual report we published Ralph's last column, which appeared in this
section. Ralph once said of writing his essays, "It is fun for me and only
mildly irritating to our shareholders." We are grateful to have had Ralph's and
Leah's presence and wisdom for all these years. On September 30, 2005, they
retired from their advisory roles with the firm.
DOMESTIC SMALL-CAP CYCLE
Small caps have outperformed large caps for over six years now; by our
reckoning, small caps bottomed vs. large caps in March 1999. The small-cap
Russell 2500 Index returned 110% from that date through December 31, 2005, far
outpacing the S&P 500, which returned 8%.
In the past, small-cap stocks had long cycles of out- and under-performance vs.
large caps. There is no science and there is no magic in predicting the exact
top of a small-cap cycle. Perhaps small caps will continue to outperform--some
believe small caps will outperform as long as rapid earnings growth continues
and some others believe outperformance will persist until the overall market
turns. Numerous economists are predicting higher inflation rates, and small caps
did relatively well during the inflationary periods of the 1970s.
However, when looking at price-to-earnings ratios, small caps appear expensive
vs. large caps. Using another measure, price-to-book value, small caps appear
somewhat more reasonably priced. While we don't think domestic small caps are
back to their all-time relative high valuations, we do think small-cap domestic
stocks on average are no longer cheap.
We do not predict market cycles. We stick to what we believe we do best: buying
reasonably priced small- and mid-cap stocks and when they enter periods of
higher valuations, we try to become more selective. Over time this consistently
applied approach has weathered the Funds through a variety of market cycles.
While we certainly can't predict what the future holds, the best defense against
unknown market factors is diversification across assets, which is a prudent and
time-tested investment strategy.
COLUMBIA WAM NEWS
We are pleased to announce that Satoshi Matsunaga has joined our international
analyst team covering Japan. He came on board in September. Before joining
Columbia Wanger Asset Management, he was with Compass Advisers in New York.
Satoshi holds an MBA from the University of Michigan and a bachelor's in
economics from Keio University in Tokyo, Japan. As a Japanese national, Satoshi
brings first-hand knowledge of the country and culture.
After the close of the period, we hired a new energy analyst. In January,
William Doyle came on board. Bill was most recently a manager of PPM America's
credit analysis team where part of his responsibilities included following the
high yield energy sector. Bill's degrees include an MBA from Loyola University
in Chicago and bachelor's degrees in finance and history from Illinois State
University.
We are pleased to welcome Satoshi and Bill to the team.
photo of: CHARLES P. MCQUAID
/S/ CHARLES P. MCQUAID
CHARLES P. MCQUAID
President and Chief Investment Officer
Columbia Wanger Asset Management, L.P.
1 The 36-month period tested ran from September 30, 1975 to September 30, 1978.
The stocks mentioned were not held at that time nor are they held by any Wanger
Advisors Fund now.
2 Wanger, Ralph, "A Zebra in Lion Country," Simon & Schuster, New York, 1997.
3 Companies Houston Oil & Minerals and the original Cray Research have
disappeared through acquisitions. International Game Technology (IGT) is not
held by any Wanger Advisors Fund portfolio.
The views expressed here are those of the respective parties. These views are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions that are difficult to predict so actual outcomes and results may
differ significantly from the views expressed. These views are subject to change
at any time based upon economic, market or other conditions and the respective
parties disclaim any responsibility to update such views. These views may not be
relied on as investment advice and, because investment decisions for a Wanger
Advisor Fund are based on numerous factors, may not be relied on as an
indication of trading intent on behalf of any particular Fund. References to
specific company securities should not be construed as a recommendation or
investment advice.
Past performance is no guarantee of future results.
Mid- and small-cap stocks are often more volatile and less liquid than the
stocks of larger companies. Small companies may have a shorter history of
operations than larger companies and may have a less diversified product line,
making them more susceptible to market pressure. Investments in foreign
securities have special risks, including political or economic instability,
higher costs, different regulations, accounting standards, trading practices and
levels of information, and currency exchange rate fluctuations.
3
Wanger International Select 2005 Annual Report
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PERFORMANCE REVIEW WANGER INTERNATIONAL SELECT
PHOTO OF: CHRISTOPHER J. OLSON
CHRISTOPHER J. OLSON
Portfolio Manager
Performance data quoted represents past performance and current performance may
be lower or higher. Past performance is no guarantee of future results. The
investment return and principal value will fluctuate so that shares, when
redeemed, may be worth more or less than the original cost. For monthly
performance updates call 1-888-4-WANGER.
Wanger International Select ended the year up 16.43% vs. a 20.35% gain for the
S&P/Citigroup World ex-US Cap Range $2-10B Index. An underweight in Japan and a
pull back in energy stock performance in the fourth quarter hurt the Fund's
performance relative to its benchmark.
Argentina's Tenaris, a multinational steel pipe manufacturer, topped the annual
winner charts with a 144% gain. Canada's Talisman Energy, an oil and gas
producer, increased 102%. Outside the energy sector, UK freight forwarder Exel
increased 56% in the year and the Fund's investment in Hong Kong exchange
operator Hong Kong Exchanges & Clearing increased 61%.
The Japanese market rallied late in the year as foreign investors, motivated by
signs of an improving economy, poured money into that market. Hoya, a maker of
opto-electrical components and eyeglass lenses, rose 28%. Industrial lighting
company Ushio gained 25%. Beverage distributor Ito En increased 19%. Daito Trust
Construction, an apartment developer, had an 11% gain for the year.
Losers for the year included Compass Group, a UK concession and contract
caterer, off 25% due to pricing competition in that market. Global Bio-Chem
Technology Group, a Hong Kong refiner of corn-based commodities, fell more than
32% in the year due to weakness in some of its commodity prices. Japanese
electronics manufacturer Funai Electric was off 32% due to increases in raw
material costs.
Looking forward to 2006, we will work to increase the Fund's weighting in Japan.
To achieve this goal, we are in the process of hiring an analyst to enhance our
coverage of Japan. Elsewhere we will continue to follow our bottom-up investment
approach to find what we believe to be the best stocks for your portfolio.
On December 7, 2005, Christopher Olson was named lead portfolio manager of
Wanger International Select. Chris had previously been a co-manager on this
Fund.
Mid-cap stocks tend to be more volatile and may be less liquid than the stocks
of larger companies. Investments in foreign securities have special risks,
including political or economic instability, higher costs, different
regulations, accounting standards, trading practices and levels of information,
and currency exchange rate fluctuations.
As of 12/31/05, the Fund's positions in the stocks mentioned were: Tenaris,
2.5%; Talisman Energy, 1.4%; Exel, 0.0%; Hong Kong Exchanges & Clearing, 3.0%;
Hoya, 3.4%; Ushio, 3.6%; Ito En, 2.4%; Daito Trust Construction, 3.9%; Compass
Group, 0.0%; Global Bio-Chem Technology Group, 1.0%; Funai Electric, 0.0%.
4
Wanger International Select 2005 Annual Report
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GROWTH OF A $10,000 INVESTMENT IN WANGER INTERNATIONAL SELECT
TOTAL RETURN FOR EACH PERIOD, FEBRUARY 1, 1999 (INCEPTION DATE) THROUGH
DECEMBER 31, 2005
AVERAGE ANNUAL TOTAL RETURN
------------------------------------
1 year 5 years Life of fund
16.43% 4.91% 12.80%
WANGER INTERNATIONAL SELECT: $23,006
S&P/Citigroup World ex-US Cap Range $2-10B Index: $20,146
Line Chart:
S&P/Citigroup
WANGER World ex-US
INTERNATIONAL Cap Range
SELECT $2-10B Index
2/1/99 10000 10000
10020 9750
10190 10135
10620 10701
10480 10249
11350 10624
11650 11021
11800 11144
11650 11183
12160 11188
14530 11508
12/31/99 18390 12388
17890 11789
21580 11941
20853 12299
20916 11806
19304 11616
20193 12232
19817 11836
20863 12208
19827 11802
19356 11437
17042 11096
12/31/00 18100 11638
18885 11580
16812 11159
14664 10289
15748 11048
15703 10954
15052 10669
14333 10401
14082 10307
11811 9110
12405 9476
12941 9814
12/31/01 13283 9835
12656 9545
12496 9690
12918 10245
13238 10432
13352 10764
12907 10390
11537 9460
11731 9437
10864 8593
10898 8746
11218 9192
12/31/02 11252 8933
10704 8708
10271 8546
10358 8400
11343 9142
12317 9797
12386 10077
12604 10481
13142 11086
13600 11543
14529 12434
14861 12538
12/31/03 15892 13367
16190 13648
16877 13977
17001 14520
16702 14026
16725 13987
17150 14342
16737 13798
16725 13925
17403 14373
17886 14857
19013 16031
12/31/04 19760 16739
19587 16649
20691 17361
20053 16921
19361 16432
19361 16531
19865 16872
20744 17429
21541 18024
22197 18916
21260 18247
21529 18987
12/31/05 23006 20146
PERFORMANCE SHOWN HERE IS PAST PERFORMANCE, WHICH CANNOT GUARANTEE FUTURE
RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT IN THE FUND WILL FLUCTUATE SO THAT FUND SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PERFORMANCE
CHANGES OVER TIME. CURRENT RETURNS FOR THE FUND MAY BE DIFFERENT THAN THAT
SHOWN. FOR MONTHLY PERFORMANCE UPDATES, PLEASE CONTACT US AT 1-888-4-WANGER.
This graph compares the results of $10,000 invested in Wanger International
Select on February 1, 1999 (the date the Fund began operations) through December
31, 2005, to the S&P/Citigroup World ex-US Cap Range $2-10B Index, with
dividends and capital gains reinvested. DUE TO ONGOING MARKET VOLATILITY,
PERFORMANCE IS SUBJECT TO SUBSTANTIAL SHORT-TERM FLUCTUATIONS. Wanger
International Select is a diversified fund that invests in the stocks of medium-
to larger-size companies with market capitalizations of $2 to $25 billion at the
time of initial purchase. Prior to 2/1/02, Wanger International Select was a
non-diversified fund, meaning that the performance of its holdings would have a
greater impact on Wanger International Select's total return and may make the
Fund's returns more volatile than a more diversified international fund. Mid-cap
stocks are more volatile and may be less liquid than large-cap stocks.
Investments in foreign securities have special risks, including political or
economic instability, higher costs, different regulations, accounting standards,
trading practices and levels of information, and currency exchange rate
fluctuations. Performance results reflect any voluntary waivers or
reimbursements of Fund expenses by the Advisor or its affiliates. Absent these
waivers or reimbursement arrangements, performance results would have been
lower.
- --------------------------------------------------------------------------------
RESULTS TO DECEMBER 31, 2005
4th quarter 1 year
WANGER INTERNATIONAL SELECT 3.64% 16.43%
S&P/Citigroup World ex-US
Cap Range $2-10B Index 6.50 20.35
MSCI EAFE 4.08 13.54
Lipper International Funds Index 4.75 15.67
NAV AS OF 12/31/05: $19.63
Performance numbers reflect all Fund expenses but do not include any insurance
charge imposed by your insurance company's separate accounts. If performance
included the effect of these additional charges, it would be lower. The
S&P/Citigroup World ex-US Cap Range $2-10B Index is a subset of the broad
market, selected by the index sponsor, representing the mid-cap developed
market, excluding the United States. MSCI EAFE is Morgan Stanley's Europe,
Australasia and Far East Index, a widely recognized international benchmark that
comprises 20 major markets in Europe, Australia and the Far East. Lipper Indexes
include the largest funds tracked by Lipper, Inc. in the named category. The
Lipper International Funds Index is made up of the 30 largest non-U.S. funds.
All indexes are unmanaged and returns include reinvested dividends. It is not
possible to invest directly in an index.
- --------------------------------------------------------------------------------
TOP 5 COUNTRIES
As a % of net assets, as of 12/31/05
Japan 27.6%
Switzerland 13.0
France 10.9
Ireland 9.2
Canada 5.9
- --------------------------------------------------------------------------------
TOP 10 HOLDINGS
As a % of net assets, as of 12/31/05
1. Jupiter Telecommunications 4.2%
Largest Cable Service Provider in Japan--Japan
2. Gambro 4.1%
Products for Renal &Blood Care--Sweden
3. Anglo Irish Bank 4.0%
Small Business & Middle Market Banking--Ireland
4. Neopost 3.9%
Postage Meter Machines--France
5. Daito Trust Construction 3.9%
Apartment Builder--Japan
6. Shimano 3.7%
Bicycle Components & Fishing Tackle--Japan
7. Ushio 3.6%
Industrial Light Sources--Japan
8. Kuehne & Nagel 3.6%
Freight Forwarding/Logistics--Switzerland
9. Northern Rock 3.5%
Low Cost Mortgage Bank--United Kingdom
10. SES Global 3.5%
Satellite Broadcasting Services--France
5
Wanger International Select 2005 Annual Report
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WANGER INTERNATIONAL SELECT STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
COMMON STOCKS-97.6%
EUROPE - 56.5%
- -----------------------------------------------------------------
UNITED KINGDOM/IRELAND - 13.8%
117,000 Anglo Irish Bank (Ireland) $1,775,779
Small Business & Middle Market Banking
95,000 Northern Rock 1,541,311
Lowest Cost Mortgage Bank
90,000 IAWS (Ireland) 1,294,595
Manufacturer of Baked Goods
55,000 Grafton Group (Ireland) 599,053
Building Materials Wholesaling & DIY Retailing
20,000 Intermediate Capital 479,332
European Provider of Mezzanine Capital
17,900 Kerry (Ireland) 396,499
Consumer Foods & Food Ingredients
- -----------------------------------------------------------------
6,086,569
- -----------------------------------------------------------------
SWITZERLAND - 13.0%
5,550 Kuehne & Nagel 1,564,838
Freight Forwarding/Logistics
7,500 Swatch Group 1,112,971
Watch & Electronics Manufacturer
7,850 Synthes 881,747
Products for Orthopedic Surgery
1,100 Geberit International 870,591
Plumbing Supplies
1,300 Schindler 515,429
Elevator Manufacturer & Service Provider
630 Givaudan 426,936
Industrial Fragrances & Flavors
5,500 BKW Energie 368,327
Electric Utility
- -----------------------------------------------------------------
5,740,839
- -----------------------------------------------------------------
FRANCE- 10.9%
17,300 Neopost 1,734,780
Postage Meter Machines
88,000 SES Global 1,540,869
Satellite Broadcasting Services
11,000 Essilor International 888,162
Eyeglass Lenses
9,000 Imerys 651,027
Industrial Minerals Producer
- -----------------------------------------------------------------
4,814,838
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
GERMANY - 4.9%
68,500 Depfa Bank $1,012,903
Investment Banker to Public Authorities
7,500 Deutsche Boerse 768,588
Trading, Clearing & Settlement Services for
Financial Markets
500 Porsche 359,296
Specialty Automobile Manufacturer
- -----------------------------------------------------------------
2,140,787
- -----------------------------------------------------------------
SWEDEN - 4.1%
164,000 Gambro 1,790,799
Products for Renal & Blood Care
- -----------------------------------------------------------------
SPAIN - 2.9%
41,000 Red Electrica 1,269,804
Spanish Power Grid
- -----------------------------------------------------------------
CZECH REPUBLIC - 2.5%
7,860 Komercni Banka 1,100,084
Leading Czech Universal Bank
- -----------------------------------------------------------------
DENMARK - 2.5%
20,000 Novozymes 1,094,890
Industrial Enzymes
- -----------------------------------------------------------------
NORWAY - 1.9%
20,000 Orkla 828,234
Materials, Branded Consumer Goods & Media
- -----------------------------------------------------------------
EUROPE - TOTAL 24,866,844
ASIA - 32.7%
- -----------------------------------------------------------------
JAPAN - 27.6%
2,320 Jupiter Telecommunications (b) 1,851,121
Largest Cable Service Provider in Japan
33,000 Daito Trust Construction 1,706,872
Apartment Builder
62,000 Shimano 1,629,711
Bicycle Components & Fishing Tackle
68,000 Ushio 1,588,502
Industrial Light Sources
41,400 Hoya 1,488,413
Opto-Electrical Components & Eyeglass Lenses
See accompanying notes to financial statements.
6
Wanger International Select 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SELECT STATEMENT OF INVESTMENTS DECEMBER 31, 2005
- -----------------------------------------------------------------
Number of Value
Shares
- -----------------------------------------------------------------
JAPAN - 27.6% (CONT)
17,400 Ito En $1,041,625
Bottled Tea & Other Beverages
13,700 USS 873,566
Used Car Auctioneer
17,300 Aeon Mall 843,473
Suburban Shopping Mall Developer, Owner & Operator
110,000 Hiroshima Bank 710,730
Regional Bank
55,000 Bank of Yokohama 450,036
Regional Bank
- -----------------------------------------------------------------
12,184,049
- -----------------------------------------------------------------
HONG KONG/CHINA - 4.0%
320,000 Hong Kong Exchanges & Clearing 1,326,859
Hong Kong Equity & Derivatives Operator
1,000,000 Global Bio-Chem Technology Group (China) 438,503
Refiner of Corn-Based Commodities
- -----------------------------------------------------------------
1,765,362
- -----------------------------------------------------------------
SINGAPORE - 1.1%
500,000 Comfort Del Gro 481,160
Taxi & Mass Transit Service
- -----------------------------------------------------------------
ASIA - TOTAL 14,430,571
OTHER COUNTRIES - 5.9%
- -----------------------------------------------------------------
CANADA - 5.9%
164,000 Kinross Gold (b) 1,515,214
Gold Mining
11,900 Talisman Energy 630,599
Oil & Gas Producer
24,000 Rona (b) 442,858
Leading Canadian DIY Retailer
- -----------------------------------------------------------------
2,588,671
- -----------------------------------------------------------------
OTHER COUNTRIES - TOTAL 2,588,671
- -----------------------------------------------------------------
Number of Shares Value
or Principal Amount
- -----------------------------------------------------------------
LATIN AMERICA - 2.5%
ARGENTINA - 2.5%
9,600 Tenaris $1,099,200
Seamless Tubes
- -----------------------------------------------------------------
LATIN AMERICA - TOTAL 1,099,200
TOTAL COMMON STOCKS (COST: $31,021,311) - 97.6% 42,985,286
- -----------------------------------------------------------------
SHORT-TERM OBLIGATION - 2.1%
- -----------------------------------------------------------------
$906,000 Repurchase Agreement with State
Street Bank & Trust dated 12/30/05,
due 1/03/06 at 3.75% collateralized by
US Treasury Bond, maturing 11/16/15
market value $924,600 (repurchase
proceeds: $906,377) 906,000
- -----------------------------------------------------------------
(COST: $906,000) 906,000
TOTAL INVESTMENTS (COST: $31,927,311) - 99.7% (a) (c) 43,891,286
- -----------------------------------------------------------------
CASH AND OTHER ASSETS LESS LIABILITIES - 0.3% 134,989
- -----------------------------------------------------------------
TOTAL NET ASSETS - 100% $44,026,275
- -----------------------------------------------------------------
NOTES TO STATEMENT OF INVESTMENTS:
(a) At December 31, 2005, cost for federal income tax purposes is $32,384,580.
The net unrealized appreciation was $11,506,706 consisting of gross
unrealized appreciation of $12,245,653 and gross unrealized depreciation of
$738,947.
(b) Non-income producing security.
(c) On December 31, 2005, the Fund's total investments were denominated in
currencies as follows:
% of Net
Currency Value Assets
- -----------------------------------------------------------------
Euro Dollars $ 12,291,354 28.0%
Japanese Yen 12,184,051 27.8
Swiss Francs 5,740,839 13.1
Canadian Dollars 2,588,670 5.9
Other currencies less than
5% of total net assets 11,086,372 24.9
------------ -----
$ 43,891,286 99.7%
============ =====
See accompanying notes to financial statements.
7
Wanger International Select 2005 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SELECT PORTFOLIO DIVERSIFICATION DECEMBER 31, 2005
AT DECEMBER 31, 2005, THE FUND'S PORTFOLIO INVESTMENTS AS A PERCENT OF NET
ASSETS WAS DIVERSIFIED AS FOLLOWS:
Value Percent
- ------------------------------------------------------------------
INDUSTRIAL GOODS/SERVICES
Construction $2,577,462 5.8%
Other Industrial Services 2,080,267 4.7
Machinery 1,734,780 3.9
Electrical Components 1,588,502 3.6
Speciality Chemicals 1,521,827 3.5
Steel 1,099,200 2.5
Industrial Materials 651,027 1.5
Industrial Distribution 599,053 1.4
- ------------------------------------------------------------------
11,852,118 26.9
- ------------------------------------------------------------------
CONSUMER GOODS/SERVICES
Durables Goods 3,101,978 7.0
Food 1,691,094 3.8
Retail 1,286,331 2.9
Beverage 1,041,625 2.4
Consumer Goods Distribution 873,566 2.0
Nondurables 828,234 1.9
- ------------------------------------------------------------------
8,822,828 20.0
- ------------------------------------------------------------------
FINANCE
Banks 6,590,843 15.0
Other Finance Companies 479,332 1.1
- ------------------------------------------------------------------
7,070,175 16.1
Value Percent
- ------------------------------------------------------------------
INFORMATION TECHNOLOGY
Financial Processors $2,095,447 4.7%
Cable Television 1,851,121 4.2
Satellite Broadcasting 1,540,869 3.5
Computer Hardware & Related Equipment 1,488,413 3.4
- ------------------------------------------------------------------
6,975,850 15.8
- ------------------------------------------------------------------
HEALTH CARE
Services 1,790,799 4.1
Medical Equipment 1,769,909 4.0
- ------------------------------------------------------------------
3,560,708 8.1
- ------------------------------------------------------------------
ENERGY/MINERALS
Non-Ferrous Metals 1,515,214 3.5
Oil/Gas Producers 630,599 1.4
Agricultural Commodities 438,503 1.0
- ------------------------------------------------------------------
2,584,316 5.9
- ------------------------------------------------------------------
OTHER INDUSTRIES
Regulated Utilities 1,638,131 3.7
Transportation 481,160 1.1
- ------------------------------------------------------------------
2,119,291 4.8
- ------------------------------------------------------------------
TOTAL COMMON STOCKS 42,985,286 97.6
- ------------------------------------------------------------------
SHORT-TERM OBLIGATION 906,000 2.1
- ------------------------------------------------------------------
TOTAL INVESTMENTS 43,891,286 99.7
- ------------------------------------------------------------------
- ------------------------------------------------------------------
CASH AND OTHER ASSETS
LESS LIABILITIES 134,989 0.3
- ------------------------------------------------------------------
NET ASSETS $44,026,275 100.0%
==================================================================
8
Wanger International Select 2005 Annual Report
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2005
- ----------------------------------------------------------------
ASSETS:
Investments, at cost $31,927,311
================================================================
Investments, at value $43,891,286
Cash 514
Foreign currency (cost of $7,771) 7,777
Receivable for:
Investments sold 103,749
Fund shares sold 43,447
Interest 189
Dividends 34,809
Foreign tax reclaims 16,013
Fee reimbursement due from
Investment Adviser 1,541
- ----------------------------------------------------------------
Total Assets 44,099,325
LIABILITIES:
Payable for:
Fund shares repurchased 37,789
Transfer agent fee 12
Trustees' fees 178
Audit fee 14,050
Custody fee 6,000
Reports to shareholders 11,248
Other liabilities 3,773
- ----------------------------------------------------------------
Total Liabilities 73,050
- ----------------------------------------------------------------
Net Assets $44,026,275
================================================================
COMPOSITION OF NET ASSETS:
Paid-in capital $33,362,542
Overdistributed net investment income (304,857)
Accumulated net realized loss (993,770)
Net unrealized appreciation (depreciation) on:
Investments 11,963,975
Foreign currency translations (1,615)
================================================================
Net Assets $44,026,275
================================================================
Fund Shares outstanding 2,243,170
================================================================
Net asset value, offering price and redemption
price per share $19.63
================================================================
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
================================================================
INVESTMENT INCOME:
Dividend income (net of foreign taxes of $62,747) $794,846
Interest income 27,145
- ----------------------------------------------------------------
Total Investment Income 821,991
EXPENSES:
Investment advisory fee 392,342
Transfer agent fee 102
Trustees' fees 4,319
Custody fee 44,405
Audit fee 25,850
Legal fees 6,605
Reports to shareholders 28,554
Compliance fees (See Note 4) 1,267
Non-recurring costs (See Note 8) 7,116
Other expenses 20,096
- ----------------------------------------------------------------
Total Expenses 530,656
Fees waived by Investment Adviser
(See Note 4) (674)
Non-recurring costs assumed by Investment
Adviser (See Note 8) (7,116)
Custody earnings credit (62)
- ----------------------------------------------------------------
Net Expenses 522,804
- ----------------------------------------------------------------
Net Investment Income 299,187
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
PORTFOLIO POSITIONS AND FOREIGN CURRENCY:
Net realized gain (loss) on:
Investments 3,602,147
Foreign currency transactions (12,608)
- ----------------------------------------------------------------
Net realized gain 3,589,539
- ----------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) on:
Investments 2,222,677
Foreign currency translations (3,008)
- ----------------------------------------------------------------
Net change in unrealized
appreciation (depreciation) 2,219,669
- ----------------------------------------------------------------
Net Gain 5,809,208
- ----------------------------------------------------------------
Net Increase in Net Assets from Operations $6,108,395
================================================================
See accompanying notes to financial statements.
9
Wanger International Select 2005 Annual Report
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Year ended December 31,
INCREASE (DECREASE) IN NET ASSETS: 2005 2004
===================================================================================================================================
FROM OPERATIONS:
Net investment income $ 299,187 $ 82,031
Net realized gain on investments and foreign currency transactions 3,589,539 3,328,351
Net change in unrealized appreciation (depreciation)
on investments and foreign currency translations 2,219,669 3,070,465
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets from Operations 6,108,395 6,480,847
DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (770,742) (87,061)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions Declared to Shareholders (770,742) (87,061)
SHARE TRANSACTIONS:
Subscriptions 12,185,603 15,850,018
Distributions reinvested 770,742 87,061
Redemptions (9,499,381) (14,026,796)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase from Share Transactions 3,456,964 1,910,283
- ------------------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets 8,794,617 8,304,069
NET ASSETS:
Beginning of period 35,231,658 26,927,589
- ------------------------------------------------------------------------------------------------------------------------------------
End of period $44,026,275 $35,231,658
- ------------------------------------------------------------------------------------------------------------------------------------
(OVERDISTRIBUTED) UNDISTRIBUTED NET INVESTMENT INCOME $(304,857) $173,486
====================================================================================================================================
See accompanying notes to financial statements.
10
Wanger International Select 2005 Annual Report
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Year Ended December 31,
Selected data for a share outstanding throughout each period 2005 2004 2003 2002 2001
===================================================================================================================================
NET ASSET VALUE, BEGINNING OF PERIOD $17.19 $13.87 $9.86 $11.64 $17.29
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (a) 0.13 0.04 0.04 0.04 (0.03)
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 2.66 3.33 4.01 (1.82) (4.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.79 3.37 4.05 (1.78) (4.49)
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS:
From net investment income (0.35) (0.05) (0.04) -- (0.02)
From net realized capital gains -- -- -- -- (1.14)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions Declared to Shareholders (0.35) (0.05) (0.04) -- (1.16)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $19.63 $17.19 $13.87 $9.86 $11.64
====================================================================================================================================
Total Return (b) 16.43%(c) 24.34% 41.24%(c) (15.29)%(c) (26.61)%
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Expenses (d) 1.32% 1.43% 1.45% 1.45% 1.45%
Net investment income (loss)(d) 0.76% 0.29% 0.39% 0.35% (0.20)%
Waiver/Reimbursement 0.00%(e) -- 0.09% 0.10% --
Portfolio turnover rate 48% 71% 59% 113% 72%
Net assets, end of period (000's) $44,026 $35,232 $26,928 $14,083 $15,431
- --------------------------------------------------------------------------------
(a) Net investment income (loss) per share was based upon the average shares
outstanding during the period.
(b) Total return at net asset value assuming all distributions reinvested.
(c) Had the Investment Adviser not waived or reimbursed a portion of expenses,
total return would have been reduced.
(d) The benefits derived from custody fees paid indirectly had no impact.
(e) Rounds to less than 0.01%.
See accompanying notes to financial statements.
11
Wanger International Select 2005 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Wanger International Select (known prior to May 1, 2004 as Wanger Foreign
Forty), (the "Fund") is a series of Wanger Advisors Trust (the "Trust"), an
open-end management investment company organized as a Massachusetts business
trust. The investment objective of the Fund is to seek long-term growth of
capital. The Fund is available only for allocation to certain life insurance
company separate accounts established for the purpose of funding qualified and
non-qualified variable annuity contracts, and variable life insurance policies
and may also be offered directly to certain types of pension plans and
retirement arrangements.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Securities of the Fund are valued at market value or, if a market quotation for
a security is not readily available or is deemed not to be reliable because of
events or circumstances that have occurred between the market quotation and the
time as of which the security is to be valued, the security is valued at a fair
value determined in accordance with procedures established by the Board of
Trustees. Securities traded on securities exchanges or in over-the-counter
markets in which transaction prices are reported are valued at the last sales
price at the time of valuation. If a security is traded principally on the
Nasdaq Stock Market Inc., the Nasdaq Official Closing Price will be applied.
Securities for which there are no reported sales on the valuation date are
valued at the latest bid quotation. Short-term debt obligations having a
maturity of 60 days or less from the valuation date are valued on an amortized
cost basis, which approximates fair value. Securities for which quotations are
not readily available and any other assets are valued as determined in good
faith under consistently applied procedures established by and under the general
supervision of the Board of Trustees. The Trust has retained an independent
statistical fair value pricing service to assist in the fair valuation process
for securities principally traded in a foreign market in order to adjust for
possible changes in value that may occur between the close of the foreign
exchange and the time at which Fund shares are priced. If a security is valued
at a "fair value", that value may be different from the last quoted market price
for the security.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreement transactions. The Fund, through its
custodians, receives delivery of underlying securities collateralizing each
repurchase agreement. The Fund's investment advisor determines that the value of
the underlying securities is at all times at least equal to the repurchase
prices including interest. In the event of default or bankruptcy by the other
party to the agreement, realization and/or retention of the collateral may be
subject to legal proceedings.
FOREIGN CURRENCY TRANSLATIONS
Values of investments denominated in foreign currencies are converted into U.S.
dollars using the spot market rate of exchange at the time of valuation.
Purchases and sales of investments and dividend and interest income are
translated into U.S. dollars using the spot market rate of exchange prevailing
on the respective dates of such transactions. The gain or loss resulting from
changes in foreign exchange rates is included with net realized and unrealized
gain or loss from investments, as appropriate.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed) and dividend income is recorded on the ex-dividend date,
except that certain dividends from foreign securities are recorded as soon as
the information is available to the Fund. Interest income is recorded on an
accrual basis and includes amortization of discounts on short-term debt
obligations and on long-term debt obligations when required for federal income
tax purposes. Realized gains and losses from security transactions are reported
on an identified cost basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP") requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results may differ from
those estimated.
FUND SHARE VALUATION
Fund shares are sold and redeemed on a continuing basis at net asset value. Net
asset value per share is determined daily as of the close of trading on the New
York Stock Exchange ("the Exchange") on each day the Exchange is open for
trading by dividing the total value of the Fund's investments and other assets,
less liabilities, by the number of Fund shares outstanding.
CUSTODY FEES/CREDITS
Custody fees are reduced based on the Fund's cash balances maintained with the
custodian. The Fund could have invested a portion of the assets utilized in
connection with the expense offset arrangement in an income-producing asset if
it had not entered into such an agreement. The amount is disclosed as a
reduction of total expenses in the Statement of Operations.
FEDERAL INCOME TAXES
The Fund has complied with the provisions of the Internal Revenue Code available
to regulated investment companies and, in the manner provided therein,
distributes all its taxable income, as well as any net realized gain on sales of
investments and foreign currency transactions reportable for federal income tax
purposes. Accordingly, the Fund paid no federal income taxes and no federal
income tax provision was required.
INDEMNIFICATION
In the normal course of business, the Fund enters into contracts that contain a
variety of representations and warranties which provide general indemnities. The
Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims against the Fund. Also, under the Trust's organizational
documents, the Trustees and Officers of the Trust are indemnified against
certain liabilities that may arise out of their duties to the Trust. However,
based on experience, the Fund expects the risk of loss due to these warranties
and indemnities to be minimal.
FOREIGN CAPITAL GAINS TAXES
Realized gains in certain countries may be subject to foreign taxes at the fund
level, at rates ranging from 10%-15%. The Fund accrues for such foreign taxes on
net realized and unrealized gains at the appropriate rate for each jurisdiction.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-date.
3. FEDERAL TAX INFORMATION
The timing and character of income and capital gain distributions are determined
in accordance with income tax regulations, which may differ from GAAP.
Reclassifications are made to the Fund's capital accounts for permanent tax
differences to reflect income and gains available for distribution (or available
capital loss carryforwards) under income tax regulations.
For the year ended December 31, 2005, permanent book and tax basis
differences resulting primarily from differing treatments for foreign currency
12
Wanger International Select 2005 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
transactions and passive foreign investment company ("PFIC") adjustments were
identified and reclassified among the components of the Fund's net assets as
follows:
OVERDISTRIBUTED ACCUMULATED PAID IN
NET INVESTMENT LOSS NET REALIZED LOSS CAPITAL
---------------------------------------------------------------
$(6,788) $6,788 $--
Net investment income and net realized gains (losses), as disclosed on the
Statement of Operations, and net assets were not affected by this
reclassification.
The tax character of distributions paid during the year ended December 31,
2005 was as follows:
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
Distributions paid from:
Ordinary Income* $770,742 $87,061
* For tax purposes short-term capital gains distributions, if any, are
considered ordinary income distributions.
As of December 31, 2005, the components of distributable earnings on a tax
basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY LONG-TERM NET UNREALIZED
INCOME CAPITAL GAINS APPRECIATION*
---------------------------------------------------------------
$152,151 $-- $11,506,706
* The differences between book-basis and tax-basis net unrealized
appreciation/depreciation are primarily due to deferral of losses from wash
sales, and PFIC adjustments.
The following capital loss carryforwards, determined as of December 31, 2005,
may be available to reduce taxable income arising from future net realized gains
on investments, if any, to the extent permitted by the Internal Revenue Code:
YEAR OF CAPITAL LOSS
EXPIRATION CARRYFORWARDS
- ---------- -------------
2010 $ 11,505
2011 982,004
- ---------- -------------
Total $993,509
Expired capital loss carryforwards, if any, are recorded as a reduction of
paid-in capital. Capital loss carryforwards of $3,581,121 were utilized during
the year ended December 31, 2005 for the Fund.
4. TRANSACTIONS WITH AFFILIATES
Columbia Wanger Asset Management, L.P., ("Columbia WAM") a wholly owned
subsidiary of Columbia Management, Inc. (CM), which in turn is an indirect
wholly owned subsidiary of Bank of America Corporation ("BOA"), furnishes
continuing investment supervision to the Fund and is responsible for the overall
management of the Fund's business affairs.
Effective March 8, 2005, under the Fund's investment management agreement,
fees are accrued daily and paid monthly to Columbia WAM at the annual rate of
0.99% of average daily net assets.
Prior to March 8, 2005, under the Fund's investment management agreement,
fees are accrued daily and paid monthly to Columbia WAM at the annual rate of
1.00% of average daily net assets.
In accordance with the terms of the Assurance of Discontinuance with the New
York Attorney General, Columbia WAM waived a portion of the fees payable under
the Fund's investment management agreement so that those fees are retained at
0.99% of average daily net assets. The fee waiver was effective from January 1,
2005 through March 8, 2005, but applied as if it had gone into effect on
December 1, 2004.
Fees waived by Columbia WAM amounted to $674 for the year ended December 31,
2005.
The investment advisory agreement also provides that through April 30, 2006
Columbia WAM will reimburse the Fund to the extent that ordinary operating
expenses (computed based on net custodian fees) exceed an annual percentage of
1.45% of average daily net assets. There was no reimbursement for the year ended
December 31, 2005.
Certain officers and trustees of the Trust are also officers of Columbia WAM.
The Trust makes no direct payments to its officers and trustees who are
affiliated with Columbia WAM. For the year ended December 31, 2005, the Fund
paid $4,319 to trustees not affiliated with Columbia WAM. The Board of Trustees
appointed a Chief Compliance Officer to the Fund in accordance with federal
securities regulations. The Fund will pay its pro-rata share of the expenses
associated with the Office of the Chief Compliance Officer. These expenses are
disclosed separately as "Compliance fees" on the Statement of Operations.
Columbia Management Distributors, Inc. (formerly Columbia Funds Distributor,
Inc.), a wholly owned subsidiary of BOA, serves as the principal underwriter of
the Trust and receives no compensation for its services.
Columbia Management Services, Inc. (formerly Columbia Funds Services, Inc.)
(the "Transfer Agent"), a wholly-owned subsidiary of BOA, provides shareholder
services to the Fund and has contracted with Boston Financial Data Services
("BFDS") to serve as subtransfer agent. For such services, the Transfer Agent
receives a fee, paid monthly, at the annual rate of $21.00 per open account. The
Transfer Agent also receives reimbursement for certain out-of-pocket expenses.
During the year ended December 31, 2005, the Fund engaged in purchase and
sales transactions with funds that have a common investment advisor (or
affiliated investment advisors), common Directors/Trustees, and/or common
Officers. These purchase and sale transactions complied with the provisions of
Rule 17a-7 under the Investment Company Act of 1940 and were $419,565 and
$5,131,823, respectively.
5. BORROWING ARRANGEMENTS
The Trust participates in a $150,000,000 credit facility, which was entered into
to facilitate portfolio liquidity. Interest is charged to each participating
fund based on its borrowings at rate per annual equal to the Federal Funds rate
plus 0.50%. In addition, a commitment fee of 0.10% per annum is accrued and
apportioned among the participating funds based on their pro-rata portion of the
unutilized line of credit. The commitment fee is included in "Other expenses" on
the Statement of Operations. No amounts were borrowed under this facility for
the year ended December 31, 2005.
6. FUND SHARE TRANSACTIONS
Proceeds and payments on Fund shares as shown in the statement of changes in net
assets are in respect of the following numbers of shares:
Year ended Year ended
December 31, 2005 December 31, 2004
- --------------------------------------------------------------------------------
Shares sold 688,890 1,041,265
- --------------------------------------------------------------------------------
Shares issued in reinvestment
of dividend distributions 43,155 6,025
- --------------------------------------------------------------------------------
Less shares redeemed 537,836 940,310
- --------------------------------------------------------------------------------
Net increase in shares outstanding 194,209 106,980
13
Wanger International Select 2005 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
7. INVESTMENT TRANSACTIONS
The aggregate cost of purchases and proceeds from sales other than
short-term obligations for the year ended December 31, 2005 were $22,173,086 and
$18,480,720.
8. LEGAL PROCEEDINGS
Columbia WAM, Columbia Acorn Trust, another mutual fund family advised by
Columbia WAM, and the trustees of Colombia Acorn Trust, are named as defendants
in class and derivative complaints which have been consolidated in a
Multi-District Action in the federal district court for the District of
Maryland. These lawsuits contend that defendants permitted certain investors to
market time their trades in certain Columbia Acorn Funds. The Multi-District
Action is ongoing. However, all claims against Columbia Acorn Trust and the
independent trustees of Columbia Acorn Trust have been dismissed.
Columbia WAM, the Columbia Acorn Funds and the trustees of Columbia Acorn
Trust are defendants in a consolidated lawsuit filed in the federal district
court of Massachusetts alleging that Columbia WAM used Fund assets to make
undisclosed payments to brokers as an incentive for the brokers to market the
Columbia Acorn Funds over the other mutual funds to investors. The complaint
alleges Columbia WAM and the Trustees of the Trust breached certain common laws
duties and federal laws. All claims against all defendants in this lawsuit have
been dismissed. However, the plaintiffs have filed a notice of appeal with the
First Circuit Court of Appeals.
The Columbia Acorn Trust and Columbia WAM are also defendants in a class
action lawsuit that alleges, in summary, that the Columbia Acorn Trust and
Columbia WAM exposed shareholders of Columbia Acorn International Fund to
trading by market timers by allegedly (a) failing to properly evaluate daily
whether a significant event affecting the value of that Fund's securities had
occurred after foreign markets had closed but before the calculation of the
Funds' net asset value ("NAV"); (b) failing to implement the Fund's portfolio
valuation and share pricing policies and procedures; and (c) failing to know and
implement applicable rules and regulations concerning the calculation of NAV
(the "Fair Valuation Lawsuit"). The Seventh Circuit ruled that the plaintiffs'
state law claims were preempted under federal law resulting in the dismissal of
plaintiffs' complaint. However, plaintiffs are in the process of appealing that
decision before the United States Supreme Court.
On March 21, 2005, a class action complaint was filed against the Columbia
Acorn Trust and Columbia WAM seeking to rescind the Contingent Deferred Sales
Charges assessed upon redemption of Class B shares of Columbia Acorn Funds due
to the alleged market timing of the Columbia Acorn Funds. In addition to the
rescission of sales charges, plaintiffs seek recovery of actual damages,
attorneys' fees and costs. The case has been transferred to the Multi-District
Action in the federal district court of Maryland.
The Columbia Acorn Trust and Columbia WAM intend to defend these suits
vigorously.
As a result of these matters or any adverse publicity or other developments
resulting from them, there may be increased redemptions or reduced sales of Fund
shares, which could increase transaction costs or operating expenses, or have
other adverse consequences for the Funds.
In connection with the events described in detail above, various parties have
filed suit against certain funds, their Boards and/or BOA (and affiliated
entities). These suits are ongoing. However, based on currently available
information, the Columbia Acorn Trust believes that the likelihood that these
lawsuits will have a material adverse impact on any fund is remote, and Columbia
WAM believes that the lawsuits are not likely to materially affect its ability
to provide investment management services to the Funds.
For the year ended December 31, 2005, CM has assumed $7,116 in consulting
services and legal fees incurred by the Fund in connection with these matters.
14
Wanger International Select 2005 Annual Report
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of Wanger International Select Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Wanger International Select Fund (a
series of the Wanger Advisors Trust, hereinafter referred to as the "Fund") at
December 31, 2005, the results of its operations for the year then ended, the
changes in its net assets and the financial highlights for each of the two years
in the period then ended, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audit of these financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. The financial highlights of the Fund for the
periods ended December 31, 2003 and prior were audited by other independent
auditors whose report dated February 6, 2004 expressed an unqualified opinion on
those financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 14, 2006
15
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[EXCERPTS FROM:]
WANGER ADVISORS TRUST
Management Fee Evaluation of the Senior Officer
Prepared Pursuant to the New York Attorney General's
Assurance of Discontinuance
July 2005
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Wanger International Select 2005 Annual Report
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Introduction
The New York Attorney General's Assurance of Discontinuance ("Order") entered
into by Columbia Management Advisors, Inc. ("CMAI") and Columbia Funds
Distributor, Inc., ("CFDI" and collectively with "CMAI," "CMG") in February
2005, allows CMAI to manage or advise a mutual fund, including the Wanger
Advisors Trust's family of funds (the "WAT Funds" or "WAT" or "Trust"), only if
the trustees of the WAT Funds appoint a "Senior Officer" to perform specified
duties and responsibilities. One of these responsibilities includes "managing
the process by which proposed management fees (including but not limited to,
advisory fees) to be charged the WAT Fund[s] are negotiated so that they are
negotiated in a manner which is at arms' length and reasonable and consistent
with this Assurance of Discontinuance."
The Order also provides that the Board of Trustees of the WAT Funds ("Board")
must determine the reasonableness of proposed "management fees" by using either
an annual competitive bidding process supervised by the Senior Officer or
Independent Fee Consultant, or by obtaining "an annual independent written
evaluation prepared by or under the direction of the Senior Officer or the
Independent Fee Consultant."
"Management fees" are only part of the costs and expenses paid by mutual fund
shareholders. The expenses can vary depending upon the class of shares held but
usually include: (1) investment management or advisory fees to compensate
analysts and portfolio managers for stock research and portfolio management, as
well as the cost of operating a trading desk; (2) administrative expenses
incurred to prepare registration statements and tax returns, calculate the
Funds' net asset values, maintain effective compliance procedures and perform
recordkeeping services; (3) transfer agency costs for establishing accounts,
accepting and disbursing funds, as well as overseeing trading in Fund shares;
(4) custodial expenses incurred to hold the securities purchased by the Funds;
and (5) distribution expenses, including commissions paid to brokers that sell
the Fund shares to investors.
Columbia Wanger Asset Management, L.P. ("CWAM"), the adviser to the WAT Funds,
has proposed that the Trust enter into an agreement that "bundles" the first two
categories listed above: advisory and administrative services. The fees paid
under this agreement are referred to as "management fees." Other fund expenses
are governed by separate agreements, in particular agreements with two CWAM
affiliates: CFDI, the broker-dealer that underwrites and distributes the WAT
Funds' shares, and Columbia Funds Services, Inc. ("CFSI"), the Funds' transfer
agent. In conformity with the terms of the Order, this evaluation, therefore,
addresses only the advisory and administrative contract between CWAM and the
Trust, and does not extend to the other agreements.
According to the Order, the Senior Officer's evaluation must consider at least
the following:
(1) Management fees (including components thereof) charged to
institutional and other clients of CWAM for like services;
(2) Management fees (including any components thereof) charged by other
mutual fund companies for like services;
(3) Costs to CWAM and its affiliates of supplying services pursuant to the
management fee agreements, excluding any intra-corporate profit;
(4) Profit margins of CWAM and its affiliates from supplying such
services;
(5) Possible economies of scale as the WAT Funds grow larger; and
(6) The nature and quality of CWAM's services, including the performance
of each WAT Fund.
On November 17, 2004, the Board appointed me, Robert Scales, Senior Officer
under the Order. The Board also determined not to pursue a competitive bidding
process and instead, charged me with the responsibility of evaluating the WAT
Funds' proposed advisory and administrative fee contract with CWAM in conformity
with the requirements of the Order. This Report is an annual evaluation required
under the Order. In discharging their responsibilities, the independent Trustees
have also consulted independent, outside counsel.
* * *
This evaluation was performed in cooperation and regular communication with the
Compliance/Contract Renewal Committee of the Board.
Process and Independence
The objectives of the Order are to ensure the independent evaluation of the
advisory fees paid by the WAT Funds as well as to ensure that all relevant
factors are considered. In my view, the contract renewal process has been
conducted at arms-length and with independence in gathering, considering and
evaluating relevant data. For example, the selection of fund peer groups is
critical in assessing a fund's relative performance and cost. I have required
Lipper and Morningstar, Inc. to prepare their reports without input or
commentary from CWAM; the engagement letters with them reflect this requirement.
As a result, the peer groups reflected in the Morningstar, Inc. and Lipper
reports were determined independently. After submission of the reports, I asked
CWAM to comment on them to avoid errors and to establish a clear record of
CWAM's views on which funds, in its judgment, constitute an appropriate peer
group.
Similarly, I discussed CWAM's profitability analysis with its management but
also sought the independent views of Ernst &Young on the reasonableness of
CWAM's cost allocation methodology and on the adequacy of the financial data it
provided. The evaluation of CWAM's profitability was performed in the context of
the limited industry data available.
My evaluation of the advisory contract was shaped by my experience as WAT's
Chief Compliance Officer ("CCO"). As CCO, I report solely to the Board and have
no reporting obligation to or employment relationship with CMG or its
affiliates, except for administrative purposes. This too contributes to the
independence of this evaluation. I have made several comments on compliance
matters in evaluating the quality of service provided by CWAM and CMG.
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Wanger International Select 2005 Annual Report
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Finally, this Report, its supporting materials and the data contained in other
materials submitted to the Compliance/Contract Renewal Committee of the Board,
in my view, provide a thorough factual basis upon which the Board, in
consultation with independent counsel as it deems appropriate, may conduct
management fee negotiations that are in the best interests of the WAT Funds'
shareholders.
* * *
VI. Conclusions
My review of the data and other material above leads to the following
conclusions with respect to the factors identified in the Order.
1. Performance. The WAT Funds generally have achieved outstanding
performance and rank very favorably against their peers. The
international funds have good recent performance records, but weaker
long-term performance relative to the domestic WAT Funds. Recent
management changes have been followed by improved performance. The
domestic WAT Funds and International Select typically achieve their
performance with less risk than their competitors; relative risks are
greater for International Small Cap.
2. Management Fees relative to Peers. The management fee rankings of the
Funds are generally well below the respective medians and, hence, less
favorable to shareholders than their peer group funds.
3. Administrative Fees. The WAT Funds pay a bundled fee that combines
advisory fees and administrative expense, so ranking these fees
separately was not possible.
4. Management Fees relative to Other Accounts. CWAM's focus is its mutual
funds. It does not actively seek to manage separate or institutional
accounts. The few institutional accounts it does manage vary in rate
structures. Some pay advisory fees commensurate with or higher than
the WAT Funds. In a few instances, however, sub-advised accounts pay
lower management fees than do the WAT Funds.
5. Costs to CWAM and its Affiliates. CWAM's costs do not appear
excessive, and, in my view, it uses appropriate methodologies to
allocate overhead costs. CWAM's affiliates do not appear to profit
indirectly from CWAM's management agreement with the WAT Funds.
6. Profit Margins. CWAM's firm-wide profit margins are at the upper end
of the industry, though these comparisons are hampered by limited
industry data. High profit margins are not unexpected for firms that
manage large, successful funds and have provided outstanding
investment performance for investors. Profit margins for the WAT Funds
are lower than the margins for other accounts managed by CWAM because
of payments made to intermediaries that offer the WAT Funds through
variable annuity products. CMAI, the Funds' administrator, currently
experiences losses rather than profits, in connection with its
activities relating to the WAT Funds.
7. Economies of Scale. Economies of scale do exist at CWAM and will
expand, if the assets of the WAT Funds get larger. They are, however,
only partially reflected in the management fee schedule for two of the
four WAT Funds. If the Funds' assets continue to grow, under the
Funds' current fee schedules, shareholders might not benefit in a
manner generally commensurate with CWAM's increased profits
8. Nature and quality of services. This category includes a variety of
considerations that are difficult to quantify, yet can have a
significant bearing on the performance of the WAT Funds. Several areas
merit comment.
a. Continuity of Management. It is critical that capable and
experienced portfolio managers remain committed to the Funds and
are able to hire and retain analysts to assist them. CWAM must
have in place appropriate incentive plans that align its
management's interests with those of investors. Further, CWAM
must maintain the independence of its investment process. It
should also be supported by effective information technology.
b. Compliance. CWAM has an effective compliance program and a
variety of related services that are valuable to shareholders,
such as, systems to ensure best execution of portfolio
transactions and the daily review of security prices to ensure
accuracy of the WAT Funds' NAV.
c. Administration Services. The WAT Funds benefit from a variety of
administrative services that are performed by CWAM and CMAI,
including preparation of registration statements, calculation of
Fund NAV's, accounting services, shareholder services, and other
functions
In my opinion, these conclusions, taken together, generally support the
reasonableness of the proposed management agreement. In reaching this
conclusion, I weighed heavily the outstanding performance of the WAT Funds
relative to their peers. Performance is an investor's first concern. The expense
incurred by shareholders to enjoy this performance is, however, high relative to
competing funds, though expenses for the WAT Funds are (with one exception)
comparable to the parallel Acorn Funds. Nonetheless, a more complete breakpoint
schedule could address this issue as well as share with investors more fully the
benefits of economies of scale.
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Wanger International Select 2005 Annual Report
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VII. Recommendations
The Trustees should consider the following proposals to address the issues
identified in this Report. Some of these recommendations require the collection
and evaluation of more data. This work cannot be accomplished effectively before
the expiration of the existing advisory contract on July 31, 2005. Therefore, I
recommend that the Trustees consider extending the existing contract pending
consideration of these recommendations.
These recommendations do not purport to offer the only avenues to address the
opinions and conclusions I have expressed in this Report. Economies of scale,
for example, can be addressed in a variety of ways in a management contract.
Sound business judgment will guide how any particular area is addressed with due
consideration given to all the factors that must be weighed in reaching a
management agreement that best serves the WAT Fund shareholders.
I believe the Trustees should consider the following:
1. Restructure the management fee schedule beyond the current breakpoints
to reflect more fully economies of scale. The Trustees might consider
several ways to accomplish this objective, including instituting a
two-tier fee structure that incorporates a complex- or CWAM-wide fee
(including assets held in separate accounts) and a fund specific fee,
with each containing breakpoints to reflect their separate economies
of scale. Another approach is to consider uniform breakpoints for all
WAT Funds, including breakpoints above and below current asset levels.
2. Conduct further study to ensure that the costs paid to insurance
company intermediaries are transparent. The Trustees could consider
forming an ad hoc committee to gather and evaluate data regarding
CWAM's payments to intermediaries and the services provided by those
intermediaries. Such a committee might also seek the assistance of a
consultant such as Ernst & Young.
3. Administrative Fees. Administrative and advisory fees could be
unbundled to allow greater transparency and to permit distinct
comparisons among peers. An administrative fee could also be
formulated with a breakpoint schedule that shares the economies of
scale available with shareholders.
4. Condition contract renewal on submission of an employment agreements
or a management incentive plan designed to ensure the continued
employment of senior management, under terms that align management's
incentives with the interests of the WAT Funds' shareholders. Any
incentive plan should be designed to permit CWAM to attract and retain
the highest caliber investment professionals and support them with
effective and reliable information technology systems.
5. Review with CWAM its anticipated capacity limitations and the degree
to which increased staffing and effective incentives may address those
issues.
Robert P. Scales
Chief Compliance Officer, Senior Vice President and General Counsel
July 25, 2005
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Wanger International Select 2005 Annual Report
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BOARD APPROVAL OF THE EXISTING ADVISORY AGREEMENT
The Compliance/Contract Review Committee (the "Committee") of the board of
trustees meets on a regular basis and holds special meetings as otherwise
necessary or advisable to review the advisory agreement (the "Agreement") of
Wanger Advisors Trust (the "Trust") and each series thereof (the "Funds") and
determines whether to recommend that the full board approve the continuation of
the Agreement for an additional term. The Committee is comprised of three or
more trustees, each of whom is an independent trustee, and the Trust's Chief
Compliance Officer ("CCO"), who is a non-voting member of the Committee. After
the Committee has made its recommendation, the full board, including the
independent trustees, determines whether to approve the continuation of the
Agreement. In addition, the board, including the independent trustees, considers
matters bearing on the Agreement at most of their other meetings throughout the
year and meets at least quarterly with the portfolio managers employed by
Columbia Wanger Asset Management, L.P. ("CWAM"), the Funds' investment adviser.
The trustees receive all materials that they and CWAM believe to be
reasonably necessary for them to evaluate the Agreement and determine whether to
approve the continuation of the Agreement. Those materials generally include,
among other items, (i) information on the investment performance of the Funds
and the performance of peer groups of funds and of the Funds' performance
benchmarks, (ii) information on the Funds' advisory fees and other expenses,
including information comparing the Funds' expenses to those of peer groups of
funds and information about any applicable expense caps and fee "breakpoints,"
(iii) share sales and redemption data, (iv) information about the profitability
to CWAM and its affiliates of their relationships with the Funds and potential
"fall-out" or ancillary benefits that CWAM and its affiliates may receive as a
result of their relationships with the Funds and (v) information obtained
through CWAM's response to a questionnaire prepared at the request of the
trustees by Bell, Boyd & Lloyd LLC, independent counsel to the Trust and to the
independent trustees. The trustees may also consider other information such as
(i) CWAM's financial results and financial condition, (ii) each Fund's
investment objective and strategies and the size, education and experience of
CWAM's investment staffs and their use of technology, external research and
trading cost measurement tools, (iii) the allocation of the Funds' brokerage, if
any, including allocations to brokers affiliated with CWAM, and the use of
"soft" commission dollars to pay Fund expenses or to pay for research products
and services, (iv) the resources devoted to, and the record of compliance with,
the Funds' investment policies and restrictions, policies on personal securities
transactions and other compliance policies, (v) the response of CWAM and its
affiliates to various legal and regulatory proceedings since 2003 and (vi) the
economic outlook generally and for the mutual fund industry in particular. In
addition, the trustees conferred with, and reviewed the Management Fee
Evaluation prepared by, the Trust's Senior Officer, who was appointed by the
trustees as contemplated by the Assurance of Discontinuance dated February 9,
2005 among affiliates of CWAM and the Office of the New York Attorney General. A
summary of the Management Fee Evaluation is included in this report. Throughout
the process, the trustees have the opportunity to ask questions of and request
additional materials from CWAM.
On July 25, 2005 the board of trustees most recently approved the
continuation of the Agreement through October 31, 2005, and on September 28,
2005 the board approved an amended and restated Agreement (the "Amended
Agreement") for an initial term ending on July 31, 2006. The board actions
followed Committee meetings held in June, July and September 2005. The board
determined in the first instance to continue the Agreement through October
(rather than for a full year period) pending the resolution of the compensation
and incentive plan for key CWAM employees, whose employment agreements were to
terminate in December, 2005. Those matters were resolved prior to September 28,
2005.
In considering whether to approve the continuation of the Agreement and to
approve the Amended Agreement, the trustees, including the independent trustees,
did not identify any single factor as determinative, and each weighed the
various factors as he or she deemed appropriate. The trustees considered the
following matters in connection with their continuation of the Agreement and,
except as noted in connection with their approval of the Amended Agreement
(collectively with the Agreement, the "Agreements").
Nature, quality and extent of services. The trustees reviewed the nature,
quality and extent of CWAM's services to the Funds, taking into account the
investment objective and strategy of each Fund and the knowledge gained from the
board's regular meetings with management. In addition, the trustees reviewed
CWAM's resources and key personnel, especially those who provide investment
management services to the Funds. The trustees considered the importance of the
continuity of management. At the September 28, 2005 meeting, the trustees
considered the fact that Columbia Management, Inc. ("CM") and CWAM had agreed on
a new compensation and incentive plan for key CWAM employees. The trustees also
considered other services provided to the Funds by CWAM, such as managing the
execution of portfolio transactions and the selection of broker-dealers for
those transactions, providing support services for the board and board
committees, communicating with shareholders and overseeing the activities of
other service providers, including monitoring compliance with various Fund
policies and procedures and with applicable securities laws and regulations.
The trustees concluded that the nature and extent of the services provided by
CWAM to each Fund were appropriate and consistent with the terms of the
Agreements, that the quality of those services had been consistent with or
superior to quality norms in the industry and that the Funds were likely to
benefit from the continued provision of those services. They also concluded that
CWAM had sufficient personnel, with the appropriate education and experience, to
serve the Funds effectively and had demonstrated its continuing ability to
attract and retain well qualified personnel.
Performance of the Funds. The trustees considered the short-term and
longer-term performance of each Fund. They reviewed information comparing each
Fund's performance with the performance of the Fund's benchmark and with the
performance of comparable funds and peer groups identified by Lipper Inc.
("Lipper") and Morningstar Associates, LLC ("Morningstar"). They noted that the
two domestic Funds, Wanger U.S. Smaller Companies and Wanger Select, have each
outperformed their respective benchmarks and Lipper and Morningstar peers. The
trustees considered that Lipper and Morningstar ranked Wanger U.S. Smaller
Companies first in its peer group for the past five years and Wanger Select
first in its peer group for the three and five-year periods. The trustees
discussed the performance of the two international Funds, Wanger International
Small Cap and Wanger International Select, noting that each Fund's performance
had improved over the past two years. They considered that Morningstar ranked
Wanger International Small Cap first in its peer group for the one-year period
and Lipper ranked it first in its peer group for the three-year period. They
also considered that Lipper ranked Wanger International Select first in its peer
group for the one-year period and second in its peer group for the three and
five-year periods. The trustees concluded that although past performance is not
necessarily indicative of future results, the Funds' improving performance
record and investment process enhancements were important factors in the
trustees' evaluation of the quality of services provided by CWAM under the
Agreement.
Costs of Services and Profits Realized by CWAM. The trustees examined
information on fees and expenses of each Fund in comparison to information for
other comparable funds as provided by Lipper and Morningstar. They considered
that both the contractual rates of advisory fees and the actual advisory fees
for most of the Funds were higher than the median advisory fees of the
respective peer groups. The trustees also considered that the expense ratios of
each Fund were also higher than the median expense ratios of the respective peer
groups. At the July 25, 2005 meeting, at the recommendation
20
Wanger International Select 2005 Annual Report
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BOARD APPROVAL OF THE EXISTING ADVISORY AGREEMENT
of the Committee, the board approved a new breakpoint for Wanger International
Small Cap's fee schedule, reducing fees by 0.10% on net assets of $500 million
and above, effective August 1, 2005.
The trustees reviewed information on the profitability of CWAM in serving as
each Fund's investment adviser and of CWAM and its affiliates in all of their
relationships with each Fund, as well as an explanation of the methodology
utilized in allocating various expenses among the Funds and other business
units. The trustees considered the methodology used by CWAM in determining
compensation payable to portfolio managers and the very competitive environment
for investment management talent. The trustees recognized that profitability
comparisons among fund managers are difficult because very little comparative
information is publicly available and profitability of any manager is affected
by numerous factors, including the organizational structure of the particular
manager, the types of funds and other accounts it manages, possible other lines
of business, the methodology for allocating expenses and the manager's capital
structure and cost of capital. However, based on the information available and
taking those factors into account, the trustees concluded that the profitability
of CWAM regarding each Fund in relation to the services rendered was not
unreasonable.
The trustees also reviewed CWAM's advisory fees for its institutional
separate accounts. Although in most instances its institutional separate account
fees for various investment strategies were lower than the advisory fees charged
to the Funds with corresponding strategies, the trustees noted that CWAM
performs significant additional services for the Funds that it does not provide
to those other clients, including administrative services, oversight of the
Funds' other service providers, trustee support, regulatory compliance and
numerous other services. Finally, the trustees considered the financial
condition of CWAM, which they found to be sound.
The trustees concluded that the advisory fees (including the additional
breakpoint for Wanger International Small Cap) and other compensation payable by
the Funds to CWAM and its affiliates were reasonable in relation to the nature
and quality of the services to be provided, taking into account the fees charged
by other advisers for managing comparable mutual funds with similar strategies
and the fees CWAM charges to other clients. The trustees noted, however, that
they would continue to evaluate the Funds' investment advisory fee rates. The
trustees also concluded that the Funds' estimated overall expense ratios, taking
into account quality of services provided by CWAM and the investment performance
of the Funds, were also reasonable.
Economies of Scale. The trustees noted that the advisory fee schedule for
each of Wanger U.S. Smaller Companies and Wanger International Small Cap
contains two breakpoints that reduce the fee rate on assets above specified
levels. They also noted that they had agreed to establish a new breakpoint for
Wanger International Small Cap. The trustees concluded that with the additional
breakpoint for Wanger International Small Cap, the fee schedule for each Fund
would represent a sharing of economies of scale at current asset levels. They
agreed, however, to continue their periodic consideration of the Funds' fee
structures and economies of scale.
Other Benefits to CWAM. The trustees also considered benefits that accrue to
CWAM and its affiliates from their relationship with the Funds. The trustees
concluded that, other than the services to be provided by CWAM and its
affiliates pursuant to the Agreement and the fees payable by the Funds therefor,
the Funds and CWAM may potentially benefit from their relationship with each
other in other ways. Recognizing that an affiliate of CWAM serves the Funds as
transfer agent and receives compensation from the Funds for those services, the
trustees determined that such compensation was not unreasonable. They noted that
the Funds' transfer agent reported that it made a small profit on its work for
the Funds. The trustees also considered CWAM's use of commissions to be paid by
the Funds on their portfolio brokerage transactions to obtain proprietary
research products and services benefiting the Funds and/or other clients of
CWAM. The trustees concluded that CWAM's use of "soft" commission dollars to
obtain research products and services was consistent with regulatory
requirements and is beneficial to the Funds. They concluded that, although CWAM
derives or may derive additional benefits through the use of soft dollars from
the Funds' portfolio transactions, the Funds also benefit from the receipt of
research products and services to be acquired through commissions paid on the
portfolio transactions of other clients of CWAM.
New Terms of the Amended Agreement. As previously mentioned, the trustees
negotiated a new breakpoint for Wanger International Small Cap's fee schedule,
reducing fees by 0.10% on net assets of $500 million and above. That new
breakpoint is reflected in the Amended Agreement.
In addition, the Amended Agreement includes representations by CWAM that are
substantially similar to those contained in a letter agreement between the Trust
and CM that expired on October 31, 2005. The Amended Agreement provides that:
(1) CWAM will endeavor to preserve the autonomy of the Trust; (2) CWAM remain a
wholly owned subsidiary of CM (or any successor company) as a Chicago-based
management firm; (3) CWAM will maintain the investment philosophy and research
that the Chicago-based management deems appropriate, research activities
separate and dedicated solely to CWAM and its own domestic and international
trading activities; (4) CWAM will use its best efforts to maintain information
systems that will provide timely and uninterrupted operating information and
data consistent with all regulatory and compliance requirements; (5) CWAM's
Chicago-based management will have the responsibility and considerable latitude
to recruit and compensate (on a competitive basis) investment management
personnel and to control travel budgets for analysts consistent with its
operational and strategic plans while subject to the approval of CM; and (6)
CWAM acknowledges the importance that the Board and its compliance/contract
review committee place on full legal and regulatory compliance by CMG, CWAM, and
all other Trust service providers and their personnel (collectively,
"Providers") and agrees to (i) cooperate fully with the Board, the
compliance/contract review committee and the CCO of the Trust with all inquiries
by the Trust concerning such compliance by the Providers and (ii) communicate
proactively with the Board, the compliance/contract review committee and the CCO
of the Trust concerning material compliance matters and any instance of legal or
regulatory non-compliance by the Providers of which CWAM is aware and that CWAM
deems to be material. Such cooperation and communication by CWAM will be done
after receipt of an inquiry or upon learning of any such legal or regulatory
non-compliance. Lastly, the Amended Agreement provides that the principal
investment management focus and responsibilities of CWAM's portfolio managers
and analysts will be dedicated to the Trust and Columbia Acorn Trust.
After full consideration of the above factors as well as other factors that
were instructive in analyzing the Agreement, the trustees, including all of the
independent trustees, concluded that the continuation of the Agreement was in
the best interest of each Fund. On July 25, 2005, the trustees continued the
Agreement, as revised to include an additional breakpoint for Wanger
International Small Cap, through October 31, 2005, and on September 28, 2005,
the trustees approved the Amended Agreement.
21
Wanger International Select 2005 Annual Report
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SPECIAL NOTICE
A special meeting of the shareholders was held on November 30, 2005 for the
purpose of electing nine trustees. A Proxy Statement that described the proposal
had been mailed to shareholders of record as of September 28, 2005. The holders
of the majority of the shares of the Trust entitled to vote at the meeting
elected the following five trustees, by the votes shown below:
NOMINEE FOR AGAINST ABSTAIN/BNV*
------- --- ------- ------------
Jerome L. Duffy 73,936,669.461 1,967,029.183 0
Fred D. Hasselbring 73,923,911.414 1,979,787.230 0
Kathryn A. Krueger 74,060,051.086 1,843,647.558 0
Ralph Wanger 73,916,921.587 1,986,777.057 0
Patricia H. Werhane 73,960,075.551 1,943,623.093 0
* "BNVs" or "broker non-votes" are shares held by brokers or nominees as to
which (i) the broker or nominee does not have discretionary voting power,
and (ii) the broker or nominee has not received instructions from the
beneficial owner or other person who is entitled to instruct how the shares
will be voted.
22
Wanger International Select 2005 Annual Report
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BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST
The Board of Trustees of the Trust has overall management responsibility for the
Trust and the Funds. Each trustee serves a term of unlimited duration, provided
that a majority of trustees always has been elected by shareholders. The
trustees appoint their own successors, provided that at least two-thirds of the
trustees, after such appointment, have been elected by shareholders.
Shareholders may remove a trustee, with or without cause, upon the vote of
two-thirds of the Trust's outstanding shares at any meeting called for that
purpose. A trustee may be removed, with or without cause, upon the vote of a
majority of the trustees.
The names of the trustees and officers of the Trust, the date each was first
elected or appointed to office, their principal business occupations during at
least the last five years, number of portfolios in the fund complex they oversee
and other directorships they hold are shown below. Each trustee serves in such
capacity for each of the four series of the Trust.
The business address of each trustee and officer of the Trust is Columbia
Wanger Asset Management, L.P., 227 West Monroe, Suite 3000, Chicago, Illinois
60606, except for Messrs. Clarke, Connaughton, and Pietropaolo, whose address is
Columbia Management Group, Inc., 245 Summer Street, Boston, Massachusetts,
02210. The Trust's Statement of Additional Information includes additional
information about Wanger's trustees and officers. You may obtain a free copy of
the Statement of Additional Information on our website, www.columbiafunds.com,
or by writing or calling toll-free:
Columbia Wanger Asset Management, L.P.
Shareholder Services Group
227 W. Monroe, Suite 3000
Chicago, IL 60606
888-4-Wanger (888-492-6437)
NUMBER OF
NAME, POSITION(S) WITH YEAR FIRST PORTFOLIOS IN
WANGER ADVISORS TRUST ELECTED OR FUND COMPLEX
AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OVERSEEN OTHER
DECEMBER 31, 2005 TO OFFICE PAST FIVE YEARS BY TRUSTEE DIRECTORSHIPS
- ---------------------- ---------- ------------------------------ ------------- -------------
TRUSTEES WHO ARE NOT INTERESTED PERSONS OF WANGER ADVISORS TRUST:
Jerome L. Duffy, 69, 2003 Retired since December 1997; prior thereto, senior vice 4 None.
Trustee president, Kemper Financial Services and treasurer,
Kemper Funds.
Fred D. Hasselbring, 64, 1994 Retail industry, general project development and business 4 None.
Trustee computer systems consultant; voice over specialist for
industrial and institutional applications; former chairman
of the board of the Trust (September 2004 to November 2004);
former lead independent trustee (August 2003 to
September 2004).
Kathryn A. Krueger, M.D., 48, 2003 Medical Fellow I, Cardiovascular Therapeutic Area, Lilly 4 None.
Trustee Research Laboratories (May 2004 to present); Medical
Advisor, Cardiovascular Therapeutic Area, Lilly Research
Laboratories (January 2003 to April 2004); Medical Director,
Cardiovascular Therapeutic Area, Lilly Research Laboratories
(October 2002 to December 2002); Medical Director, Neptune
Product Team, Lilly Research Laboratories (October 2001 to
October 2002); Acting Director and Senior Clinical Research
Physician, Lilly Research Laboratories (April 2001 to
September 2001); Senior Clinical Research Physician, Lilly
Research Laboratories (January 2000 to March 2001); Clinical
Research Physician, Lilly Research Laboratories (June 1996
to December 1999).
Patricia H. Werhane, 70, 1998 Ruffin Professor of Business Ethics, Darden Graduate School 4 None.
Chair of the Board and Trustee of Business Administration, University of Virginia, since
1993; Senior Fellow of the Olsson Center for Applied
Ethics, Darden Graduate School of Business Administration,
University of Virginia, from 2001 to present; and
Wicklander Chair of Business Ethics and Director of
the Institute for Business and Professional Ethics,
DePaul University (since September 2003).
TRUSTEE WHO IS AN INTERESTED PERSON OF WANGER ADVISORS TRUST:
Ralph Wanger, 71, (1) 1994 Founder, former president, chief investment officer and 10 Columbia
Trustee portfolio manager, Columbia Wanger Asset Acorn
Management, L.P. (CWAM) from July 1992 until Trust.
September 2003; Former president, Columbia Acorn
Trust from April 1992 through September 2003;
Former president, Wanger Advisors Trust (1994 through
September 2003); principal, Wanger Asset Management,
L.P. (WAM) from July 1992 until September 2000;
president, WAM Ltd. from July 1992 to September 2000;
director, Wanger Investment Company plc.
23
Wanger International Select 2005 Annual Report
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES AND MANAGEMENT OF WANGER ADVISORS TRUST
NUMBER OF
PORTFOLIOS IN
NAME, POSITION(S) WITH YEAR FIRST FUND COMPLEX
WANGER ADVISORS TRUST ELECTED OR FOR WHICH
AND AGE AT APPOINTED PRINCIPAL OCCUPATION(S) DURING OFFICER ACTS IN OTHER
DECEMBER 31, 2005 TO OFFICE PAST FIVE YEARS SAME CAPACITY DIRECTORSHIPS
- ---------------------- ---------- ------------------------------ ------------- -------------
OFFICERS OF WANGER ADVISORS TRUST:
Ben Andrews, 39, 2004 Analyst and portfolio manager, CWAM since 1998; 10 None.
Vice President vice president, Columbia Acorn Trust.
J. Kevin Connaughton, 41, 2001 Treasurer and CFO of the Columbia Funds and of the 10 Nations
Assistant Treasurer Liberty All-Star Funds since December 2000 Offshore Offshore
(formerly chief accounting officer and controller of Funds
the Columbia Funds and of the Liberty All-Star Funds
from February 1998 to October 2000); treasurer of the Bank of
Galaxy Funds from September 2002 through November 2005; America
treasurer, Columbia Management Multi-Strategy Hedge Fund, Global
LLC from December 2002 through December 2004. Liquidity
Funds, PLC
Banc of
America
Capital
Management
(Ireland),
Limited
Michael G. Clarke, 35, 2004 Chief accounting officer of the Columbia Funds, Liberty 10 None.
Assistant Treasurer Funds, Stein Roe Funds and All-Star Funds since October
2004; Controller of the Columbia Funds, Liberty Funds,
Stein Roe Funds and All-Star Funds from May 2004 to
October 2004; Assistant Treasurer from June 2002 to May
2004; Vice President, Product Strategy & Development
of the Liberty Funds and Stein Roe Funds from February
2001 to June 2002; Assistant Treasurer of the Liberty
Funds, Stein Roe Funds and the All-Star Funds from August
1999 to February 2001.
Bruce H. Lauer, 48, 1995 Chief operating officer, CWAM since April 1995; principal, 10 Banc of
Vice President, Secretary WAM from January 2000 to September 2000; vice president, America
and Treasurer treasurer and secretary, Columbia Acorn Trust; director, Capital
Wanger Investment Company plc and New Americas Small Cap Fund. Management
(Ireland),
Limited
Charles P. McQuaid, 52, 1994 President, CWAM since October 2003; Chief Investment Officer 10 Columbia
President of CWAM since September 2003; senior vice president of the Acorn
Trust from 1994 through September 2003; Portfolio Trust.
manager since 1995 and director of research,
CWAM from July 1992 through December 2003; Interim
director of international research, CWAM from December
2003 until December 2004; principal, WAM from July
1995 to September 2000; Trustee since 1992 and
president since 2003, Columbia Acorn Trust.
Robert A. Mohn, 44, 1997 Analyst and portfolio manager, CWAM since August 1992; 10 None.
Vice President director of domestic research, CWAM since March 2004;
principal, WAM from 1995 to September 2000; vice president,
Columbia Acorn Trust.
Christopher Olson, 41, 2001 Analyst and portfolio manager, CWAM since January 2001; vice 10 None.
Vice President president, Columbia Acorn Trust; prior thereto, director
and portfolio strategy analyst with UBS Asset Management/
Brinson Partners.
Vincent P. Pietropaolo, 40, 2001 Assistant General Counsel, Bank of America (and its 10 None.
Assistant Secretary predecessors), since December 1999.
Robert Scales, 53, 2004 Associate General Counsel, Grant Thornton LLP (2002-2004); 10 None.
Chief Compliance Officer, Senior prior thereto Associate General Counsel, UBS PaineWebber
Vice President and General Counsel (broker-dealer)
Zach Egan, 37, 2004 Director of International Research since December 2004;
Director of International Research Co-manager Director of International Research of Columbia
Acorn International Fund since May 2003; International
Analyst, CWAM, 1999-2003.
- -------------------------
(1) Trustee who is an "interested person" of the Trust and of CWAM, as defined
in the Investment Company Act of 1940, because he is a former officer of
the Trust and former employee of CWAM.
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Wanger International Select 2005 Annual Report
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[Graphic: Squirrel]
WANGER ADVISORS TRUST
TRANSFER AGENT,
DIVIDEND DISBURSING AGENT
Columbia Management Services, Inc.
P.O. Box 8081
Boston, Massachusetts
02266-8081
DISTRIBUTOR
Columbia Management Distributors, Inc.
One Financial Center
Boston, Massachusetts
02111-2621
INVESTMENT ADVISER
Columbia Wanger Asset
Management, L.P.
227 West Monroe Street
Suite 3000
Chicago, Illinois 60606
1-888-4-WANGER
(1-888-492-6437)
LEGAL COUNSEL
Bell, Boyd & Lloyd LLC
Chicago, Illinois
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
Chicago, Illinois
This report, including the schedules of investments and financial statements, is
submitted for the general information of the shareholders of the Wanger Advisors
Trust. This report is not authorized for distribution unless preceded or
accompanied by a prospectus.
A description of the fund's proxy voting policies and procedures is available
(i) on the fund's website, www.columbiafunds.com; (ii) on the Securities and
Exchange Commission's website at www.sec.gov, and (iii) without charge, upon
request, by calling 888-492-6437. Information regarding how the fund voted
proxies relating to portfolio securities during the 12-month period ended June
30 is available from the SEC's website.
The fund files a complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is
available on the SEC's website at www.sec.gov and may be reviewed and copied at
the SEC's Public Reference Room in Washington, D.C. Information on the operation
of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
28
WANGER ADVISORS TRUST
SHC-42/106334-1205 0206 06/9827
ITEM 2. CODE OF ETHICS.
(a) The registrant has, as of the end of the period covered by this
report, adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party.
(b) During the period covered by this report, there were not any
amendments to a provision of the code of ethics adopted in 2(a) above.
(c) During the period covered by this report, there were not any waivers
or implicit waivers to a provision of the code of ethics adopted in
2(a) above.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's Board of Trustees has determined that Jerome L. Duffy, who is a
member of the registrant's Board of Trustees and Audit Committee, qualifies as
an audit committee financial expert. Mr. Duffy is an independent trustee, as
defined in paragraph (a)(2) of this item's instructions.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Aggregate Audit Fees billed by the principal accountant for professional
services rendered during the fiscal years ended December 31, 2005 and December
31, 2004 are approximately as follows:
2005 2004
$85,000 $82,000
Audit Fees include amounts related to the audit of the registrant's annual
financial statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal
years.
(b) Aggregate Audit-Related Fees billed by the principal accountant for
professional services rendered during the fiscal years ended December 31, 2005
and December 31, 2004 are approximately as follows:
2005 2004
$13,800 $10,400
Audit-Related Fees include amounts for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported in Audit Fees
above. In both fiscal years 2005 and 2004, Audit-Related Fees include certain
agreed-upon procedures performed for semi-annual shareholder reports. In fiscal
year 2005 Audit-Related Fees also include certain agreed-upon procedures related
to the review of the registrant's anti-money laundering program.
(c) Aggregate Tax Fees billed by the principal accountant for professional
services rendered during the fiscal years ended December 31, 2005 and December
31, 2004 are approximately as follows:
2005 2004
$11,600 $11,000
Tax Fees in both fiscal years 2005 and 2004 consist primarily of the review of
annual tax returns and include amounts for professional services by the
principal accountant for tax compliance, tax advice and tax planning.
(d) Aggregate All Other Fees billed by the principal accountant for professional
services rendered during the fiscal years ended December 31, 2005 and December
31, 2004 are as follows:
2005 2004
$0 $0
All Other Fees include amounts for products and services provided by the
principal accountant, other than the services reported in paragraphs (a) through
(c) above.
None of the amounts described in paragraphs (a) through (d) above were approved
pursuant to the "de minimis" exception under paragraph (c)(7)(i)(C) of Rule 2-01
of Regulation S-X.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The policy of the registrant's Audit Committee is to specifically pre-approve
(i) all audit and non-audit (including audit related, tax and all other)
services provided by the registrant's independent auditor to the registrant and
individual funds (collectively "Fund Services") and (ii) all non-audit services
provided by the registrant's independent auditor to the funds' adviser or a
control affiliate of the adviser, that relate directly to the funds' operations
and financial reporting (collectively "Fund-related Adviser Services"). A
"control affiliate" is an entity controlling, controlled by, or under common
control with
the adviser that provides ongoing services to the funds, and the term "adviser"
is deemed to exclude any unaffiliated sub-adviser whose role is primarily
portfolio management and is sub-contracted or overseen by another investment
adviser.
If such Fund Services or Fund-related Adviser Services are required during the
period between the Audit Committee's regularly scheduled meetings, the Chairman
of the Audit Committee has the authority to pre-approve the service, with
reporting to the full Audit Committee at the next regularly scheduled meeting.
The Audit Committee will waive pre-approval of Fund Services or Fund-related
Adviser Services provided that the requirements under paragraph (c)(7)(i)(C) of
Rule 2-01 of Regulation S-X are met.
(e)(2) The percentage of services described in paragraphs (b) through (d) of
this Item approved pursuant to the "de minimis" exception under paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X during both fiscal years ended
December 31, 2005 and December 31, 2004 was zero.
(f) Not applicable.
(g) All non-audit fees billed by the registrant's accountant for services
rendered to the registrant for the fiscal years ended December 31, 2005 and
December 31, 2004 are disclosed in (b) through (d) of this Item.
During the fiscal years ended December 31, 2005 and December 31, 2004, there
were no Audit-Related Fees or Tax Fees that were approved for services to the
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser) and any entity controlling, controlled by, or under common control with
the adviser that provides ongoing services to the registrant under paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X. During the fiscal years ended
December 31, 2005 and December 31, 2004, All Other Fees that were approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X were
approximately $104,200 and $93,500, respectively. For both fiscal years, All
Other Fees relate to internal controls reviews of the registrant's transfer
agent performed by the current principal accountant.
The percentage of Audit-Related Fees, Tax Fees and All Other Fees required to be
approved under paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X that were
approved under the "de minimis" exception during both fiscal years ended
December 31, 2005 and December 31, 2004 was zero.
(h) The registrant's Audit Committee of the Board of Directors has considered
whether the provision of non-audit services that were rendered to the
registrant's adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that
provides ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, is compatible with
maintaining the principal accountant's independence. The Audit Committee
determined that the provision of such services is compatible with maintaining
the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
The registrant's "Schedule I - Investments in securities of unaffiliated
issuers" (as set forth in 17 CFR 210.12-12) is included in Item 1 of this Form
N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have not been any material changes to the procedures by which shareholders
may recommend nominees to the registrant's board of directors, since those
procedures were last disclosed in response to the requirements of Item
7(d)(2)(ii)(G) of Schedule 14A or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officers, based on their evaluation of the registrant's disclosure
controls and procedures as of a date within 90 days of the filing of
this report, have concluded that such controls and procedures are
adequately designed to ensure that information required to be disclosed
by the registrant in Form N-CSR is accumulated and communicated to the
registrant's management, including the principal executive officer and
principal financial officer, or persons performing similar functions,
as appropriate to allow timely decisions regarding required disclosure.
(b) There were no changes in the registrant's internal control over
financial reporting that occurred during the registrant's second fiscal
quarter of the period covered by this 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) Code of ethics required to be disclosed under Item 2 of Form N-CSR
attached hereto as Exhibit 99.CODE ETH.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) attached hereto as Exhibit 99.CERT.
(a)(3) Not applicable.
(b) Certification pursuant to Rule 30a-2(b) under the Investment Company Act of
1940 (17 CFR 270.30a-2(b)) attached hereto as Exhibit 99.906CERT.
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) Wanger Advisors Trust
-----------------------------------------------------------------
By (Signature and Title) /S/ Charles P. McQuaid
-----------------------------------------------------
Charles P. McQuaid, President
Date February 27, 2006
-------------------------------------------------------------------------
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/ Charles P. McQuaid
------------------------------------------------------
Charles P. McQuaid, President
Date February 27, 2006
--------------------------------------------------------------------------
By (Signature and Title) /S/ Bruce H. Lauer
------------------------------------------------------
Bruce H. Lauer, Treasurer
Date February 27, 2006
--------------------------------------------------------------------------