2000
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Prudential Securities Annual
Strategic Trust Report
PRUDENTIAL SECURITIES STRATEGIC TRUST
March 2001
Dear Limited Owner:
1
PricewaterhouseCoopers (LOGO)
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Telephone (212) 596 8000
Facsimile (212) 596 8910
Report of Independent Accountants
To the Managing Owner and
Limited Owners of
Prudential Securities Strategic Trust
In our opinion, the accompanying statements of financial condition and the
related statements of operations and changes in trust capital present fairly, in
all material respects, the financial position of Prudential Securities Strategic
Trust at December 31, 2000 and 1999, and the results of its operations for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Managing Owner; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
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 the Managing Owner, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
January 26, 2001
2
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
STATEMENTS OF FINANCIAL CONDITION
December 31,
-----------------------------
2000 1999
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ASSETS
Cash $13,240,014 $31,489,773
Net unrealized gain on open futures and options contracts 75,883 3,686,345
Premium paid on options -- 152,364
Other receivable 895 2,203
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Total assets $13,316,792 $35,330,685
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LIABILITIES AND TRUST CAPITAL
Liabilities
Redemptions payable $ 222,610 $ 1,219,087
Management fees payable 15,110 65,935
Unrealized loss on open forward contracts 11,692 205,135
Incentive fees payable -- 37,416
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Total liabilities 249,412 1,527,573
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Commitments
Trust capital
Limited interests (146,544.840 and 261,529.578 interests
outstanding) 12,936,640 33,465,044
General interests (1,481 and 2,642 interests outstanding) 130,740 338,068
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Total trust capital 13,067,380 33,803,112
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Total liabilities and trust capital $13,316,792 $35,330,685
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Net asset value per limited and general interest ('Interests') $ 88.28 $ 127.96
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The accompanying notes are an integral part of these statements.
3
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
STATEMENTS OF OPERATIONS
Year Ended December 31,
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2000 1999 1998
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REVENUES
Net realized gain (loss) on commodity transactions $(5,711,411) $1,076,676 $13,284,951
Change in net unrealized gain/loss on open commodity
positions (3,417,019) 2,499,725 (1,597,171)
Interest income 1,011,209 1,497,863 2,022,918
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(8,117,221) 5,074,264 13,710,698
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EXPENSES
Commissions 1,239,674 2,966,784 3,265,316
Management fees 226,233 865,933 1,155,091
Incentive fees -- 394,427 2,339,362
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1,465,907 4,227,144 6,759,769
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Net income (loss) $(9,583,128) $ 847,120 $ 6,950,929
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ALLOCATION OF NET INCOME (LOSS)
Limited interests $(9,487,283) $ 838,655 $ 6,882,295
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General interests $ (95,845) $ 8,465 $ 68,634
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NET INCOME (LOSS) PER WEIGHTED AVERAGE LIMITED AND
GENERAL INTEREST
Net income (loss) per weighted average limited and
general interest $ (47.34) $ 2.62 $ 15.76
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Weighted average number of limited and general
interests outstanding 202,424 323,719 441,066
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STATEMENTS OF CHANGES IN TRUST CAPITAL
LIMITED GENERAL
INTERESTS INTERESTS INTERESTS TOTAL
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Trust capital--December 31, 1997 463,547.078 $ 47,217,112 $ 507,923 $ 47,725,035
Contributions 49,726.311 5,359,300 27,000 5,386,300
Net income 6,882,295 68,634 6,950,929
Redemptions (149,687.958) (14,894,553) (153,395) (15,047,948)
------------ ------------ --------- ------------
Trust capital--December 31, 1998 363,585.431 44,564,154 450,162 45,014,316
Net income 838,655 8,465 847,120
Redemptions (99,413.853) (11,937,765) (120,559) (12,058,324)
------------ ------------ --------- ------------
Trust capital--December 31, 1999 264,171.578 33,465,044 338,068 33,803,112
Net loss (9,487,283) (95,845) (9,583,128)
Redemptions (116,145.738) (11,041,121) (111,483) (11,152,604)
------------ ------------ --------- ------------
Trust capital--December 31, 2000 148,025.840 $ 12,936,640 $ 130,740 $ 13,067,380
------------ ------------ --------- ------------
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The accompanying notes are an integral part of these statements.
4
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
NOTES TO FINANCIAL STATEMENTS
A. General
Prudential Securities Strategic Trust, formerly known as Willowbridge
Strategic Trust, (the 'Trust') was organized under the Delaware Business Trust
Statute on October 16, 1995 and commenced trading operations on May 1, 1996. The
Trust will terminate on December 31, 2015 unless terminated sooner as provided
in the Second Amended and Restated Declaration of Trust and Trust Agreement (the
'Trust Agreement'). The Trust was formed to engage in the speculative trading of
commodity futures, forward and options contracts. The Trustee of the Trust is
Wilmington Trust Company. The managing owner is Prudential Securities Futures
Management Inc. (the 'Managing Owner'), a wholly owned subsidiary of Prudential
Securities Incorporated ('PSI'), which, in turn, is a wholly owned subsidiary of
Prudential Securities Group Inc. PSI is the principal underwriter and selling
agent for the Trust's interests ('Interests'), as well as its commodity broker
('Commodity Broker'). The Managing Owner is required to maintain at least a 1%
interest in the Trust so long as it is acting as the Managing Owner.
On May 1, 1996, the Trust completed its initial offering with gross proceeds
of $12,686,200 from the sale of 125,352 limited interests and 1,510 general
interests. General interests were sold exclusively to the Managing Owner.
Additional Interests were offered monthly at the then current net asset value
per Interest until the continuous offering period expired on January 31, 1998.
Additional contributions raised during the continuous offering period resulted
in additional proceeds to the Trust of $51,242,700.
At inception of the Trust's trading activities, Willowbridge Associates Inc.
('Willowbridge') made all the Trust's commodity trading decisions. During July
1998, Willowbridge ceased trading approximately 50% of the Trust's assets and,
during August 1998, these assets were reallocated to Bridgewater Associates,
Inc. ('Bridgewater'). As of February 15, 2000, Willowbridge ceased to serve as a
trading manager to the Trust when the remaining assets allocated to
Willowbridge, after adjusting for redemptions, declined by greater than 33 1/3%
from their balance at the beginning of the year. On July 5, 2000, these assets
were reallocated to Gamma Capital Management, LLC ('Gamma'). As a result of the
changes in the Trust's independent commodity trading managers discussed above,
during a majority of July and August 1998 as well as from February 16, 2000
through July 4, 2000, a portion of the Trust's assets were not allocated to
commodities trading and, as a result, were not subject to management fees and
commissions. The monthly management fees paid on traded assets and the quarterly
incentive fees paid on 'New High Net Trading Profits' (as defined in each
advisory agreement among the Trust, Managing Owner and each trading manager) to
each trading manager are as follows:
Monthly Quarterly
Trading Management Incentive
Manager Fee Fee
- ----------------------- --------------------------------- ---------------------------------------
Willowbridge 3% annually of traded assets 20% of 'New High Net Trading Profits'
Bridgewater .9756% annually of traded assets 20% of 'New High Net Trading Profits'
Gamma 2% annually of traded assets 20% of 'New High Net Trading Profits'
Additionally, Gamma must recoup the cumulative trading losses of Willowbridge
before it is paid an incentive fee. The advisory agreements may be terminated
for a variety of reasons, including at the discretion of the Managing Owner.
B. Summary of Significant Accounting Policies
Basis of accounting
The financial statements of the Trust are prepared in accordance with
accounting principles generally accepted in the United States of America.
Commodity futures, forward and options transactions are reflected in the
accompanying statements of financial condition on trade date. The difference
between the original contract amount and market value is reflected as net
unrealized gain or loss. The market value of each contract is based upon the
closing quotation on the exchange, clearing firm or bank on, or through, which
the contract is traded.
5
The weighted average number of limited and general interests outstanding was
computed for purposes of disclosing net income (loss) per weighted average
limited and general interest. The weighted average limited and general interests
are equal to the number of Interests outstanding at year end, adjusted
proportionately for Interests subscribed and redeemed based on their respective
time outstanding during such year.
The Trust has elected not to provide a Statement of Cash Flows as permitted
by Statement of Financial Accounting Standards No. 102, 'Statement of Cash
Flows--Exemption of Certain Enterprises and Classification of Cash Flows from
Certain Securities Acquired for Resale.'
Income taxes
The Trust is treated as a partnership for Federal income tax purposes. As
such, the Trust is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from its operations are passed
directly to the individual Interest holders. The Trust may be subject to other
state and local taxes in jurisdictions in which it operates.
Profit and loss allocation, distributions, contributions and redemptions
The Trust allocates profits and losses for both financial and tax reporting
purposes to its Interest holders monthly on a pro rata basis based on each
owner's Interests outstanding during the month. Distributions (other than
redemptions of Interests) may be made at the sole discretion of the Managing
Owner on a pro rata basis in accordance with the respective capital balances of
the Interest holders; however, no distributions have been made since inception,
nor does the Managing Owner presently intend to make any distributions in the
future.
Additional Interests were offered monthly at their month-end net asset value
per Interest until the continuous offering period expired as discussed in Note
A.
Redemptions are permitted as of the last day of each month, on at least 10
days prior written notice. Redemptions are at the then current net asset value
per Interest. Prior to February 1999, Interests redeemed on or prior to the end
of the first and second successive six-month periods after their effective date
of purchase were subject to redemption charges of 4% and 3%, respectively, of
the net asset value at which they were redeemed. These redemption charges were
paid to the Managing Owner. Partial redemptions are permitted.
New Accounting Guidance
In June 2000, the Financial Accounting Standards Board ('FASB') issued
Statement No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities--an amendment of FASB Statement No. 133 ('SFAS 138'), which
became effective for the Trust on July 1, 2000. SFAS 138 amends the accounting
and reporting standards of FASB Statement No. 133 for certain derivative
instruments and certain hedging activities. SFAS 138 has not had a material
effect on the carrying value of assets and liabilities within the financial
statements.
C. Fees
Organizational, offering and general and administrative costs
PSI or its affiliates paid the costs of organizing the Trust and offering its
Interests and continue to pay administrative costs incurred by the Managing
Owner or its affiliates for services they perform for the Trust. These costs
include, but are not limited to, those discussed in Note D below. Routine legal,
audit, postage and other third party costs are also paid by PSI or its
affiliates.
Management and incentive fees
The Trust pays each trading manager a monthly management fee on the portion
of the Trust's net assets allocated to each trading manager as of the last day
of each month. In addition, the Trust pays each trading manager a quarterly
incentive fee based on 'New High Net Trading Profits' (as defined in the
advisory agreements among the Trust, the Managing Owner and each trading
manager). See Note A for a discussion of changes to the Trust's trading managers
and the rates paid to each trading manager since inception of the Trust.
6
Commissions
The Managing Owner, on behalf of the Trust, entered into an agreement with
PSI to act as Commodity Broker whereby the Trust pays a fixed monthly fee for
brokerage services rendered. Effective September 1, 1998, the Trust pays PSI
commissions at a flat rate of 5/8 of 1% (7.5% per annum) of the Trust's net
asset value as of the first day of each month. Prior to September 1, 1998, the
Trust paid commissions at a flat rate of .64583 of 1% (7.75% per annum.) From
this fee, PSI pays all of the Trust's execution (including floor brokerage
expenses, give-up charges and NFA, clearing and exchange fees) and account
maintenance costs, as well as compensation to employees who sold Interests in
the Trust.
D. Related Parties
The Managing Owner or its affiliates perform services for the Trust, which
include but are not limited to: brokerage services; accounting and financial
management; registrar, transfer and assignment functions; investor
communications; printing and other administrative services. Except for costs
related to brokerage services, PSI or its affiliates pay the costs of these
services in addition to the Trust's routine operational, administrative, legal
and auditing costs, as well as costs paid to organize the Trust and offer its
Interests.
The Trust's assets are maintained either in trading or cash accounts at PSI
or, for margin purposes, with the various exchanges on which the Trust is
permitted to trade. PSI credits the Trust monthly with 80% of the interest it
earns on the average net assets in the Trust's accounts and retains the
remaining 20%.
The Trust, acting through its trading managers, executes over-the-counter,
spot, forward and/or option foreign exchange transactions with PSI. PSI then
engages in back-to-back trading with an affiliate, Prudential-Bache Global
Markets Inc. ('PBGM'). PBGM attempts to earn a profit on such transactions. PBGM
keeps its prices on foreign currency competitive with other interbank currency
trading desks. All over-the-counter currency transactions are conducted between
PSI and the Trust pursuant to a line of credit. PSI may require that collateral
be posted against the marked-to-market positions of the Trust.
As of December 31, 2000, a non-U.S. affiliate of the Managing Owner owns
538.703 limited interests of the Trust.
The costs charged to the Trust for brokerage services for the years ended
December 31, 2000, 1999 and 1998 were $1,239,674, $2,966,784, and $3,265,316,
respectively.
E. Income Taxes
There have been no differences between the tax basis and book basis of
Interest holders' capital since inception of the Trust.
F. Derivative Instruments and Associated Risks
The Trust is exposed to various types of risks associated with the derivative
instruments and related markets in which it invests. These risks include, but
are not limited to, risk of loss from fluctuations in the value of derivative
instruments held (market risk) and the inability of counterparties to perform
under the terms of The Trust's investment activities (credit risk).
Market Risk
Trading in futures and forward (including foreign exchange) contracts
involves entering into contractual commitments to purchase or sell a particular
commodity at a specified date and price. The gross or face amount of the
contracts, which is typically many times that of the Trust's net assets being
traded, significantly exceeds the Trust's future cash requirements since the
Trust intends to close out its open positions prior to settlement. As a result,
the Trust is generally subject only to the risk of loss arising from the change
in the value of the contracts. As such, the Trust considers the 'fair value' of
its futures and forwards to be the net unrealized gain or loss on the contracts.
The market risk associated with the Trust's commitments to purchase commodities
is limited to the gross or face amount of the contracts held. However, when the
Trust enters into a contractual commitment to sell commodities, it must make
delivery of the underlying commodity at the contract price and then repurchase
the contract at prevailing market prices. Since the repurchase price to which a
commodity can rise is unlimited, entering into commitments to sell commodities
exposes the Trust to unlimited risk.
7
Trading in options involves the payment or receipt of a premium and the
corresponding right or obligation, as the case may be, to either purchase or
sell the underlying commodity for a specified price during a limited period of
time. Purchasing options involves the risk that the underlying commodity does
not change price as expected, so that the option expires worthless and the
premium is lost. On the other hand, selling options involves unlimited risk
because the Trust is exposed to the potentially unlimited price movement in the
underlying commodity.
Market risk is influenced by a wide variety of factors including government
programs and policies, political and economic events, the level and volatility
of interest rates, foreign currency exchange rates, the diversification effects
among the derivative instruments the Trust holds and the liquidity and inherent
volatility of the markets in which the Trust trades.
Credit risk
When entering into futures, forward and options contracts, the Trust is
exposed to credit risk that the counterparty to the contract will not meet its
obligations. The counterparty for futures and options contracts traded in the
United States and on most foreign futures and options exchanges is the
clearinghouse associated with such exchanges. In general, clearinghouses are
backed by their corporate members who are required to share any financial burden
resulting from the non-performance by one of their members and, as such, should
significantly reduce this credit risk. In cases where the clearinghouse is not
backed by the clearing members (i.e., some foreign exchanges), it is normally
backed by a consortium of banks or other financial institutions. On the other
hand, the sole counterparty to the Trust's forward transactions is PSI, the
Trust's commodity broker. The Trust has entered into a master netting agreement
with PSI and, as a result, when applicable, presents unrealized gains and losses
on open forward positions as a net amount in the statements of financial
condition. The amount at risk associated with counterparty non-performance of
all of the Trust's contracts is the net unrealized gain included in the
statements of financial condition. There can be no assurance that any
counterparty, clearing member or clearinghouse will meet its obligations to the
Trust.
The Managing Owner attempts to minimize both credit and market risks by
requiring the Trust and its trading managers to abide by various trading
limitations and policies. The Managing Owner monitors compliance with these
trading limitations and policies which include, but are not limited to,
executing and clearing all trades with creditworthy counterparties; limiting the
amount of margin or premium required for any one commodity or all commodities
combined; and generally limiting transactions to contracts which are traded in
sufficient volume to permit the taking and liquidating of positions.
Additionally, pursuant to the advisory agreements among the Trust, the Managing
Owner and each trading manager, the Trust shall automatically terminate a
trading manager if the net asset value allocated to that trading manager
declines by 33 1/3% from the value at the beginning of any year or since the
initial allocation of assets to that trading manager. (See Note A for a
discussion of the termination of Willowbridge as a trading manager to the
Trust.) Furthermore, the Second Amended and Restated Declaration of Trust and
Trust Agreement provides that the Trust will liquidate its positions, and
eventually dissolve, if the Trust experiences a decline in the net asset value
of 50% from the value at the beginning of any year or since the commencement of
trading activities. In each case, the decline in net asset value is after giving
effect for distributions and redemptions. The Managing Owner may impose
additional restrictions (through modifications of trading limitations and
policies) upon the trading activities of the trading managers as it, in good
faith, deems to be in the best interests of the Trust.
PSI, when acting as the Trust's futures commission merchant in accepting
orders for the purchase or sale of domestic futures and options contracts, is
required by Commodity Futures Trading Commission ('CFTC') regulations to
separately account for and segregate as belonging to the Trust all assets of the
Trust relating to domestic futures and options trading and not to commingle such
assets with other assets of PSI. At December 31, 2000, such segregated assets
totalled $2,657,711. Part 30.7 of the CFTC regulations also requires PSI to
secure assets of the Trust related to foreign futures and options trading which
totalled $10,658,186 at December 31, 2000. There are no segregation requirements
for assets related to forward trading.
As of December 31, 2000, all open futures and forward contracts mature within
one year.
8
At December 31, 2000 and December 31, 1999, the fair values of futures,
forward and options contracts were:
2000 1999
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Assets Liabilities Assets Liabilities
----------- ----------- ----------- -----------
Futures Contracts:
Domestic exchanges
Interest rates $ 23,200 $ 178,704 $ 5,455 $ 13,650
Stock indices 17,350 -- 2,022,713 3,606
Currencies 288,497 15,500 142,955 185,257
Commodities -- 2,812 206,761 119,006
Foreign exchanges
Interest rates 31,675 88,797 167,112 181,994
Stock indices 20,397 15,369 -- 11,538
Commodities 4,250 8,304 1,670,554 256,879
Forward Contracts:
Currencies -- 11,692 -- 8,656
Commodities -- -- -- 196,479
Options Contracts:
Foreign exchanges
Commodities -- -- 395,089 --
----------- ----------- ----------- -----------
$ 385,369 $ 321,178 $ 4,610,639 $ 977,065
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9
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I hereby affirm that, to the best of my knowledge and belief, the information
contained herein relating to Prudential Securities Strategic Trust is accurate
and complete.
PRUDENTIAL SECURITIES
FUTURES MANAGEMENT INC.
(Managing Owner)
By: Barbara J. Brooks
Chief Financial Officer
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10
PRUDENTIAL SECURITIES STRATEGIC TRUST
(a Delaware Business Trust)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Trust commenced operations on May 1, 1996 with gross proceeds of
$12,686,200 allocated to commodities trading. Additional Interests were offered
monthly at the then current net asset value per Interest until the continuous
offering period expired on January 31, 1998. Additional contributions made
during the continuous offering period totalled $51,242,700, including $375,000
of contributions from the Managing Owner.
The Trust Agreement provides that an Interest holder may redeem its Interests
as of the last day of any month at the then current net asset value per
Interest. Redemptions of limited interests recorded for the years ended December
31, 2000, 1999 and 1998 were $11,041,121, $11,937,765 and $14,894,553,
respectively. Redemptions by the Managing Owner for the years ended December 31,
2000, 1999 and 1998 were $111,483, $120,559 and $153,395, respectively.
Redemptions of limited interests and general interests from the commencement of
operations, May 1, 1996 through December 31, 2000 totalled $49,196,511 and
$385,437, respectively. Future redemptions will impact the amount of funds
available for investment in commodity contracts in subsequent periods.
At December 31, 2000, 100% of the Trust's net assets were allocated to
commodities trading. A significant portion of the net assets are held in cash,
which is used as margin for the Trust's trading in commodities. Inasmuch as the
sole business of the Trust is to trade in commodities, the Trust continues to
own such liquid assets to be used as margin. PSI credits the Trust monthly with
80% of the interest it earns on the average net assets in these accounts and
retains the remaining 20%.
The commodities contracts are subject to periods of illiquidity because of
market conditions, regulatory considerations and other reasons. For example,
commodity exchanges limit fluctuations in commodity futures contract prices
during a single day by regulations referred to as 'daily limits.' During a
single day, no trades may be executed at prices beyond the daily limit. Once the
price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
neither be taken nor liquidated unless traders are willing to effect trades at
or within the limit. Commodity futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading. Such market
conditions could prevent the Trust from promptly liquidating its commodity
futures positions.
Since the Trust's business is to trade futures, forward and options
contracts, its capital is at risk due to changes in the value of these contracts
(market risk) or the inability of counterparties to perform under the terms of
the contracts (credit risk). The Trust's exposure to market risk is influenced
by a number of factors including the volatility of interest rates and foreign
currency exchange rates, the liquidity of the markets in which the contracts are
traded and the relationships among the contracts held. The inherent uncertainty
of the Trust's speculative trading as well as the development of drastic market
occurrences could result in monthly losses considerably beyond the Trust's
experience to date and could ultimately lead to a loss of all or substantially
all of investors' capital. The Managing Owner attempts to minimize these risks
by requiring the Trust's trading managers to abide by various trading
limitations and policies, which include limiting margin amounts, trading only in
liquid markets and permitting the use of stop loss provisions. See Note F to the
financial statements for a further discussion of the credit and market risks
associated with the Trust's futures, forward and options contracts.
The Trust does not have, nor does it expect to have, any capital assets.
Results of Operations
The net asset value per Interest as of December 31, 2000 was $88.28, a
decrease of 31.01% from the December 31, 1999 net asset value per Interest of
$127.96, which was an increase of 3.35% from the December 31, 1998 net asset
value per Interest of $123.81. The MAR (Managed Account Reports) Fund/Pool
Index, which tracks the performance of approximately 300 futures funds, returned
9.41% and 1.48% for the years ended December 31, 2000 and 1999, respectively.
Past performance is not necessarily indicative of future results.
11
The Trust's gross trading gains/(losses) were ($9,128,000), $3,576,000 and
$11,688,000 during the years ended December 31, 2000, 1999 and 1998,
respectively. Due to the nature of the Trust's trading activities, a period to
period comparison of its trading results is not meaningful. However, a detailed
discussion of the Trust's 2000 trading results is presented below.
The Trust's unfavorable performance in 2000 was attributed to losses in the
stock index, currency, interest rate and metals sectors, particularly in the
first quarter. Gains were recognized in the energy sector.
During January and February, positions in the NASDAQ and S&P 500 indices led
to the Trust's largest losses durng the year. These losses, coupled with
negative performance in other sectors, particularly positions in the euro as
well as metal positions, caused the termination of Willowbridge Associates Inc.
as a trading manager to the Trust as more fully described below.
During the first half of 2000, the world financial markets experienced
extreme volatility. During the second half of the year, equity markets
experienced continued volatility, but markets trended downward as global
economies began to show signs of slowing down and most major indices ended the
year lower. Gains earned during the second and fourth quarters were not
sufficient to offset losses incurred by the Trust during the first and third
quarters.
The euro began 2000 lower versus the U.S. dollar, Japanese yen and British
pound before rallying slightly in June as a result of solid European economic
data and sentiment that the currency was undervalued. Long euro positions
resulted in losses. Despite a brief rally after intervention by the European
Central Bank and other G-7 central banks to boost the failing euro in September,
the euro settled back down more than $0.02 below its intervention peaks. The
euro reversed its downtrend during the fourth quarter as it rose against the
U.S. dollar and Japanese yen. Short euro positions incurred losses for the
Trust. The Japanese yen rallied sharply, gaining on the U.S. dollar and most
other currencies in the final months of Japan's fiscal year (which ended March
31st) resulting in gains in long positions. This was attributed to positive
sentiment regarding Japan's economy. In May, the yen rose slightly against the
U.S. dollar supported by expectations of a possible change in the Bank of
Japan's (BOJ) zero-interest rate policy and continued to rise when the BOJ
increased short-term interest rates in August. Political and economic
uncertainty in Japan during the fourth quarter caused the yen to fall against
the U.S. dollar and short Japanese yen positions resulted in gains. The Swiss
franc spent most of the first three quarters drifting lower against the U.S.
dollar, tracking the euro's trend and incurring losses for long positions. The
Swiss franc, Australian dollar and Canadian dollar were among other currencies
that rose against the U.S. dollar in the fourth quarter due to a weakening U.S.
economy incurring losses in short positions.
Global bond markets began 2000 on a strong note. The U.S. Federal Reserve,
European Central Bank, Bank of England, Reserve Bank of Australia, and Bank of
Canada increased interest rates in early February. These rate increases shared
motivation of strong economic growth and concerns about inflation. Despite rate
hikes and news of robust worldwide economic growth, global bond markets
continued to rally partially due to investors seeking refuge from volatile
equity markets. U.S. and euro bond positions resulted in losses during the first
and third quarters of the year. Negative equity performance throughout the
fourth quarter and mounting fear of a global economic slowdown contributed to a
bond market rally towards year end as investors continued their flight to
quality from the stock market. Prices of long- and short-term interest rate
instruments rose, and losses resulted from short U.S., Australian and euro bond
positions during the last quarter.
Short metal positions provided negative performance for the Trust throughout
most of the year as strong demand and fear of inflation drove prices higher. In
addition, the high cost of energy, which is used in the production of base
metals, caused a decrease in metal supply driving prices higher and incurring
losses for short positions.
Energy prices climbed throughout January and February and into the first week
of March. Prices of crude oil futures rose above $33 a barrel, the highest level
for a front-month (the most liquid) contract since the Gulf War in 1991. The
energy sector reached a high early in March just prior to OPEC's agreement to
increase production sufficiently to stabilize prices. Political pressure by the
United States, along with a desire among OPEC members to maintain crude oil
prices in the range of $22-$28 per barrel, prompted the cartel to announce a
production increase and crude oil prices reversed downward. Increased demand and
low supplies caused oil prices to surge once again during the second quarter.
Energy markets ended a year
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long uptrend with natural gas surging to an all time high in December as low
supplies were strained by unusually cold temperatures in the U.S. resulting in
gains from natural gas positions in the third quarter.
Fluctuations in overall average net asset levels have led to corresponding
fluctuations in interest earned and commissions and management fees incurred by
the Trust, which are largely based on the level of net assets. The Trust's
average net asset levels were significantly lower during the year ended December
31, 2000 versus the prior year, primarily from redemptions and unfavorable
trading performance in 2000. The Trust's average net asset levels were also
lower during the year ended December 31, 1999 versus the year ended December 31,
1998, primarily from redemptions.
At inception of the Trust's trading activities, Willowbridge Associates Inc.
('Willowbridge') made all the Trust's commodity trading decisions. During July
1998, Willowbridge ceased trading approximately 50% of the Trust's assets and,
during August 1998, these assets were reallocated to Bridgewater Associates,
Inc. ('Bridgewater'). As of February 15, 2000, Willowbridge ceased to serve as
a trading manager to the Trust when the remaining assets allocated to
Willowbridge, after adjusting for redemptions, declined by greater than 33 1/3%
from their balance at the beginning of the year. On July 5, 2000, these assets
were reallocated to Gamma Capital Management, LLC ('Gamma'). As a result of the
changes in the Trust's independent commodity trading managers discussed above,
during a majority of July and August 1998 as well as from February 16, 2000
through July 4, 2000, a portion of the Trust's assets were not allocated to
commodities trading and, as a result, were not subject to management fees and
commissions. The monthly management fees paid on traded assets and the quarterly
incentive fees paid on 'New High Net Trading Profits' (as defined in each
advisory agreement among the Trust, Managing Owner and each trading manager) to
each trading manager are as follows:
Monthly Quarterly
Trading Management Incentive
Manager Fee Fee
- ----------------------- --------------------------------- ---------------------------------------
Willowbridge 3% annually of traded assets 20% of 'New High Net Trading Profits'
Bridgewater .9756% annually of traded assets 20% of 'New High Net Trading Profits'
Gamma 2% annually of traded assets 20% of 'New High Net Trading Profits'
Additionally, Gamma must recoup the cumulative trading losses of Willowbridge
before it is paid an incentive fee. The advisory agreements may be terminated
for a variety of reasons, including at the discretion of the Managing Owner.
Interest income is earned on the equity balances held at PSI and, therefore,
varies monthly according to interest rates, trading performance, contributions
and redemptions. Interest income decreased by $487,000 for the year ended
December 31, 2000 as compared to 1999 and decreased by $525,000 for the year
ended December 31, 1999 as compared to 1998. These decreases were due primarily
to the decline in net asset levels as discussed above. However, higher overall
interest rates in 2000 versus 1999 offset some of the decrease in 2000, but
lower overall interest rates in 1999 versus 1998 compounded the decrease in
1999.
Commissions are calculated on the Trust's net asset value at the beginning of
each month and, therefore, vary according to trading performance, contributions
and redemptions. Commissions decreased by $1,727,000 for the year ended December
31, 2000 as compared to 1999 and decreased by $299,000 for the year ended
December 31, 1999 as compared to 1998 due to the decline in average net asset
levels as well as the postponement of commissions charged to the Trust by PSI on
the net assets unallocated to commodities trading as discussed above.
Additionally, effective September 1, 1998, the annual rate of commissions
charged to the Trust was reduced from 7.75% to 7.5% of the net asset value of
the Trust.
At December 31, 2000, all trading decisions were made by Gamma and
Bridgewater. Management fees are calculated on the net asset value allocated to
each trading manager at the end of each month and, therefore, are affected by
trading performance, contributions and redemptions. Management fees decreased by
$640,000 for the year ended December 31, 2000 as compared to 1999 and decreased
by $289,000 for the year ended December 31, 1999 as compared to 1998. The
decreases were due to the decline in average net asset levels as well as the
effect of the 2000 and 1998 reallocation of Trust assets to the different
trading managers who are paid differently, as well as the postponement of
management fees on the portion of Trust assets not allocated to commodities
trading, as more fully discussed above.
13
Incentive fees are based on the 'New High Net Trading Profits' generated by
each trading manager, as defined in the advisory agreements among the Trust, the
Managing Owner and each trading manager. Incentive fees of $394,000, and
$2,339,000 were earned for the years ended December 31, 1999 and 1998,
respectively. The payment of incentive fees is not contingent upon future
trading performance and, therefore, is unaffected by the Trust's poor trading
performance in 2000. None of the Trust's trading managers earned an incentive
fee in 2000.
New Accounting Guidance
In June 2000, FASB issued SFAS 138, which became effective for the Trust on
July 1, 2000, SFAS 138 amends the accounting and reporting standards of FASB
Statement No. 133 for certain derivative instruments and certain hedging
activities. SFAS 138 has not had a material effect on the carrying value of
assets and liabilities within the financial statements.
Inflation
Inflation has had no material impact on operations or on the financial
condition of the Trust from inception through December 31, 2000.
14
OTHER INFORMATION
The actual round-turn equivalent of brokerage commissions paid per contract
for the year ended December 31, 2000 was $68.
The Trust's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission is available to limited owners without charge upon written
request to:
Prudential Securities Strategic Trust
P.O. Box 2016
Peck Slip Station
New York, New York 10272-2016
15
Peck Slip Station PRESORTED
P.O. Box 2016 STANDARD
New York, NY 10272 U.S. POSTAGE
PAID
Automatic Mail
WILLO/17225