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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 811-1743
Spectra Fund
(Exact name of registrant as specified in charter)
111 Fifth Avenue New York, New York 10003
(Address of principal executive offices) (Zip code)
Mr. Hal Liebes
Fred Alger Management, Inc.
111 Fifth Avenue
New York, New York 10003
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-806-8800
Date of fiscal year end: October 31
Date of reporting period: October 31, 2005
ITEM 1. REPORT(S) TO STOCKHOLDERS.
SPECTRA FUND
ANNUAL REPORT
OCTOBER 31, 2005
[LOGO]
GO PAPERLESS WITH ALGER ELECTRONIC DELIVERY SERVICE
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this free service, simply enroll at WWW.ICSDELIVERY.COM/ALGER.
Dear Shareholders, December 12, 2005
THE YEAR IN REVIEW
The past 12 months had more than their share of challenges. Hurricanes
Katrina and Rita devastated the southern coast, leaving hundreds of thousands
jobless and without homes, and prompting investor fears of high energy prices
(which came true) and inflation (which did not). The war in Iraq entered its
third year, and the domestic debate about the war intensified. The job market
showed some improvement but job creation and wage growth remained sub-par
relative to economic growth and corporate profitability. The Fed--concerned
about inflation and the frothiness of the housing market--raised overnight
lending rates eight times to 3.75%, the highest level in 4.5 years. In response,
anxious investors--and Wall Street professionals, in particular--remained
skeptical, adopting a wait-and-see attitude.
Despite such understandable concerns, the U.S. equity markets have emerged
from the bear market of the early 2000s. In fact, since October of 2002, when
the market made a post-bubble low, the major U.S. indices have been very strong.
So has the economy, both domestically and globally. Over the past year, the U.S.
economy showed steady growth of around 3.5%, core inflation excluding energy
remained muted at around 2%, and corporate earnings stayed in double-digits,
much to the surprise of most strategists. Growth companies in particular saw
healthy stock appreciation. Going forward, we see even greater potential for the
better growth managers to outperform their benchmarks and the overall markets.
Challenges for consumers did not necessarily translate into problems for
investors. High energy prices created investment opportunities, and energy
stocks outperformed all other sectors. Additionally, high gas prices prompted
exploration into both alternative sources of energy and innovative solutions to
reducing fuel consumption.
The twin effects of productivity and globalization continue to reshape the
competitive landscape for dynamic companies. Information technologies no longer
attract the same attention, but their effects on companies are more significant
than ever. The result is higher productivity, which translates into higher
profitability for many corporations. In addition, more businesses are operating
on a global scale, and U.S. corporate profits rose dramatically from foreign
sales. Emerging economies in Asia, Latin America and Eastern Europe are all
contributing to global economic growth, and China, both as a consumer of raw
materials and finished goods and as a producer of products for global
consumption, shows no signs of diminishing.
Consumers have also been affected by these trends. In the United States, a
critical mass of consumers adopted high-speed broadband technology. As a result,
the Internet has become more fully integrated into day-to-day life as a
ubiquitous resource for retail, services, entertainment, education,
communication, and business needs. This has created opportunities for dynamic
new business models, whether it is Google in the on-line search and advertising
space, eBay and auctions, or Apple iPods and downloadable music files.
In sum, for the 12 months ended October 31, 2005, the equity markets
experienced modest gains with the Dow gaining 6.4%, the Nasdaq up 8.1% and the
S&P 500 up 8.7%. While long-term Treasury yields were markedly inconsistent with
the Fed's overnight interest rate increases, the yield on the U.S. Treasury
10-year note was 4.57% on October 31, 2005, compared to 4.05% a year earlier.
PORTFOLIO MATTERS
The Spectra Fund gained 18.84% for the fiscal year, compared to the
Russell 3000 Growth Index which returned 8.99%. The Fund's holdings in the
information technology sector, at an average weight of 28.11%, were overweight
compared to the benchmark and significantly outperformed. Strong IT performers
included Google Inc., Apple Computer, Inc., whose iPod technologies continued to
show dominant sales, Palm Inc., the market leader in handheld computer
solutions, and Verifone Holdings Inc., the global leader in secure electronic
payment technologies.
Our holdings in the health care sector were underweight compared to the
benchmark, at an average weight of 17.59%. Companies contributing to our
outperformance in this sector included PacifiCare Health Systems, Inc., a
managed care health insurance company, Vertex Pharmaceuticals Incorporated, and
Caremark Rx, Inc., one of the nation's largest pharmaceutical firms. During the
year some sector shifts were made. We decreased our exposure to biotech and
pharmaceuticals, and increased it in health care providers.
In the consumer staples sector, we were underweight compared to the
benchmark, at an average weight of 6.99%. Here too, the Fund significantly
outperformed, bolstered by performances from CVS Corporation, Gillette, and
Parlux Frangrances Inc. During the course of the year we shifted our weightings
in this sector, decreasing our holdings in internet and catalog retail. In the
consumer discretionary sector, the Fund was underweight compared to the
benchmark, at an average weight of 10.35%, and underperformed. In this sector,
we increased our holdings in personal products throughout the year.
Energy stocks accounted for an average weight of 8.52% of the Fund's
holdings, an overweight to the benchmark. Despite strong returns in oil and gas
drilling companies, including National Oilwell Varco Inc. and Patterson-UTI
Energy, Inc., the Fund underperformed the benchmark. Both the materials and
industrials sectors were also impacted by rising energy prices and our holdings
in these sectors significantly outperformed the benchmark with contributors like
Peabody Energy Corporation, the world's largest private sector coal company, and
UTi Worldwide, Inc.
LOOKING AHEAD
At Alger, we look for dynamic, innovative companies regardless of whether
the stock markets are dominated by bulls or bears. Our long-term success is not
a product of momentum or fads, but that of a highly-disciplined approach
grounded in fundamental, bottom-up research, and bolstered by the thorough
conviction of our analysts. Looking ahead in 2006, we anticipate a year similar
to 2005, with continued strong corporate earnings, and an equity market that
increasingly recognizes growth and responds in kind.
2
As we end another fiscal year, we'd like to take the opportunity to thank
you for growing with us, and continuing to entrust us with your investment
needs.
Respectfully submitted,
/s/ Daniel C. Chung
Daniel C. Chung
CHIEF INVESTMENT OFFICER
IMPORTANT PERFORMANCE AND OTHER INFORMATION
The views of the fund's management and the portfolio holdings described in
this report are as of October 31, 2005; these views and portfolio holdings may
have changed subsequent to this date and they do not guarantee the future
performance of the markets or the Fund. Information provided in this report
should not be considered a recommendation to purchase or sell securities.
A WORD ABOUT RISK
For a more detailed discussion of the risks associated with a Fund, please
see the Fund's Prospectus.
PERFORMANCE
PERFORMANCE DATA QUOTED IS HISTORICAL. PAST PERFORMANCE IS NOT AN
INDICATION OR A GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL
VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. CURRENT
PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE QUOTED.
Investors should consider the Fund's investment objective, risks and
charges and expenses carefully before investing. The Fund's prospectus contains
this and other information about the Fund, and may be obtained by asking your
financial advisor, calling (800) 992-5437, visiting our website at
www.alger.com, or contacting the Fund's distributor, Fred Alger & Company,
Incorporated, 30 Montgomery Street, Jersey City, New Jersey 07302. Read the
prospectus carefully before investing.
3
#
- --------------------------------------------------------------------------------
SPECTRA FUND Fund Highlights Through October 31, 2005 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Hypothetical $10,000 Investment in Class N Shares -- 10 years ended
October 31, 2005.
- --------------------------------------------------------------------------------
[The table below represents a line chart in the printed report.]
Spectra Fund
Spectra Russell 3000
11/1/95 10000 10000 ENDING VALUE
11268 12114 SPECTRA FUND
10/31/97 14248 15705 CLASS N:
16662 18907 $20,167
10/31/99 27103 25316
28785 27798
10/31/01 18366 16861 ENDING VALUE
13832 13532 RUSSELL 3000
10/31/03 17087 16691 GROWTH INDEX:
16971 17279 $18,832
10/31/05 20167 18832
The chart above illustrates the growth in value of a hypothetical $10,000
investment made in Spectra Fund Class N shares and the Russell 3000 Growth Index
for the ten years ended October 31, 2005. The figures for Spectra Fund and the
Russell 3000 Growth Index (an unmanaged index of common stocks) include
reinvestment of dividends. Performance for Spectra Fund Class A shares will vary
from the results shown above due to the sales charge on Class A shares.
- --------------------------------------------------------------------------------
PERFORMANCE COMPARISON PERFORMANCE COMPARISON
as of October 31, 2005 as of October 31, 2005
AVERAGE ANNUAL RETURNS AVERAGE ANNUAL RETURNS
SINCE
INCEPTION
1 5 10 1 5 (JULY 1,
YEAR YEARS YEARS YEAR YEARS 2000)
----------------------- ---------------------------------------
Class N 18.84% (6.87%) 7.27% Class A+ 12.54% (7.81%) (9.81)
Russell 3000 Russell 3000
Growth Index 8.99% (7.49%) 6.53% Growth Index 8.99% (7.49%) (6.80%)
================================================================================
THE FUND'S AVERAGE ANNUAL TOTAL RETURNS INCLUDE CHANGES IN SHARE PRICE AND
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. THE GRAPH AND TABLE ABOVE DO NOT
REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD HAVE PAID ON FUND
DISTRIBUTIONS OR ON THE REDEMPTION OF FUND SHARES. INVESTMENT RETURN AND
PRINCIPAL WILL FLUCTUATE AND THE FUND'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL COST. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE
RESULTS.
+ Returns reflect maximum initial sales charges on Class A shares.
4
PORTFOLIO SUMMARY+
- --------------------------------------------------------------------------------
Value (%) Value (%)
- --------------------------------------- ---------------------------------------
Consumer Discretionary 10.0% Health Care 17.3%
Consumer Staples 7.1 Industrials 8.4
Energy 10.7 Information Technology 28.8
Financials 6.6 Materials 1.7
Telecommunication Services 5.3
Cash and Net Other Assets 4.1
-----
100.0%
-----
- --------------------------------------------------------------------------------
- ----------
+ Based on net assets.
5
SPECTRA FUND
SCHEDULE OF INVESTMENTS
October 31, 2005
SHARES COMMON STOCKS--95.9% VALUE
--------- ---------
AIR FREIGHT & LOGISTICS--1.9%
43,000 UTI Worldwide, Inc. $ 3,678,220
------------
BIOTECHNOLOGY--1.6%
169,800 ARIAD Pharmaceuticals, Inc.* 1,181,808
82,700 Vertex Pharmaceuticals Incorporated* 1,881,425
------------
3,063,233
------------
CHEMICALS--1.3%
58,700 Lubrizol Corporation 2,441,332
------------
COMMUNICATION EQUIPMENT--.9%
43,400 QUALCOMM Inc. 1,725,584
------------
COMMUNICATION TECHNOLOGY--3.2%
240,500 Nextel Partners, Inc. Cl. A* 6,048,575
------------
COMPUTERS & PERIPHERALS--2.9%
114,600 EMC Corporation* 1,599,816
80,900 Network Appliance, Inc.* 2,213,424
147,700 Western Digital Corporation* 1,787,170
------------
5,600,410
------------
COMPUTER TECHNOLOGY--.8%
37,900 NAVTEQ* 1,482,648
------------
DIVERSIFIED FINANCIAL SERVICES--3.8%
160,400 Citigroup Inc. 7,343,112
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS--1.6%
68,000 Evergreen Solar, Inc.* 561,000
96,215 Multi-Fineline Electronix, Inc.* 2,561,243
------------
3,122,243
------------
ENERGY EQUIPMENT & SERVICES--4.4%
91,900 GulfMark Offshore, Inc.* 2,622,826
65,900 National-Oilwell Varco Inc.* 4,116,773
31,100 Transocean Inc.* 1,787,939
------------
8,527,538
------------
FINANCIAL INFORMATION SERVICES--1.0%
61,600 Genworth Financial Inc. Cl. A 1,952,104
------------
FOOD & STAPLES RETAILING--1.3%
105,200 CVS Corporation 2,567,932
------------
FREIGHT & LOGISTICS--1.4%
28,050 FedEx Corp. 2,578,637
------------
HEALTH CARE EQUIPMENT & SUPPLIES--2.2%
89,600 St. Jude Medical, Inc.* 4,307,072
------------
HEALTH CARE PROVIDERS & SERVICES--6.8%
109,350 Caremark Rx, Inc.* 5,729,940
87,800 PacifiCare Health Systems, Inc.* 7,231,208
------------
12,961,148
------------
6
SPECTRA FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
October 31, 2005
SHARES COMMON STOCKS (CONTINUED) VALUE
--------- ---------
HOTELS, RESTAURANTS & LEISURE--3.2%
24,000 Carnival Corporation $ 1,192,080
48,700 Fairmont Hotels & Resorts Inc. 1,584,211
115,900 Penn National Gaming, Inc.* 3,424,845
------------
6,201,136
------------
HOUSEHOLD PRODUCTS--4.2%
144,202 Procter & Gamble Company 8,073,870
------------
INDUSTRIAL CONGLOMERATES--3.4%
190,600 General Electric Company 6,463,246
------------
INSURANCE--1.7%
51,200 American International Group, Inc. 3,317,760
------------
INTERNET & CATALOG RETAIL--.8%
36,300 eBay Inc.* 1,437,480
------------
INTERNET SOFTWARE & SERVICES--9.8%
29,700 Google Inc. Cl. A* 11,052,558
19,400 Netease.com Inc. ADR*# 1,479,638
17,500 TNS Inc.* 307,650
160,600 Yahoo! Inc.* 5,937,382
------------
18,777,228
------------
LEISURE & ENTERTAINMENT--.4%
30,400 Shanda Interactive Entertainment Ltd. ADR*# 753,008
------------
MACHINERY--1.4%
40,900 Caterpillar Inc. 2,150,931
13,100 Terex Corporation* 720,107
------------
2,871,038
------------
MACHINERY--OIL WELL EQUIPMENT & SERVICES--1.5%
82,800 Patterson-UTI Energy, Inc. 2,825,964
------------
MEDIA--4.1%
79,300 Disney (Walt) Company 1,932,541
80,200 Time Warner Inc. 1,429,966
143,200 Viacom Inc. Cl. B 4,434,904
------------
7,797,411
------------
MEDICAL INSTRUMENTS AND SUPPLIES--.5%
42,100 Symmetry Medical Inc.* 932,094
------------
MEDICAL TECHNOLOGY--1.1%
59,100 Syneron Medical Ltd.* 2,124,054
------------
METALS & MINING--4.5%
46,300 Alpha Natural Resources, Inc.* 1,099,625
84,300 Peabody Energy Corporation 6,588,888
7,400 Phelps Dodge Corporation 891,478
------------
8,579,991
------------
OIL AND GAS EXPLORATION SERVICES--.7%
211,700 Petrobank Energy and Resources Ltd.* 1,422,624
------------
PERSONAL PRODUCTS--.5%
36,400 Avon Products, Inc. 982,436
------------
7
SPECTRA FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
October 31, 2005
SHARES COMMON STOCKS (CONTINUED) VALUE
--------- ---------
PHARMACEUTICALS--5.1%
87,900 Johnson & Johnson $ 5,504,298
210,400 Schering-Plough Corporation 4,279,536
------------
9,783,834
------------
SEMICONDUCTORS & SEMICONDUCTOR
EQUIPMENT--6.6%
53,400 Advanced Micro Devices, Inc.* 1,239,948
154,100 Marvell Technology Group Ltd.* 7,151,781
350,700 Silicon Storage Technology Inc.* 1,771,035
84,435 Tessera Technologies Inc.* 2,355,737
3,400 Trident Microsystems, Inc.* 102,884
------------
12,621,385
------------
SOFTWARE--6.1%
268,900 Microsoft Corporation 6,910,730
203,100 Verifone Holdings Inc.* 4,711,920
------------
11,622,650
------------
SPECIALTY RETAIL--1.2%
43,400 Abercrombie & Fitch Co. Cl. A 2,256,366
------------
TEXTILES, APPAREL & LUXURY GOODS--.8%
29,500 Polo Ralph Lauren Corporation Cl. A 1,451,400
------------
TOBACCO--1.0%
26,500 Altria Group, Inc. 1,988,825
------------
WIRELESS TELECOMMUNICATION SERVICES--2.2%
35,600 America Movil S.A. de C.V. ADR Series L# 934,500
38,800 NII Holdings Inc. Cl. B* 3,217,296
------------
4,151,796
------------
Total Common Stocks
(Cost $171,370,815) 183,835,384
------------
WARRANTS
COMMUNICATION EQUIPMENT
29,422 Lucent Technologies Inc., 12/10/07
(Cost $0) 20,301
------------
PRINCIPAL
AMOUNT
---------
SHORT-TERM INVESTMENTS--4.6%
U.S. AGENCY OBLIGATIONS
$8,783,000 Federal National Mortgage Association, 3.62%, 11/1/05
(Cost $8,783,000) 8,783,000
------------
Total Investments
(Cost $180,153,815) (a) 100.5% 192,638,685
Liabilities in Excess of Other Assets (0.5) (1,017,213)
----- ------------
Net Assets 100.0% $191,621,472
===== ============
- ----------
* Non-income producing security.
# American Depositary Receipts.
(a) At October 31, 2005, the net unrealized appreciation on investments, based
on cost for federal income tax purposes of $180,361,034 amounted to
$12,277,651 which consisted of aggregate gross unrealized appreciation of
$16,922,467 and aggregate gross unrealized depreciation of $4,644,816.
See Notes to Financial Statements.
8
SPECTRA FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2005
ASSETS:
Investments in securities, at value (cost $180,153,815)--
see accompanying schedule of investments .................. $ 192,638,685
Cash ........................................................ 1,352
Receivable for investment securities sold ................... 3,014,964
Receivable for shares of beneficial interest sold ........... 186,075
Dividends receivable ........................................ 60,480
Prepaid expenses ............................................ 18,163
-------------
Total Assets ............................................ 195,919,719
LIABILITIES:
Payable for investment securities purchased ................. $3,704,594
Payable for shares of beneficial interest redeemed .......... 122,617
Investment advisory fees payable ............................ 241,501
Shareholder servicing fees payable .......................... 40,250
Transfer agent fees payable ................................. 56,686
Trustees' fees payable ...................................... 6,637
Accrued expenses ............................................ 125,962
----------
Total Liabilities ....................................... 4,298,247
-------------
NET ASSETS ..................................................... $ 191,621,472
=============
NET ASSETS CONSIST OF:
Paid-in capital ............................................. $ 435,094,448
Undistributed net investment income (accumulated loss) ...... --
Undistributed net realized gain (accumulated loss) .......... (255,957,846)
Net unrealized appreciation (depreciation) of investments ... 12,484,870
-------------
NET ASSETS ..................................................... $ 191,621,472
=============
Class A
Net Asset Value Per Share ................................... $ 6.96
=============
Offering Price Per Share .................................... $ 7.35
=============
Class N
Net Asset Value and Offering Price Per Share ................ $ 6.94
=============
Shares of beneficial interest outstanding--Note 5
Class A ..................................................... 585,811
=============
Class N ..................................................... 27,026,583
=============
See Notes to Financial Statements.
9
SPECTRA FUND
STATEMENT OF OPERATIONS
For the year ended October 31, 2005
INVESTMENT INCOME:
Income:
Dividends (net of foreign withholding
taxes of $925) ... .......................... $ 2,318,198
Interest ...................................... 236,226
------------
Total Income ................................ 2,554,424
Expenses:
Investment advisory fees--Note 2(a) ........... $ 3,029,513
Shareholder servicing fees--Note 2(f) ......... 504,919
Printing and postage .......................... 150,790
Transfer agent fees ........................... 285,657
Interest expense .............................. 2,990
Custodian fees ................................ 30,825
Registration fees ............................. 17,600
Trustees' fees ................................ 41,951
Professional fees ............................. 56,000
Miscellaneous ................................. 70,292
-----------
Total Expenses .............................. 4,190,537
------------
NET INVESTMENT LOSS ................................ (1,636,113)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND OPTIONS:
Net realized gain on investments ................... 44,854,538
Net realized gain on options ....................... (1,089)
Net change in unrealized appreciation
(depreciation) on investments .................... (7,528,642)
-----------
Net realized and unrealized gain on
investments and options .................. 37,324,807
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ................................. $ 35,688,694
============
See Notes to Financial Statements.
10
SPECTRA FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31,
2005 2004
------------ ------------
Net investment loss ............................ $ (1,636,113) $ (4,058,447)
Net realized gain on investments and options ... 44,853,449 18,386,855
Net change in unrealized appreciation
(depreciation) on investments ................ (7,528,642) (15,856,220)
------------ ------------
Net increase (decrease) in net assets
resulting from operations ............... 35,688,694 (1,527,812)
Decrease from shares of beneficial interest
transactions:
Class A ...................................... (1,577,132) (1,438,077)
Class N ...................................... (57,811,000) (45,395,289)
------------ ------------
Net decrease from shares of beneficial
interest transactions--Note 5a .............. (59,388,132) (46,833,366)
------------ ------------
Total decrease in net assets ............. (23,699,438) (48,361,178)
Net assets:
Beginning of year ............................ 215,320,910 263,682,088
------------ ------------
End of year .................................. $191,621,472 $215,320,910
============ ============
See Notes to Financial Statements.
11
SPECTRA FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING
THROUGHOUT THE YEAR
INCOME FROM
INVESTMENT OPERATIONS
------------------------
NET
REALIZED DISTRIBUTIONS
NET ASSET AND UNREALIZED TOTAL FROM
VALUE, NET GAIN (LOSS) FROM NET
BEGINNING INVESTMENT ON INVESTMENT REALIZED
OF YEAR LOSS(I) INVESTMENTS OPERATIONS GAINS
------------------------------------------------------------
SPECTRA FUND
CLASS A
Year ended 10/31/05 $ 5.86 $(0.05) $ 1.15 $ 1.10 $ --
Year ended 10/31/04 5.90 (0.10) 0.06 (0.04) --
Year ended 10/31/03 4.76 (0.08) 1.22 1.14 --
Year ended 10/31/02 6.32 (0.09) (1.47) (1.56) --
Year ended 10/31/01 10.63 (0.08) (3.60) (3.68) (0.63)
CLASS N
Year ended 10/31/05 $ 5.84 $(0.05) $ 1.15 $ 1.10 $ --
Year ended 10/31/04 5.88 (0.10) 0.06 (0.04) --
Year ended 10/31/03 4.76 (0.07) 1.19 1.12 --
Year ended 10/31/02 6.32 (0.09) (1.47) (1.56) --
Year ended 10/31/01 10.63 (0.08) (3.60) (3.68) (0.63)
- ----------
(i) Amount was computed based on average shares outstanding during the year.
(ii) Does not reflect the effect of any sales charge.
See Notes to Financial Statements.
12
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------
NET ASSETS, RATIO OF NET
END OF RATIO OF INVESTMENT
NET ASSET YEAR EXPENSES LOSS PORTFOLIO
VALUE, END TOTAL (000'S TO AVERAGE TO AVERAGE TURNOVER
OF YEAR RETURN OMITTED) NET ASSETS NET ASSETS RATE
------------------------------------------- ---------------------------
SPECTRA FUND
CLASS A
Year ended 10/31/05 $ 6.96 18.77%(ii) $ 4,079 2.07% (0.78)% 247.72%
Year ended 10/31/04 5.86 (0.68)(ii) 4,882 1.98 (1.63) 159.35
Year ended 10/31/03 5.90 23.95(ii) 6,346 2.01 (1.35) 192.19
Year ended 10/31/02 4.76 (24.68)(ii) 6,722 1.98 (1.52) 172.25
Year ended 10/31/01 6.32 (36.20)(ii) 12,951 1.88 (1.03) 114.75
CLASS N
Year ended 10/31/05 $ 6.94 18.84% $187,542 2.07% (0.81)% 247.72%
Year ended 10/31/04 5.84 (0.68) 210,439 1.98 (1.63) 159.35
Year ended 10/31/03 5.88 23.53 257,337 2.03 (1.39) 192.19
Year ended 10/31/02 4.76 (24.68) 252,620 1.98 (1.52) 172.25
Year ended 10/31/01 6.32 (36.20) 423,860 1.88 (0.99) 114.75
13
SPECTRA FUND
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Spectra Fund (the "Fund") is a diversified open-end registered investment
company organized as a business trust under the laws of the Commonwealth of
Massachusetts. The Fund's investment objective is capital appreciation. It seeks
to achieve its objective by investing primarily in equity securities.
The Fund offers Class A and Class N shares. Class A shares were first
offered on July 1, 2000 and are generally subject to an initial sales charge.
Class Nshares are offered only to Class Nshareholders of record as of January
21, 2005. Each class has identical rights to assets and earnings.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
(A) INVESTMENT VALUATION--Investments in securities are valued each day the
New York Stock Exchange (the "NYSE") is open as of the close of the NYSE
(normally 4:00 p.m. Eastern time). Listed securities for which such information
is regularly reported are valued at the last reported sales price or, in the
absence of reported sales, at the mean between the bid and asked price, or in
the absence of a recent bid or asked price, the equivalent as obtained from one
or more of the major market makers for the securities to be valued. Short-term
notes are valued at amortized cost which approximates market value. Shares of
mutual funds are valued at the net asset value of the underlying mutual fund.
Securities included within the Nasdaq market shall be valued at the Nasdaq
official closing price ("NOCP") on the day of valuation, or if there is no NOCP
issued, at the last sale price on such day. Securities included within the
Nasdaq market for which there is no NOCP and no last sale price on the day of
valuation shall be valued at the mean between the last bid and asked prices on
such day.
(B) SECURITIES TRANSACTIONS AND INVESTMENT INCOME--Securities transactions are
recorded on a trade date basis. Realized gains and losses from securities
transactions are recorded on the basis of the first-in, first-out method.
Dividend income is recognized on the ex-dividend date and interest income is
recognized on the accrual basis.
(C) REPURCHASE AGREEMENTS--The Fund enters into repurchase agreements with
approved institutions. The repurchase agreements are collateralized by U.S.
Government securities, which are either received and held in physical possession
by the custodian or received by such custodian in book-entry form through the
Federal Reserve book-entry system. The collateral is valued on a daily basis
during the term of the agreement to ensure that its value equals or exceeds the
agreed-upon repurchase price to be repaid to the Fund. Additional collateral is
obtained when necessary.
(E) LENDING OF PORTFOLIO SECURITIES--The Fund lends its securities to
financial institutions, provided that the market value of the securities loaned
will not at any time
14
SPECTRA FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
exceed one third of the Fund's total assets, as defined. The Fund earns fees on
the securities loaned. In order to protect against the risk of failure by the
borrower to return the securities loaned or any delay in the delivery of such
securities, the loan is collateralized by cash, letters of credit or U.S.
Government securities that are maintained in an amount equal to at least 100
percent of the current market value of the loaned securities. The market value
of the loaned securities is determined at the close of business of the Fund and
any required additional collateral is delivered to the Fund on the next business
day. As of October 31, 2005, there were no securities on loan.
(F) DIVIDENDS TO SHAREHOLDERS--Dividends and distributions payable to
shareholders are recorded by the Fund on the ex-dividend date. Dividends from
net investment income and distributions from net realized gains are declared and
paid annually after the end of the fiscal year in which earned.
Each class is treated separately in determining the amounts of dividends
from net investment income and distributions from capital gains payable to
holders of its shares.
The characterization of distributions to shareholders for financial
reporting purposes is determined in accordance with federal income tax rules.
Therefore, the source of the Fund's distributions may be shown in the
accompanying financial statements as either from, or in excess of net investment
income, net realized gain on investment transactions or return of capital,
depending on the type of book/tax differences that may exist. Capital accounts
within the financial statements are adjusted for permanent book/tax differences.
Reclassifications result primarily from the difference in tax treatment of net
operating losses. The reclassification had no impact on the net asset value of
the Fund and is designed to present the Fund's capital accounts on a tax basis.
(G) FEDERAL INCOME TAXES--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its investment company taxable income to its
shareholders. Provided the Fund maintains such compliance, no federal income tax
provision is required. (H) ALLOCATION METHOD--Income, realized and unrealized
gains and losses, and expenses are allocated among the Fund's classes based on
relative net assets.
(I) INDEMNIFICATION--The Fund enters into contracts that contain a variety of
indemnification provisions. The Fund's maximum exposure under these arrangements
is unknown. The Fund does not anticipate recognizing any loss related to these
arrangements.
(J) OTHER--These financial statements have been prepared using estimates and
assumptions that affect the reported amounts therein. Actual results may differ
from those estimates.
15
SPECTRA FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES:
(A) INVESTMENT ADVISORY FEES--The Fund pays its investment adviser, Fred Alger
Management, Inc. ("Alger Management"), a monthly fee at an annual rate of 1.50%
based on the value of the Fund's average daily net assets. (B) TRANSFER AGENT
FEES--Alger Shareholder Services, Inc. ("Alger Services"), an affiliate of Alger
Management, served as transfer agent for the Fund. During the year ended October
31, 2005, the Fund incurred fees of approximately $9,570 for services provided
by Alger Services. Effective November 22, 2004, State Street Bank and Trust
Company replaced Alger Services as the Fund's transfer agent. Transfer agent
services are provided by State Street Bank and Trust Company's affiliate, Boston
Financial Data Services, Inc. ("BFDS").
Effective February 28, 2005, the Fund has entered into a shareholder
administrative services agreement with Alger Services to compensate Alger
Services on a per account basis for its liaison and administrative oversight of
BFDS and related services. During the year ended October 31, 2005, the Fund
incurred fees of $31,552 for these services provided by Alger Services.
(C) SALES CHARGES--Purchases of Class A shares of the Fund may be subject to
initial sales charges. For the year ended October 31, 2005, the initial sales
charges retained by Fred Alger &Company (the "Distributor"), were approximately
$1,801. Sales charges do not represent expenses of the Fund.
(D) BROKERAGE COMMISSIONS--During the year ended October 31, 2005, the Fund
paid Fred Alger & Company, Incorporated ("Alger Inc."), an affiliate of Alger
Management, $640,343 in connection with securities transactions.
(E) TRUSTEES' FEES--Certain trustees and officers of the Fund are directors
and officers of Alger Management, Alger Inc. and Alger Services. The Fund pays
each trustee who is not affiliated with Alger Management or its affiliates an
annual fee of $8,000.
(F) SHAREHOLDER SERVICING FEES--The Fund has entered into a shareholder
servicing agreement with Alger Inc. whereby Alger Inc. provides the Fund with
ongoing servicing of shareholder accounts. As compensation for such services,
the Fund pays Alger Inc. a monthly fee at an annual rate equal to .25% of the
value of the Fund's average daily net assets.
(G) OTHER TRANSACTIONS WITH AFFILIATES--Certain trustees and officers of the
Fund are directors and officers of Alger Management, the Distributor and Alger
Services.
16
SPECTRA FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SECURITIES TRANSACTIONS:
During the year ended October 31, 2005, purchases and sales of investment
securities, excluding short-term securities, aggregated $476,030,579 and
$533,610,555, respectively.
NOTE 4--LINES OF CREDIT:
The Fund has a committed line of credit with a bank. All borrowings have
variable interest rates and are payable on demand. To the extent the Fund
borrows under these lines, the Fund must pledge securities with a total value of
at least twice the amount borrowed. For the year ended October 31, 2005, the
Fund had borrowings which averaged $105,452 at a weighted average interest rate
of 2.84%.
Written call and put option activity for the year ended October 31, 2005
was as follows:
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- ----------
Options outstanding at October 31, 2004 -- --
Options written 240 $ 207,471
Options closed or expired (240) (207,471)
Options exercised -- --
------- ---------
Options outstanding at October 31, 2005 -- $ --
======= =========
NOTE 5--SHARE CAPITAL:
(A) The Fund has an unlimited number of authorized shares of beneficial
interest of $.001 par value which are presently divided into two separate
classes.
During the year ended October 31, 2005, transactions of shares of
beneficial interest were as follows:
CLASS A: SHARES AMOUNT
------------ ------------
Shares sold .................................... 34,531 $ 228,971
Shares redeemed ................................ (282,454) (1,806,103)
------------ ------------
Net decrease ................................... (247,923) $ (1,577,132)
============ ============
CLASS N: SHARES AMOUNT
------------ ------------
Shares sold .................................... 1,103,111 $ 7,028,549
Shares redeemed ................................ (10,137,002) (64,839,549)
------------ ------------
Net decrease ................................... (9,033,891) $(57,811,000)
============ ============
17
SPECTRA FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During the year ended October 31, 2004, transactions of shares of
beneficial interest were as follows:
CLASS A: SHARES AMOUNT
------------ ------------
Shares sold .................................... 57,059 $ 343,940
Shares redeemed ................................ (298,614) (1,782,017)
------------ ------------
Net decrease ................................... (241,555) $ (1,438,077)
============ ============
CLASS N: SHARES AMOUNT
------------ ------------
Shares sold .................................... 3,864,237 $ 23,379,536
Shares redeemed ................................ (11,553,622) (68,774,825)
------------ ------------
Net decrease ................................... (7,689,385) $(45,395,289)
============ ============
(B) REDEMPTION FEE--The Fund may impose a 2.00% redemption fee on Fund shares
redeemed (including shares redeemed by exchange) within 30 days after such
shares were acquired. The fees retained by the Fund are included as paid-in
capital on the Statement of Assets and Liabilities. During the year ended
October 31, 2005 and the year ended October 31, 2004, redemption fees were $426
and $431 respectively.
NOTE 6--DISTRIBUTIONS TO SHAREHOLDERS:
During the year ended October 31, 2005 and the year ended October 31,
2004, there were no distributions paid. As of October 31, 2005, the components
of distributable earnings on a tax basis were as follows:
Undistributed ordinary capital .................................... --
Undistributed long-term gain ...................................... --
Unrealized appreciation ........................................... $12,277,651
The differences between book basis and tax basis unrealized appreciation
is attributable primarily to the tax deferral of losses on wash sales.
At October 31, 2005, the Fund, for federal income tax purposes, had
capital loss carryforwards which expire as set forth in the table below. These
amounts may be applied against future net realized gains until the earlier of
their utilization or expiration.
EXPIRATION DATE AMOUNT
- --------------- ------------
2009 $148,683,326
2010 107,067,302
------------
$255,750,628
============
NOTE 7--LITIGATION
Alger Management has responded to inquiries, document requests and/or subpoenas
from regulatory authorities, including the United States Securities and Exchange
Commission ("SEC"), the Office of the New York State Attorney General, the
Attorney General of New Jersey, and the West Virginia Securities
18
SPECTRA FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Commissioner, in connection with their investigations of practices in the mutual
fund industry identified as "market timing" and "late trading."
On December 16, 2005, Alger Management received from the staff of the SEC a
"Wells Notice" which indicated that the staff intends to recommend that the
Commission bring civil enforcement action for possible violations of the federal
securities laws. "Wells Notices" also have been sent to certain companies
affiliated with Alger Management, as well as certain present and former members
of its senior management. The Wells Notices arose out of the SEC's staff ongoing
investigation of market timing and late trading practices in the mutual fund
industry. Alger Management and the other recipients have the opportunity to
respond to the staff before the staff makes a formal recommendation. Alger
Management plans to send a Wells submission to the staff in January 2006. On
August 31, 2005, the West Virginia Securities Commissioner in an ex parte
Summary Order to Cease and Desist and Notice of Right to Hearing concluded that
Alger Management and Alger Inc. had violated the West Virginia Uniform
Securities Act, and ordered Alger Management and Alger Inc. to cease and desist
from further violations of the Act by engaging in the market-timing related
conduct described in the order. The ex parte order provided notice of their
right to a hearing with respect to the violations of law asserted by the
Commissioner. Other firms unaffiliated with Alger Management were served with
similar orders. Alger Management and Alger Inc. intend to request a hearing for
the purpose of seeking to vacate or modify the order.
In addition, in 2003 and 2004 several purported class actions and shareholder
derivative suits were filed against various parties in the mutual fund industry,
including Alger Management, certain mutual funds managed by Alger Management
(the "Alger Mutual Funds"), and certain current and former Alger Mutual Fund
trustees and officers, alleging wrongful conduct related to market-timing and
late-trading by mutual fund shareholders. These cases were transferred to the
U.S. District Court of Maryland by the Judicial Panel on Multidistrict
Litigation for consolidated pre-trial proceedings. In September 2004,
consolidated amended complaints involving these cases (not yet including the
West Virginia action) -- a Consolidated Amended Fund Derivative Complaint (the
"Derivative Complaint") and two substantially identical Consolidated Amended
Class Action Complaints (together, the "Class Action Complaint") -- were filed
in the Maryland federal district court under the caption number 1:04-MD-15863
(JFM). In April 2005, a civil lawsuit involving similar allegations was filed by
the West Virginia Attorney General and also transferred to the Maryland District
Court.
The Derivative Complaint alleged (i) violations, by Alger Management and,
depending on the specific offense alleged, by its immediate parent, Alger Inc.,
which is the Distributor of the Alger Mutual Funds, and/or the fund trustee
defendants, of Sections 36(a), 36(b), 47, and 48 of the Investment Company Act
of 1940 (the "Investment Company Act") and of Sections 206 and 215 of the
19
SPECTRA FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Investment Advisers Act of 1940, breach of fiduciary duty, and breach of
contract, (ii) various offenses by other third-party defendants, and (iii)
unjust enrichment by all the named defendants. The Class Action Complaint
alleged, in addition to the offenses listed above, (i) violations, by Alger
Management, Alger Inc., their affiliates, the funds named as defendants, and the
current and former fund trustees and officers, of Sections 11, 12(a)(2), and 15
of the Securities Act of 1933, Sections 10(b) (and Rule 10b-5 thereunder) and
20(a) of the Securities Exchange Act of 1934 (the "1934 Act"), and Section 34(b)
of the Investment Company Act of 1940, (ii) breach of contract by the funds
named as defendants, and (iii) unjust enrichment of the defendants. The West
Virginia attorney general action also alleges violations of the West Virginia
Consumer Credit and Protection Act and other wrongful conduct.
Motions to dismiss the Class Action Complaint and the Derivative Complaint were
subsequently filed. On November 3, 2005, the district court dismissed both
complaints in their entirety with respect to the Alger Mutual Funds and
dismissed all claims against the other Alger defendants other than the claims
under the 1934 Act and Section 36(b) of the Investment Company Act, with leave
to the class action plaintiffs to file amended complaints against those
defendants with respect to claims under state law. It is anticipated that orders
implementing the rulings will be entered in or about January 2006, and that
motions for reconsideration will thereafter be filed.
Alger Management does not believe that the Alger Mutual Funds are themselves
targets of the regulatory investigations as potential enforcement defendants.
The SEC and, in some cases, state government authorities have a variety of
administrative and civil enforcement powers, including injunctive powers,
authority to assess fines and penalties and order restitution, authority to
limit the activities of a person or company and other enforcement powers, that
may be exercised administratively or through the courts.
Under Section 9(a) of the Investment Company Act, if any of the various
regulatory proceedings or lawsuits were to result in a court injunction against
Alger Management or Alger Inc., Alger Management would, in the absence of
exemptive relief granted by the SEC, be barred from serving as investment
adviser/sub-adviser for any registered investment company, including the Fund.
While exemptive relief from Section 9(a) has been granted in certain other
cases, there is no assurance that such exemptive relief would be granted if
sought. In addition, it is possible that these matters and/or other developments
resulting from these matters could result in loss of Alger Management personnel,
diversion of time and attention of Alger Management personnel, diminishment of
financial resources of Alger Management, or other consequences potentially
adverse to the Fund. Alger Management cannot predict the potential effect of
such actions upon Alger Management or the Fund. There can be no assurance that
the effect, if any, would not be material.
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of
Spectra Fund:
We have audited the accompanying statement of assets and liabilities of Spectra
Fund (the "Fund"), including the schedule of investments, as of October 31,
2005, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the four years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the year ended October 31, 2001 were
audited by other auditors, whose report, dated November 30, 2001, expressed an
unqualified opinion on those financial highlights.
We conducted our audits 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 and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of October 31, 2005, by correspondence with custodians and
brokers. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above, and audited by us, present fairly, in all material respects, the
financial position of Spectra Fund at October 31, 2005, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the four years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst & Young LLP
December 12, 2005
21
SPECTRA FUND
ADDITIONAL INFORMATION (UNAUDITED)
SHAREHOLDER EXPENSE EXAMPLE
As a shareholder of the Fund, you incur two types of costs: transaction
costs, if applicable, including sales charges (loads) and redemption fees; and
ongoing costs, including management fees, distribution (12b-1) fees, if
applicable, and other fund expenses. This example is intended to help you
understand your ongoing costs (in dollars) of investing in the Fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
The example below is based on an investment of $1,000 invested at the
beginning of the six-month period starting May 1, 2005 and ending October 31,
2005.
ACTUAL EXPENSES
The first line for each class of shares in the table below provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested, to estimate the
expenses that you would have paid over the period. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number in the first line under the heading
entitled "Expenses Paid During the Period" to estimate the expenses you paid on
your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each class of shares in the table below provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class of shares and an assumed rate of
return of 5% per year before expenses, which is not the Fund's actual return.
The hypothetical account values and expenses may not be used to estimate the
actual ending account balance or expenses you paid for the period. You may use
this information to compare the ongoing costs of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any transaction costs, such as sales
charges (loads) and redemption fees. Therefore, the second line under each class
of shares in the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher.
EXPENSES PAID
BEGINNING ENDING DURING THE PERIOD
ACCOUNT VALUE ACCOUNT VALUE MAY 1, 2005 TO
CLASS A: MAY 1, 2005 OCTOBER 31, 2005 OCTOBER 31, 2005(B)
------------- ---------------- ------------------
Actual $1,000.00 $1,154.20 $11.24
Hypothetical(a) 1,000.00 1,014.77 10.51
EXPENSES PAID
BEGINNING ENDING DURING THE PERIOD
ACCOUNT VALUE ACCOUNT VALUE MAY 1, 2005 TO
CLASS N: MAY 1, 2005 OCTOBER 31, 2005 OCTOBER 31, 2005(B)
------------- ---------------- ------------------
Actual $1,000.00 $1,154.70 $11.24
Hypothetical(a) 1,000.00 1,014.77 10.51
- ----------
(a) 5% annual return before expenses.
(b) Expenses are equal to the Fund's annualized expense ratio of 2.07% for both
Class A and Class N shares, multiplied by the average account value over
the period, multiplied by 184/365 (to reflect the one-half year period).
22
SPECTRA FUND
ADDITIONAL INFORMATION (UNAUDITED)
TRUSTEES AND OFFICERS OF THE FUND
Information about the Trustees and officers of the Fund is set forth below. In
the table the term "Alger Fund Complex" refers to the Fund, The Alger Funds, The
Alger American Fund, The Alger Institutional Funds, The China-U.S. Growth Fund
and Castle Convertible Fund, Inc., each of which is a registered investment
company managed by Fred Alger Management, Inc. ("Alger Management"). Each
Trustee serves until an event of termination, such as death or resignation, or
until his successor is duly elected; each officer's term of office is one year.
Unless otherwise noted, the address of each person named below is 111 Fifth
Avenue, New York, NY 10003.
NUMBER OF
PORTFOLIOS IN
TRUSTEE THE ALGER FUND
NAME, AGE, POSITION AND/OR COMPLEX WHICH
WITH THE FUND OFFICER ARE OVERSEEN
AND ADDRESS PRINCIPAL OCCUPATIONS SINCE BY TRUSTEE
- --------------------------------------------------------------------------------
INTERESTED TRUSTEES
Fred M. Alger III (70) Chairman of the Board of 1974 22
Chairman of the Board Alger Associates, Inc.
("Associates"), Fred Alger &
Company, Incorporated ("Alger
Inc."), Alger Management, Alger
Properties, Inc. ("Properties"),
Alger Shareholder Services, Inc.
("Services"), Alger Life
Insurance Agency, Inc. ("Agency"),
Fred Alger International Advisory
S.A. ("International"), and five
of the six funds in the Alger
Fund Complex; Chairman of the
Boards of Alger SICAV ("SICAV")
and Analysts Resources, Inc.
("ARI").
Dan C. Chung (43) President, Director and Chief 2001 16
President and Trustee Investment Officer of Alger
Management; President and
Director of Associates, Alger
Inc., Properties, Services,
Agency, International, ARI and
Trust; Trustee/Director of four
of the six funds in the Alger
Fund Complex.
Hilary M. Alger (44) Trustee/Director of five of the 2003 17
Trustee six funds in the Alger Fund
Complex; Director of Development,
Pennsylvania Ballet; formerly
Associate Director of
Development, College of Arts and
Sciences, University of Virginia,
formerly Director of Development
and Communications, Lenox Hill
Neighborhood House.
23
NUMBER OF
PORTFOLIOS IN
TRUSTEE THE ALGER FUND
NAME, AGE, POSITION AND/OR COMPLEX WHICH
WITH THE FUND OFFICER ARE OVERSEEN
AND ADDRESS PRINCIPAL OCCUPATIONS SINCE BY TRUSTEE
- --------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
Stephen E. O'Neil (73) Attorney; Private investor 1972 23
Trustee since 1981; Director of
Brown-Forman Corporation;
Trustee/Director of the six
funds in the Alger Fund Complex;
formerly of Counsel to the law
firm of Kohler & Barnes.
Charles F. Baird, Managing Partner of North Castle 2000 16
Jr. (52) Partners, a private equity
Trustee securities group; Chairman of
Equinox, Leiner Health Products,
Elizabeth Arden Day Spas, Grand
Expeditions and EAS; Trustee/
Director of four of the six funds
in the Alger Fund Complex.
Formerly Managing Director of
AEAInvestors, Inc.
Roger P. Cheever (60) Associate Dean of Development, 2000 16
Trustee Harvard University; Trustee/
Director of four of the six funds
in the Alger Fund Complex.
Formerly Deputy Director of the
Harvard College Fund.
Lester L. Colbert, Private investor; Trustee/ 2000 17
Jr. (71) Director of five of the six
Trustee funds in the Alger Fund Complex.
Formerly Chairman of the Board
and Chief Executive Officer of
Xidex Corporation.
Nathan E. Saint-Amand, Medical doctor in private 1986 23
M.D. (67) practice; Co-Partner Fishers
Manhattan Island Partners; Member of the
Board of the Trustee Institute;
Trustee/Director of the six
funds in the Alger Fund Complex.
Formerly Co-Chairman Special
Projects Committee of Memorial
Sloan Kettering.
OFFICERS
Frederick A. Blum (51) Executive Vice President and 1996 N/A
Treasurer Treasurer of Alger, Inc.,
Alger Management, Properties,
Associates, ARI, Services and
Agency since September 2003
and Senior Vice President prior
thereto; Treasurer or Assistant
Treasurer, and Assistant
Secretary, of each of the other
five investment companies in the
Alger Fund Complex since the
later of 1996 or its inception.
Director of SICAV and
International and Chairman of the
Board (and prior thereto, Senior
Vice President) and Treasurer of
Alger National Trust Company
since 2003.
24
NUMBER OF
PORTFOLIOS IN
TRUSTEE THE ALGER FUND
NAME, AGE, POSITION AND/OR COMPLEX WHICH
WITH THE FUND OFFICER ARE OVERSEEN
AND ADDRESS PRINCIPAL OCCUPATIONS SINCE BY TRUSTEE
- --------------------------------------------------------------------------------
OFFICERS (CONTINUED)
Hal Liebes (41) Executive Vice President, Chief 2005 N/A
Secretary and Chief Legal Officer and Secretary of
Compliance Officer Alger Inc., Secretary of the
other five investment companies
in the Alger Fund Complex-2005.
Formerly U.S. General Counsel
1994-2002 and Global General
Counsel 2002-2004, Credit
Suisse Asset Management; Global
Chief Compliance Officer 2004,
AMVESCAP PLC.
Michael D. Martins (39) Senior Vice President of Alger 2005 N/A
Assistant Treasurer Management; Assistant Treasurer
and Assistant and Assistant Secretary of the
Secretary other five investment companies
in the Alger Fund Complex-2005.
Formerly Vice President, Brown
Brothers Harriman & Co.
1997-2004.
Messrs. Alger and Chung are "interested persons"(as defined in the Investment
Company Act) of the Fund because of their affiliations with Alger Management.
Mr. Chung is Mr. Alger's son-in-law. Ms. Alger is a daughter of Fred M.
AlgerIII. Ms. Alger is an "interested person" because she is an immediate family
member of Mr. Alger. No Trustee is a director of any public company except as
may be indicated under "Principal Occupations."
The Statement of Additional Information contains additional information about
the Fund's Trustees and is available without charge upon request by calling
(800) 992-3863.
25
SPECTRA FUND
ADDITIONAL INFORMATION (UNAUDITED)
INVESTMENT MANAGEMENT AGREEMENT RENEWAL
At an in-person meeting held on September 7, 2005, the Trustees of the Fund
considered renewal of the Investment Management Agreement, dated February 12,
1996, (the "Agreement") between the Fund and Fred Alger Management, Inc. (the
"Adviser"). The Trustees who are not "interested persons" of the Fund (the
"Independent Trustees") within the meaning of the Investment Company Act of 1940
(the "1940 Act") also met separately with their counsel to consider the
Agreement. In evaluating the Agreement, the Trustees drew on materials that they
requested and which were provided to them in advance of the meeting by the
Adviser and by counsel to the Fund. The materials covered, among other matters,
(i) the nature, extent and quality of the services provided by the Adviser under
the Agreement, (ii) the investment performance of the Fund, (iii) the costs to
the Adviser of its services and the profits realized by the Adviser and its
affiliates Fred Alger & Company, Incorporated and Alger Shareholder Services,
Inc. from their relationship with the Fund, and (iv) the extent to which
economies of scale would be realized if and as the Fund grows and whether the
fee level in the Agreement reflects these economies of scale. These materials
included an analysis of the Fund and the Adviser's services by Callan Associates
Inc. ("Callan"), an independent consulting firm whose specialties include
assistance to fund trustees and directors in their review of advisory contracts
pursuant to Section 15(c) of the 1940 Act. At the meeting, senior Callan
personnel provided a presentation to the Trustees based on the Callan materials.
In deciding whether to renew the Agreement, the Trustees considered various
factors, including those enumerated above. They also considered other direct and
indirect benefits to the Adviser and its affiliates from their relationship with
the Fund.
NATURE, EXTENT AND QUALITY OF SERVICES
In considering the nature, extent and quality of the services provided by the
Adviser, the Trustees relied on their prior experience as Trustees of the Fund,
their familiarity with the personnel and resources of Alger Management and its
affiliates, and the materials provided at the meeting. They noted that under the
Agreement the Adviser is responsible for managing the investment operations of
the Fund and for providing a full range of administrative, compliance, reporting
and accounting services necessary for the conduct of the Fund's affairs. The
Trustees reviewed the background and experience of the Adviser's senior
investment management personnel, including those individuals responsible for the
investment operations of the Fund. They also considered the resources,
operational structures and practices of the Adviser in managing the Fund's
portfolio and administering the Fund's affairs, as well as the Adviser's overall
investment management business. The Trustees concluded that the Adviser's
experience, resources and strength in those areas of importance to the Fund are
considerable. They noted especially the Adviser's history of expertise in
managing portfolios of "growth" stocks like that of the Fund. The Trustees also
considered the level and depth of the Adviser's ability to execute portfolio
transactions to effect investment decisions. They also noted the history of
extremely favorable reviews of the Adviser's shareholder-relations
representatives by an independent rating concern. Finally, the Trustees took
notice of the enhancements to the control and compliance environment at the
Adviser and within the Fund. On the basis of their review, the Trustees
determined that the nature and extent of the services provided to the Fund by
the Adviser (including the Fund's performance, as discussed below) were of high
quality and could be expected to remain so.
INVESTMENT PERFORMANCE OF THE FUND
Drawing upon information provided at the meeting by the Adviser as well as
Callan and upon reports provided to the Trustees by the Adviser throughout the
preceding year, the Trustees noted that the Fund's performance had improved
substantially for the year ended August 31, 2005, beating the Fund's benchmark
index by a significant margin and placing the Fund well above the median for its
peer group. The Trustees acknowledged that the Adviser's recent efforts to
improve the Fund's performance and, more generally, the firm's rebuilding of the
investment team in response to the devastating events of September 11, 2001,
were bearing fruit. Accordingly, they concluded that the performance of the Fund
strongly supported renewal of the Agreement.
26
PROFITABILITY TO THE ADVISER AND ITS AFFILIATES
The Trustees considered the profitability of the advisory arrangement with the
Fund to the Adviser and the Adviser's affiliates and the methodology used by the
Adviser in determining such profitability. The Trustees had been provided with
data on the Fund's profitability to the Adviser and to the Adviser's affiliates
for the Fund's most recent fiscal year. In addition, the Trustees reviewed the
Fund's management fees and expense ratios and compared them with a group of
comparable funds. In order to assist the Trustees in this comparison, Callan
provided the Trustees with comparative information with respect to fees paid,
and expense ratios incurred, by similar funds. That information indicated that
the Fund's advisory fee and expense ratio were higher than the fees and expense
ratios of most of the funds in the Callan reference group. The Trustees
determined that this fact should be taken into account in weighing the size of
the fee against the nature, extent and quality of the services provided. After
discussing with representatives of the Adviser and Callan the methodologies used
in computing the costs that formed the bases of the profitability calculations,
they turned to the data provided. After analysis and discussion they concluded
that, to the extent that the Adviser's and its affiliates' relationships with
the Fund had been profitable to either or both of those entities, the
profitability was not unacceptable.
ECONOMIES OF SCALE
On the basis of their discussions with management and their analysis of
information provided at the meeting, the Trustees determined that the nature of
the Fund and its operations is such that the Adviser is likely to realize
economies of scale in the management of the Fund as it grows in size, but that
in view of the comparatively small size of the Fund and the current level of its
profitability to the Adviser, adoption of breakpoints in the advisory fee, while
possibly appropriate at a later date, could await further analysis of the
sources and potential scale of the economies and the fee structure that would
best reflect them. Accordingly, the Trustees requested that the Adviser address
this topic with the Trustees at future meetings.
OTHER BENEFITS TO THE ADVISER
The Trustees considered whether the Adviser benefits in other ways from its
relationship with the Fund. In that connection, they noted that the Adviser
maintains soft-dollar arrangements in connection with the Fund's brokerage
transactions, data on which is regularly supplied to the Trustees at their
quarterly meetings. The Trustees also noted that the Fund's Distributor, Fred
Alger & Company, Incorporated, provides a substantial portion of the Fund's
brokerage and receives shareholder servicing fees from the Fund as well, and
that Alger Shareholder Services, Inc. receives fees from the Fund under a
shareholder services agreement. The Trustees had been provided with information
regarding, and had considered, the brokerage and shareholder servicing fee
benefits in connection with their review of the profitability to the Adviser and
its affiliates of their relationship with the Fund. As to the benefits received
from the soft-dollar arrangements, the Trustees decided that, in light of the
nature and scale of the arrangements, they were not so significant as to render
the Adviser's fees excessive.
CONCLUSION
After weighing the foregoing factors, the Trustees, including the Independent
Trustees, approved the renewal of the Investment Management Agreement. They
reasoned that, considered in themselves, the services provided by the Adviser
were appropriate for the needs of the Fund and of high quality, that the recent
performance of the Fund had been excellent, and that the Adviser could
reasonably be expected to provide services of comparable quality in the future.
The Trustees determined that the fee, while higher than that charged by the
majority of similar funds, was not so high as to be unreasonable when considered
in relation to the nature, extent and high quality of the services currently
provided, including the Fund's recent performance, that the Fund's relationship
with the Adviser and its affiliates was not so profitable as to render the fee
excessive, that any additional benefits to the Adviser and/or its affiliates
other than those already considered in the profitability analysis were not of a
magnitude materially to affect the Trustees' deliberations, and that the Fund's
current size was such that the issue of sharing economies of scale with the
Fund, while inviting future consideration, was not of major current importance.
27
SPECTRA FUND
ADDITIONAL INFORMATION (UNAUDITED)
PROXY VOTING POLICIES
A description of the policies and procedures the Fund uses to determine how to
vote proxies relating to portfolio securities and the proxy voting record is
available, without charge, by calling (800) 711-6141 or online on the Fund's
website at http://www.alger.com or on the SEC's website at http://www.sec.gov.
QUARTERLY FUND HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarter of each fiscal year on Form N-Q. Forms N-Q are available
online on the Fund's website at http://www.alger.com or on the SEC's website at
HTTP://WWW.SEC.GOV. The Fund's Forms N-Q may be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. Information regarding the operation of
the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. A
copy of the most recent quarterly holdings may also be obtained from the Fund by
calling (800) 711-6141.
28
SPECTRA FUND
111 Fifth Avenue
New York, NY 10003
(800) 711-6141
www.alger.com
INVESTMENT MANAGER
Fred Alger Management, Inc.
111 Fifth Avenue
New York, NY 10003
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Boston Financial Data Services, Inc.
P.O. Box 8480
Boston, MA 02266
This report is submitted for the general information of the shareholders of
Spectra Fund. It is not authorized for distribution to prospective investors
unless accompanied by an effective Prospectus for the Fund, which contains
information concerning the Fund's investment policies, fees and expenses as well
as other pertinent information.
[LOGO]
SAS 103105
[LOGO] Spectra Fund
Boston Financial Data Services, Inc.
P.O. Box 8480
Boston, MA 02266
SAS 103105
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics (the "Code of Ethics")
that applies to its principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions.
(b) Not applicable.
(c) The amendments to the Code of Ethics are: The 60-day holding
period for selling securities at gains now applies to Access persons,
before it applied only to Advisory persons; Prohibition on IPO's now
applies to Access persons, before it applied only to Advisory persons;
Approval from Legal/Compliance is now necessary for investments in
Private Placements by Access persons, before, such approval was only
required of Advisory persons.
(d) The Registrant has not granted a waiver or an implicit waiver from
a provision of its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto.
(e) Not applicable.
(f) The Registrant's Code of Ethics is attached as an Exhibit hereto.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees of the Registrant determined that Stephen E.
O'Neil is an audit committee financial expert (within the meaning of
that phrase specified in the instructions to Form N-CSR) on the
Registrant's audit committee. Mr. O'Neil is an "independent" trustee -
i.e., he is not an interested person of the Registrant as defined in
the Investment Company Act of 1940, nor has he accepted directly or
indirectly any consulting, advisory or other compensatory fee from the
Registrant, other than in his capacity as Trustee.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
a) Audit Fees:
October 31, 2005 $21,600
October 31, 2004 $32,000
b) Audit-Related Fees: NONE
c) Tax Fees for tax advice, tax compliance and tax planning:
October 31, 2005 $3,470
October 31, 2004 $3,300
d) All Other Fees:
October 31, 2005 $1,650
October 31, 2004 $5,000
Other fees include a review and consent for Registrants
registration statement filing and a review of the semi-annual
financial statements.
e) 1) Audit Committee Pre-Approval Policies And Procedures:
Audit and non-audit services provided by the Registrant's
independent registered public accounting firm (the "Auditors") on
behalf the Registrant must be pre-approved by the Audit
Committee. Non-audit services provided by the Auditors on behalf
of the Registrant's Investment Adviser or any entity controlling,
controlled by, or under common control with the Investment
Adviser must be pre-approved by the Audit Committee if such
non-audit services directly relate to the operations or financial
reporting of the Registrant.
2) All fees in item 4(b) through 4(d) above were approved by the
Registrants' Audit Committee.
f) Not Applicable
g) Non-Audit Fees:
October 31, 2005 $186,831 and 56,050 Euros
October 31, 2004 $157,449 and 82,300 Euros
h) The audit committee of the board of trustees has considered whether
the provision of the non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control, with the adviser that provides ongoing
services to the registrant that were not approved pursuant to
(c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with
maintaining the principle accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable
ITEM 6. SCHEDULE OF INVESTMENTS
Not applicable
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.
None
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's principal executive officer and principal
financial officer have concluded that the Registrant's disclosure
controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended) are effective based on
their evaluation of the disclosure controls and procedures as of a
date within 90 days of the filing date of this document.
(b) No changes in the Registrant's internal control over financial
reporting occurred during the Registrant's second fiscal half-year
that materially affected, or are reasonably likely to materially
affect, the Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) (1) Code of Ethics as Exhibit 99.CODE ETH
(a) (2) Certifications of principal executive officer and principal
financial officer as required by rule 30a-2(a) under the Investment
Company Act of 1940 are attached as Exhibit 99.CERT
(b) Certifications of principal executive officer and principal
financial officer as required by rule 30a-2(b) under the Investment
Company Act of 1940 are attached 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.
Spectra Fund
By: /s/Dan C. Chung
Dan C. Chung
President
Date: January 6, 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: /s/Dan C. Chung
Dan C. Chung
President
Date: January 6, 2006
By: /s/Frederick A. Blum
Frederick A. Blum
Treasurer
Date: January 6, 2006