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: 811-8059
Cohen & Steers Special Equity Fund, Inc.
(Exact name of registrant as specified in charter)
757 Third Avenue, New York, NY 10017
(Address of principal executive offices) (Zip code)
Robert H. Steers
Cohen & Steers Capital Management, Inc.
757 Third Avenue
New York, New York 10017
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 832-3232
Date of fiscal year end: December 31
Date of reporting period: June 30, 2003
Item 1. Reports to Stockholders.
The registrant's semi-annual report to shareholders, for the period ended June
30, 2003, is hereby included.
Item 9. Controls and Procedures.
(b) There were no significant changes in the registrant's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Item 10. Exhibits.
(a)(2)(i) Certification, dated as of August 19, 2003, of Robert H. Steers,
principal executive officer of the registrant.
(a)(2)(ii) Certification, dated as of August 19, 2003, of Martin Cohen,
principal financial officer of the registrant.
(b) (1) Certification, dated as of August 19, 2003, of Robert H. Steers, chief
executive officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) (2) Certification, dated as of August 19, 2003, of Martin Cohen, chief
financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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.
COHEN & STEERS SPECIAL EQUITY FUND, INC.
By: /s/ Robert H. Steers, Chairman
Date: August 19, 2003
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/ Robert H. Steers, Chairman, Secretary and principal executive
officer
Date: August 19, 2003
By: /s/ Martin Cohen, President, Treasurer and principal financial officer
Date: August 19, 2003
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
July 23, 2003
To Our Shareholders:
We are pleased to submit to you our report for the quarter and six months
ended June 30, 2003. The net asset value on that date was $32.18 per share. A
semiannual dividend of $0.61 per share was declared for shareholders of record
on June 19, 2003 and was paid on June 20, 2003. For the quarter, Cohen & Steers
Special Equity Fund had a total return, based on income and change in net asset
value, of 19.0%. This compares to the NAREIT Equity REIT Index's(a) total return
of 13.9% and the S&P 500 Index's total return of 15.4%. For the six months
ended June 30, 2003, Cohen & Steers Special Equity Fund had a total return of
19.3% versus the NAREIT Equity REIT Index's total return of 13.9% and the
S&P 500 Index's total return of 11.8%.
MIDYEAR REVIEW
At long last, nearly every sector of the U.S. financial markets provided
exceptional returns in the second quarter. REITs extended their winning streak
to over three years, and posted their best quarterly return since the fourth
quarter of 1996. In addition, the stock market arose from its three year slump
and posted its best performance (15.4% total return for the S&P 500 Index) since
the fourth quarter of 1998. Bonds extended what has now been, effectively, a
22-year bull market, with the 30-year Treasury bond registering a total return
of 5.4%.
There was an avalanche of geopolitical and economic news in the past three
months, most of it with positive implications. War in Iraq abated while steps
toward peace in the Middle East were promising. Congress passed tax cut
legislation, with a great deal of benefit going to investors by virtue of
lowered levies on dividends and capital gains. Interest rates reached their
lowest level in over 50 years, as the Fed's accommodative monetary policy
continued unabated. Consumer and business confidence clearly began to rise, and
more Americans now own homes than ever before. While these positive developments
have yet to ignite job creation, capital spending and strong overall economic
growth -- with the exception of housing -- we believe that forecasts for
accelerated growth in the second half of 2003 and beyond have clearly gained
credibility. We believe this renewed optimism has helped the outlook for both
real estate and REITs.
- -------------------
(a) The NAREIT Equity REIT Index is an unmanaged, market-capitalization-weighted
index of all publicly traded REITs that invest predominantly in the equity
ownership of real estate. The index is designed to reflect the performance
of all publicly traded equity REITs as a whole.
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1
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
We are very pleased with the fund's top tier performance relative to our
benchmarks and our competition. The fund's disciplined investment
strategy -- focused on the twenty or so real estate securities with the best
valuation -- really bore fruit this quarter as REIT market investors began to
believe in the economic recovery and pushed up the stocks that would be expected
to respond well to that recovery. The strongest contributors to performance were
our overweight and stock selection in the office and hotel sectors and our
underweight in the apartment sector. Also contributing to our out-performance
was our overweight in the regional mall sector.
REITs are operating in an environment that they have never before
experienced. In nearly all of the previous cycles that we can remember, when
coming out of a recession real estate fundamentals have been dismal, property
owners were in distress, and equity and debt capital was unavailable at a
reasonable price as investors and lenders shunned the asset class. In this
cycle, however, there is virtually no distress on the part of any major property
owners. While there is no doubt that real estate fundamentals are
weak -- vacancy rates are high and many property-level cash flows have been flat
or declining -- fundamentals are more disparate across sectors than we have ever
seen coming out of a recession. Most notable is the retail sector where
occupancies and rents remain very strong. Instead of capital fleeing the
industry, it is now more plentiful than ever and has never carried a lower cost.
Investors that have been waiting for an opportunity to acquire assets at bargain
prices have been disappointed as prices have remained firm, or even risen,
nearly across the board.
Consequently, the opportunity set for REITs is entirely different from past
history. Instead of an asset pricing opportunity, property owners now have a
liability pricing opportunity. Record low interest rates have allowed REITs to
refinance existing higher cost debt and boost earnings, just as homeowners and
homebuyers have been doing as they finance and refinance their mortgages. In
addition, REITs have been able to take advantage of the strong demand for
property by selling assets, enabling them to reposition and upgrade the quality
of their portfolios, while simultaneously strengthening their balance sheets.
For some investors, REITs themselves are the opportunity -- there were four
major acquisitions of public REITs in the first half of the year, and we suspect
that there will be even more merger and acquisition activity in the second half
of the year.
The strong REIT equity market offered renewed opportunities in the first
half of the year. Two initial public offerings were completed in late June, as
American Financial Realty and Maguire Properties together raised $1.4 billion in
common stock. This compares to just one IPO in 2002 (Heritage Properties), which
raised $450 million. Lower interest rates enabled REITs to tap the preferred
stock market as $1.7 billion was raised in the first half of 2003, compared to
$1.2 billion in the first half of 2002. Much of this capital was used to
refinance, at lower rates, preferred issues that reached their call dates. An
important source of demand for these securities has been mutual funds
specializing strictly in preferred stocks. REITs also issued $6.8 billion of
unsecured debt, mostly at historically low interest rates.
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2
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
Despite such market conditions, equity issuance was modest in the first half
of the year, as was demand for REIT shares. Common equity issuance, at $1.4
billion, was at a historical low and well below last year's $2.1 billion pace at
mid-year. Capital flows into real estate mutual funds were $1.6 billion,
compared to $2.5 billion in the first half of 2002. Largely due to capital
appreciation, real estate mutual fund assets stood at a record $20 billion at
mid-year, up from $15 billion just six months ago. Some observers have suggested
that REITs were relatively disadvantaged by the recent tax bill's exclusion of
REITs from the lowered 15% dividend tax rate for investors, because REITs
already don't pay taxes at the corporate level. Nonetheless their substantial
dividend yield potential (still superior to nearly all alternatives on an
after-tax basis) and growth potential have enabled REITs to remain the
investment of choice for many real estate and income-oriented investors.
Finally, the matter of corporate governance has become one of the most
important issues in the financial world. As the nation's leading REIT investor
and a very long-term holder of these securities, we view corporate governance as
one of our most important responsibilities. While REITs in general tend to score
rather well in comparison to other industries, many concerns remain. In the
proxy-voting period of 2003, Cohen & Steers voted in opposition to management
proposals or directors on 22 separate occasions. Most of these related to poison
pills, board classification and independence, and compensation. Our emphasis on
corporate governance issues is not new; in 2002 we voted in opposition to
management 17 times, and in 2001, 21 times.
INVESTMENT OUTLOOK
In our opinion, the single most important investment variable today relates
to the current interest rate climate and the prospect of a low-return
environment for the foreseeable future. We have experienced a secular re-
pricing of the cost of money, as the inflation risk premium has effectively been
extinguished from the bond market. As short-term interest rates approach zero,
investors, savers, retirees, pension funds, foundations and endowments, and a
host of financial managers are at a loss to find appropriate means to fulfill
both long-term and short-term obligations. For example, a recent survey by
Morgan Stanley Research found that nearly 90% of the 292 S&P 500 component
companies they surveyed have annual return expectations of 8% or more for their
pension fund assets. These obligations simply cannot be satisfied through U.S.
Treasury or investment grade corporate debt securities whose coupons are far
below this minimum return expectation. The experience of the equity markets over
the past several years has served to rein in exposure to the volatility and low
current income of stocks in general. Ironically, despite this aversion to the
risk of equity markets, there has been a marked shift towards alternative and
riskier investments, including high yield bonds, commodities, foreign
securities, hedge funds and other vehicles, a trend that, frankly, we have
difficulty figuring out.
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3
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
In today's market environment, many investors are finding REITs to be a very
appealing asset class. Offering the potential for high income, tangible
underlying asset value, low correlation to other assets and long-term growth
potential, REITs are becoming increasingly more appreciated by investors.
Further, we believe that the prudent use of leverage -- which is plentiful today
at a modern record low cost -- by real estate owners and investors has helped
real estate prices remain firm despite weak fundamentals. Moreover, in our view,
it explains why REITs are trading closer to some analysts' net asset value
estimates than might otherwise be expected.
The entire notion of net asset value is subject to considerable debate. It
is our opinion that many analysts are underestimating REIT NAVs because they are
ignoring three important variables. First, the capitalization rate used to value
current rental streams and the discount rate used to value future rental streams
are at a low point in history, suggesting that higher valuations are warranted.
Second is the replacement cost of REIT assets. From Class A downtown office
buildings to dominant regional malls, the cost to replace these
assets -- assuming that one could at all -- far exceeds most current value
estimates of such properties. And third, since we believe we are just beginning
new economic and real estate growth cycles, investors should consider the
potential for real assets to appreciate as economic conditions improve. With
little or no speculative building taking place, except in the apartment sector,
it is unlikely that there will be a glut of new space coming on to the market
just as demand is increasing. This should necessarily precipitate an increase in
occupancy rates, rents and asset values.
In our view, the key to continued positive returns from REITs is the future
course of the U.S. economy. As mentioned, signs of a recovery are beginning to
emerge. In light of the massive fiscal and monetary stimulus currently in place,
we are confident that in the coming quarters the economy will demonstrate
increasing strength.
With respect to strategy, we are encouraged that our office sector holdings
are beginning to produce positive results. In our opinion, we are early in this
cycle and are making few changes except with respect to some individual
holdings. We are also maintaining a strong position in the hotel sector, in
anticipation of an improved economy. Similarly, we believe that regional malls,
the stars of the REIT industry over the past three years, are likely to show the
strongest earnings growth and therefore remain an overweight position. The only
sector that we continue to have little enthusiasm for is apartments, due to low
demand created by ongoing incentives for, and the unparalleled attractiveness
of, single-family home ownership.
When any sector performs as well as -- and for as long as -- REITs have, an
abundance of skeptics invariably appear, both among industry analysts as well as
outside observers. We remain firm in our belief that we are at the beginning of
a new cycle and that real estate owners are entering the new cycle in a very
strong position. Further, we are not inclined to be market timers because we
have not seen any timing strategies that
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4
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
have been consistently successful. We are confident that REITs will continue to
play an important role in investors' portfolio needs.
Sincerely,
MARTIN COHEN ROBERT H. STEERS
MARTIN COHEN ROBERT H. STEERS
President Chairman
JOSEPH M. HARVEY JAMES S. CORL
JOSEPH M. HARVEY JAMES S. CORL
Portfolio Manager Portfolio Manager
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Cohen & Steers is online at COHENANDSTEERS.COM
We have enhanced both the look and features of our Web site
to give you more information about our company, our funds
and the REIT market in general.
ONLINE ACCESS is available for shareholders of Cohen &
Steers funds whose accounts are held directly with Boston
Financial Data Services, the fund's transfer agent. After
registering, you will be able to manage your entire account
online including purchasing or redeeming shares, updating
account information, and checking your portfolio holdings.
Check out our interactive Asset Allocation Tool, which
allows you to hypothetically add REITs to any portfolio to
see how they impact expected total returns and risk. Or try
the Fund Performance Calculator and see how our funds have
performed versus the S&P 500 Index or Nasdaq composite. As
always, you can also get daily net asset values, fund fact
sheets, portfolio highlights, recent news articles and our
overall insights on the REIT market.
So visit us today at COHENANDSTEERS.COM
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5
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 2003 (UNAUDITED)
<Table>
<Caption>
NUMBER VALUE
OF SHARES (NOTE 1)
---------- ------------
EQUITIES 96.24%
DIVERSIFIED 12.56%
Alexander's(a).................................... 11,300 $ 943,437
Crescent Real Estate Equities Co. ................ 30,800 511,588
Vornado Realty Trust.............................. 25,800 1,124,880
------------
2,579,905
------------
HEALTH CARE 1.60%
Ventas............................................ 21,700 328,755
------------
HOTEL 11.01%
Hilton Hotels Corp. .............................. 43,800 560,202
Host Marriott Corp.(a)............................ 60,900 557,235
Innkeepers USA Trust.............................. 52,300 355,640
Starwood Hotels & Resorts Worldwide............... 27,600 789,084
------------
2,262,161
------------
INDUSTRIAL 5.52%
Catellus Development Corp.(a)..................... 33,300 732,600
ProLogis.......................................... 14,700 401,310
------------
1,133,910
------------
OFFICE 22.12%
Arden Realty...................................... 34,400 892,680
Boston Properties................................. 21,600 946,080
Brookfield Properties Corp.(b).................... 27,300 583,957
Equity Office Properties Trust.................... 45,100 1,218,151
Highwoods Properties.............................. 8,000 178,400
Maguire Properties................................ 10,600 204,050
Prentiss Properties Trust......................... 10,500 314,895
SL Green Realty Corp. ............................ 5,900 205,851
------------
4,544,064
------------
</Table>
- -------------------
(a) Nonincome producing security.
(b) Brookfield Properties Corp. is a Canadian company whose common stock is
listed on the Toronto and New York Stock Exchanges. The Toronto Stock
Exchange is deemed the principal exchange for valuation purposes. The market
value of the fund's position in Canadian dollars on June 30, 2003 was
$791,699 based on an exchange rate of 1 Canadian dollar to 0.73760 U.S.
dollars.
See accompanying notes to financial statements.
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6
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2003 (UNAUDITED)
<Table>
<Caption>
NUMBER VALUE
OF SHARES (NOTE 1)
---------- ------------
OFFICE/INDUSTRIAL 10.27%
Kilroy Realty Corp. .............................. 48,300 $ 1,328,250
Reckson Associates Realty Corp. .................. 37,500 782,250
------------
2,110,500
------------
RESIDENTIAL 10.29%
APARTMENT 7.81%
Archstone-Smith Trust............................. 21,100 506,400
AvalonBay Communities............................. 16,300 695,032
Post Properties................................... 15,200 402,800
------------
1,604,232
------------
MANUFACTURED HOME 2.48%
Sun Communities................................... 13,000 510,900
------------
TOTAL RESIDENTIAL................................. 2,115,132
------------
SHOPPING CENTER 22.87%
COMMUNITY CENTER 3.58%
Federal Realty Investment Trust................... 23,000 736,000
------------
REGIONAL MALL 19.29%
CBL & Associates Properties....................... 9,000 387,000
Macerich Co. ..................................... 28,600 1,004,718
Mills Corp. ...................................... 19,200 644,160
Rouse Co. ........................................ 26,200 998,220
Simon Property Group.............................. 23,800 928,914
------------
3,963,012
------------
TOTAL SHOPPING CENTER............................. 4,699,012
------------
TOTAL INVESTMENTS (Identified
cost -- $17,348,296) ........................... 96.24% 19,773,439
OTHER ASSETS IN EXCESS OF LIABILITIES .............. 3.76% 773,316
------ ------------
NET ASSETS (Equivalent to $32.18 per share based on
638,421 shares of capital stock outstanding) ... 100.00% $ 20,546,755
------ ------------
------ ------------
</Table>
See accompanying notes to financial statements.
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7
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2003 (UNAUDITED)
<Table>
ASSETS:
Investments in securities, at value (Identified
cost -- $17,348,296) (Note 1)........................ $ 19,773,439
Cash.................................................... 744,074
Receivable for investment securities sold............... 519,546
Dividends receivable.................................... 116,503
Receivable for fund shares sold......................... 10,969
Other assets............................................ 8,681
------------
Total Assets....................................... 21,173,212
------------
LIABILITIES:
Payable for investment securities purchased............. 518,317
Payable for professional fees........................... 41,587
Payable for fund shares redeemed........................ 28,294
Payable to investment advisor........................... 15,082
Payable to administrator................................ 1,086
Other liabilities....................................... 22,091
------------
Total Liabilities.................................. 626,457
------------
NET ASSETS applicable to 638,421 shares of $0.001 par value
common stock outstanding (Note 5)......................... $ 20,546,755
------------
------------
NET ASSET VALUE PER SHARE:
($20,546,755[div]638,421 shares outstanding).............. $ 32.18
------------
------------
NET ASSETS consist of:
Paid-in capital (Notes 1 and 5)......................... $ 43,496,935
Undistributed net investment income..................... 87,037
Accumulated net realized loss on investments............ (25,462,360)
Net unrealized appreciation on investments.............. 2,425,143
------------
$ 20,546,755
------------
------------
</Table>
See accompanying notes to financial statements.
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8
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 (UNAUDITED)
<Table>
Investment Income (Note 1):
Dividend income (net of $1,139 of foreign withholding
tax)................................................. $ 611,484
Interest income......................................... 1,303
----------
Total Income....................................... 612,787
----------
Expenses:
Investment advisory fees (Note 2)....................... 82,772
Reports to shareholders................................. 21,888
Professional fees....................................... 21,822
Directors' fees and expenses (Note 2)................... 21,724
Registration and filing fees............................ 12,576
Custodian fees and expenses............................. 11,327
Administration and transfer agent fees (Note 2)......... 10,666
Line of credit fees and expenses (Note 6)............... 823
Miscellaneous........................................... 8,137
----------
Total Expenses..................................... 191,735
----------
Reduction of Expenses (Note 2).......................... (53,781)
----------
Net Expenses....................................... 137,954
----------
Net Investment Income....................................... 474,833
----------
Net Realized and Unrealized Gain on Investments:
Net realized gain on investments........................ 955,512
Net change in unrealized appreciation on investments.... 1,936,743
----------
Net realized and unrealized gain on investments.... 2,892,255
----------
Net Increase in Net Assets Resulting from Operations........ $3,367,088
----------
----------
</Table>
See accompanying notes to financial statements.
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9
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
<Table>
<Caption>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Change in Net Assets:
From Operations:
Net investment income................... $ 474,833 $ 898,614
Net realized gain on investments........ 955,512 1,997,128
Net change in unrealized
appreciation/(depreciation) on
investments.......................... 1,936,743 (1,492,737)
----------- -----------
Net increase in net assets
resulting from operations........ 3,367,088 1,403,005
----------- -----------
Dividends and Distributions to Shareholders
from (Note 1):
Net investment income................... (387,796) (892,484)
----------- -----------
Capital Stock Transactions (Note 5):
Decrease in net assets from fund share
transactions......................... (637,972) (2,514,576)
----------- -----------
Total increase/(decrease) in net
assets........................... 2,341,320 (2,004,055)
Net Assets:
Beginning of period..................... 18,205,435 20,209,490
----------- -----------
End of period........................... $20,546,755 $18,205,435
----------- -----------
----------- -----------
</Table>
See accompanying notes to financial statements.
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10
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the
financial statements. It should be read in conjunction with the financial
statements and notes thereto.
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED DECEMBER 31,
MONTHS ENDED --------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: JUNE 30, 2003 2002 2001 2000 1999 1998
- -------------------------------- ------------- ---------- ---------- ---------- ---------- ----------
Net asset value, beginning of period... $27.50 $26.63 $26.60 $26.76 $20.88 $ 32.25
------ ------ ------ ------ ------ ----------
Income from investment operations:
Net investment income............... 0.75 1.22 1.01 1.02 0.12 0.53
Net realized and unrealized
gain/(loss) on investments........ 4.53 0.80 0.17 (0.16) 5.87 (11.39)
------ ------ ------ ------ ------ ----------
Total from investment
operations.................... 5.28 2.02 1.18 0.86 5.99 (10.86)
------ ------ ------ ------ ------ ----------
Less dividends and distributions to
shareholders from:
Net investment income............... (0.61) (1.21) (0.52) (1.02) (0.07) (0.34)
Tax return of capital............... -- -- (0.63) -- (0.04) (0.17)
------ ------ ------ ------ ------ ----------
Total dividends and
distributions to
shareholders.................. (0.61) (1.21) (1.15) (1.02) (0.11) (0.51)
------ ------ ------ ------ ------ ----------
Redemption fees retained by the fund... 0.01 0.06 -- -- -- --
------ ------ ------ ------ ------ ----------
Net increase/(decrease) in net
assets................................ 4.68 0.87 0.03 (0.16) 5.88 (11.37)
------ ------ ------ ------ ------ ----------
Net asset value, end of period......... $32.18 $27.50 $26.63 $26.60 $26.76 $ 20.88
------ ------ ------ ------ ------ ----------
------ ------ ------ ------ ------ ----------
- ------------------------------------------------------------------------------------------------------------------------
Total investment return................ 19.31%(a) 7.67% 4.39% 3.38% 28.76% - 33.83%
------ ------ ------ ------ ------ ----------
------ ------ ------ ------ ------ ----------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
- -------------------------
Net assets, end of period (in millions). $ 20.5 $ 18.2 $ 20.2 $ 33.5 $ 43.0 $ 55.2
------ ------ ------ ------ ------ --------
------ ------ ------ ------ ------ --------
Ratio of expenses to average daily net
assets (before expense reduction)..... 2.08%(b) 2.09% 1.83% 2.40% 2.21% 1.31%
------ ------ ------ ------ ------ --------
------ ------ ------ ------ ------ --------
Ratio of expenses to average daily net
assets (net of expense reduction)..... 1.50%(b) 1.50% 1.83% 2.37% 1.96% 1.28%
------ ------ ------ ------ ------ --------
------ ------ ------ ------ ------ --------
Ratio of net investment income to
average daily net assets (before
expense reduction).................... 4.58%(b) 3.68% 3.17% 3.67% 0.26% 1.68%
------ ------ ------ ------ ------ --------
------ ------ ------ ------ ------ --------
Ratio of net investment income to
average daily net assets (net of
expense reduction).................... 5.16%(b) 4.27% 3.17% 3.70% 0.51% 1.71%
------ ------ ------ ------ ------ --------
------ ------ ------ ------ ------ --------
Portfolio turnover rate................ 80.18%(a) 179.19% 107.68% 58.99% 115.43% 112.32%
------ ------ ------ ------ ------ --------
------ ------ ------ ------ ------ --------
</Table>
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(a) Not annualized.
(b) Annualized
See accompanying notes to financial statements.
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11
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers Special Equity Fund, Inc. (the fund) was incorporated under
the laws of the State of Maryland on February 14, 1997 and is registered under
the Investment Company Act of 1940, as amended, as an open-end, nondiversified
management investment company.
The following is a summary of significant accounting policies followed by
the fund in the preparation of its financial statements. The policies are in
conformity with accounting principles generally accepted in the United States of
America. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reported period. Actual results could differ from those
estimates.
Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange on the business day
as of which such value is being determined. If there has been no sale on such
day, the securities are valued at the mean of the closing bid and asked prices
for the day.
Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. (Nasdaq) national
market system are valued in a similar manner. Securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by Cohen & Steers
Capital Management, Inc. to be over-the-counter, but excluding securities
admitted to trading on the Nasdaq national list, are valued at the official
closing prices as reported by Nasdaq, the National Quotation Bureau, or such
other comparable sources as the board of directors deems appropriate to reflect
their fair market value. Where securities are traded on more than one exchange
and also over-the-counter, the securities will generally be valued using the
quotations the board of directors believes reflect most closely the value of
such securities.
Unrealized gains and losses on securities which result from changes in
foreign exchange rates, as well as changes in market prices of securities, are
included in unrealized appreciation/(depreciation) on investments.
Short-term debt securities, which have a maturity value of 60 days or less,
are valued at amortized cost, which approximates value.
Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost for accounting and tax purposes.
Interest income is recorded on the accrual basis. Dividend income is recorded on
the ex-dividend date.
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12
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Dividends and Distributions to Shareholders: Dividends from net investment
income are declared and paid semiannually. Distributions to shareholders are
recorded on the ex-dividend date. Dividends are automatically reinvested in full
and fractional shares of the fund based on the net asset value per share at the
close of business on the ex-dividend date unless the shareholder has elected to
have them paid in cash.
A portion of the fund's dividend may consist of amounts in excess of net
investment income derived from nontaxable components of the dividends from the
fund's portfolio investments. Net realized capital gains, unless offset by any
available capital loss carryforward, are distributed to shareholders annually.
Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. Federal Income Tax regulations, which may
differ from generally accepted accounting principles.
Federal Income Taxes: It is the policy of the fund to qualify as a regulated
investment company, if such qualification is in the best interest of the
shareholders, by complying with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, and by distributing
substantially all of its taxable earnings to its shareholders. Accordingly, no
provision for federal income or excise tax is necessary.
NOTE 2. INVESTMENT ADVISORY AND ADMINISTRATION FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
Investment Advisory Fees: Cohen & Steers Capital Management, Inc. (the
advisor) serves as the fund's investment advisor pursuant to an investment
advisory agreement (the advisory agreement). Under the terms of the advisory
agreement, the advisor provides the fund with the day-to-day investment
decisions and generally manages the fund's investments in accordance with the
stated policies of the fund, subject to the supervision of the fund's board of
directors. For the services provided to the fund, the advisor receives a monthly
fee in an amount equal to 1/12th of 0.90% of the average daily net assets of the
fund. For the six months ended June 30, 2003, the fund incurred $82,772 in
advisory fees.
The investment advisor has voluntarily agreed to limit the total expenses of
the fund (excluding interest, taxes, brokerage, and extraordinary expenses) to
an annual rate of 1.50% of the fund's average net assets until December 31,
2003. As long as this expense cap continues, it may lower the fund's expenses
and increase its total return. After December 31, 2003, the expense limitation
may be terminated or revised at any time, at which time the fund's expenses may
increase and its total return may be reduced depending on the total assets of
the fund. For the six months ended June 30, 2003, the investment advisor waived
investment advisory fees of $53,781.
Administration Fees: The fund has entered into an administration agreement
with the advisor under which the advisor performs certain administrative
functions for the fund and receives a monthly fee in an amount equal to 1/12th
of 0.02% of the fund's average daily net assets. For the six months ended June
30, 2003, the fund paid the advisor $1,839 in fees under this administration
agreement.
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13
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Directors' Fees: Certain directors and officers of the fund are also
directors, officers, and/or employees of the advisor. None of the directors and
officers so affiliated received compensation from the fund for their services.
For the six months ended June 30, 2003, fees and related expenses accrued for
nonaffiliated directors totaled $21,724.
Other: At June 30, 2003, there was one investor owning 10% of the fund's
outstanding shares. Investment activities of this shareholder could have a
material impact on the fund.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments, for the
six months ended June 30, 2003 totaled $14,550,766 and $15,777,716,
respectively.
NOTE 4. INCOME TAXES
At June 30, 2003, the cost of investments and net unrealized appreciation
for federal income tax purposes were as follows:
<Table>
Aggregate cost..................................... $17,348,296
-----------
-----------
Gross unrealized appreciation...................... $ 2,503,940
Gross unrealized depreciation...................... $ (78,797)
-----------
Net unrealized appreciation........................ $ 2,425,143
-----------
-----------
</Table>
Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to return of capital and capital gain
distributions received by the fund on portfolio securities. To the extent such
differences are permanent in nature, such amounts are reclassified within the
capital accounts. Short-term capital gains are reflected in the financial
statements as realized gains on investments but are typically reclassified as
ordinary income for tax purposes.
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14
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 5. CAPITAL STOCK
The fund is authorized to issue 50 million shares of capital stock, par
value $0.001 per share. The board of directors of the fund may increase or
decrease the aggregate number of shares of common stock that the fund has
authority to issue. Transactions in fund shares were as follows:
<Table>
<Caption>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2003 DECEMBER 31, 2002
--------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
------- ----------- -------- -----------
Sold.......................... 25,730 $ 760,240 123,790 $ 3,683,795
Issued as reinvestment of
dividends................... 11,676 363,258 29,379 847,195
Redemption fees retained by
fund(a)..................... -- 3,763 -- 42,027
Redeemed...................... (60,956) (1,765,233) (250,155) (7,087,593)
------- ----------- -------- -----------
Net decrease.................. (23,550) $ (637,972) (96,986) $(2,514,576)
------- ----------- -------- -----------
------- ----------- -------- -----------
</Table>
NOTE 6. BORROWINGS
The fund, in conjunction with Cohen & Steers Realty Shares, Inc., Cohen &
Steers Institutional Realty Shares, Inc. and Cohen & Steers Equity Income Fund,
Inc., has entered into a $200,000,000 credit agreement (the credit agreement)
with Fleet National Bank, as administrative agent, State Street Bank and Trust
Company, as operations agent, and the lenders identified in the credit
agreement.
During the six months ended June 30, 2003, the fund did not have any loans
outstanding. For the six months ended June 30, 2003, the fund paid commitment
fees and other expenses of $823.
- -------------------
(a) The fund charges a 2% redemption fee on shares sold within one year of the
time of purchase.
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15
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
AVERAGE ANNUAL TOTAL RETURNS
(PERIODS ENDED JUNE 30, 2003) (UNAUDITED)
<Table>
<Caption>
ONE YEAR FIVE YEARS SINCE INCEPTION (5/8/97)
-------- ---------- ------------------------
9.00% 5.46% 8.74%
</Table>
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16
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
<Table>
MEET THE COHEN & STEERS FAMILY OF OPEN-END FUNDS:
FOR HIGH CURRENT INCOME: FOR TOTAL RETURN:
COHEN & STEERS COHEN & STEERS
EQUITY INCOME FUND REALTY SHARES
IDEAL FOR INVESTORS SEEKING A HIGH DIVIDEND IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL
YIELD AND CAPITAL APPRECIATION, INVESTING RETURN THROUGH BOTH CURRENT INCOME AND
PRIMARILY IN REITS CAPITAL APPRECIATION, INVESTING PRIMARILY IN
A, B, C AND I SHARES AVAILABLE REITS
SYMBOLS: CSEIX, CSBIX, CSCIX, CSDIX SYMBOL: CSRSX
FOR CAPITAL APPRECIATION: FOR TOTAL RETURN:
COHEN & STEERS COHEN & STEERS
SPECIAL EQUITY FUND INSTITUTIONAL REALTY SHARES
IDEAL FOR INVESTORS SEEKING MAXIMUM CAPITAL IDEAL FOR INVESTORS SEEKING MAXIMUM TOTAL
APPRECIATION, INVESTING IN A LIMITED NUMBER RETURN THROUGH BOTH CURRENT INCOME AND
OF REITS AND OTHER REAL ESTATE COMPANIES CAPITAL APPRECIATION, INVESTING PRIMARILY IN
CONCENTRATED, HIGHLY FOCUSED PORTFOLIO REITS
SYMBOL: CSSPX OFFERS LOW TOTAL EXPENSE RATIO
HIGHER MINIMUM PURCHASE REQUIRED
SYMBOL: CSRIX
FOR MORE INFORMATION ABOUT ANY COHEN & STEERS FUND
OR TO OBTAIN A PROSPECTUS PLEASE CONTACT US AT:
1-800-330-REIT, OR VISIT OUR WEB SITE AT COHENANDSTEERS.COM
THE PROSPECTUS CONTAINS MORE INFORMATION ABOUT EACH FUND INCLUDING ALL CHARGES AND EXPENSES,
AND SHOULD BE READ CAREFULLY BEFORE YOU INVEST.
</Table>
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17
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COHEN & STEERS SPECIAL EQUITY FUND, INC.
<Table>
OFFICERS AND DIRECTORS KEY INFORMATION
Robert H. Steers INVESTMENT ADVISER
Director and chairman Cohen & Steers Capital Management, Inc.
757 Third Avenue
Martin Cohen New York, NY 10017
Director and president (212) 832-3232
Gregory C. Clark FUND SUBADMINISTRATOR AND CUSTODIAN
Director State Street Bank and Trust Company
225 Franklin Street
Bonnie Cohen Boston, MA 02110
Director
TRANSFER AGENT
George Grossman Boston Financial Data Services, Inc.
Director Two Heritage Drive
North Quincy, MA 02171
Richard J. Norman (800) 437-9912
Director
LEGAL COUNSEL
Willard H. Smith Jr. Simpson Thacher & Bartlett
Director 425 Lexington Avenue
New York, NY 10017
Adam Derechin
Vice president and assistant treasurer DISTRIBUTOR
Cohen & Steers Securities, LLC
Joseph M. Harvey 757 Third Avenue
Vice president New York, NY 10017
Lawrence B. Stoller Nasdaq Symbol: CSSPX
Assistant secretary
Web site: cohenandsteers.com
Net asset value (NAV) can be found in
the daily mutual fund listings in the
financial section of most major
newspapers under Cohen & Steers.
This report is authorized for delivery
only to shareholders of Cohen & Steers
Special Equity Fund, Inc. unless
accompanied or preceded by the
delivery of a currently effective
prospectus setting forth details of
the fund. Past performance, of course,
is no guarantee of future results and
your investment may be worth more or
less at the time you sell.
</Table>
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18
COHEN & STEERS
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SPECIAL EQUITY FUND
SEMIANNUAL REPORT
JUNE 30, 2003
COHEN & STEERS
SPECIAL EQUITY FUND
757 THIRD AVENUE
NEW YORK, NY 10017
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as................................ 'SS'
The division sign shall be expressed as.................................[div]