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 811-04550
THE MAINSTAY FUNDS
(Exact name of Registrant as specified in charter)
51 Madison Avenue, New York, NY 10010
(Address of principal executive offices) (Zip code)
Marguerite E.H. Morrison, Esq.
169 Lackawanna Avenue
Parsippany, NJ 07054
(Name and address of agent for service)
Registrant's telephone number, including area code: (973) 394-4437
Date of fiscal year end: October 31
Date of reporting period: October 31, 2008
ITEM 1. REPORTS TO STOCKHOLDERS.
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CAPITAL APPRECIATION FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CAPITAL APPRECIATION FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 13
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 18
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 24
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 25
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 29
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 29
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 29
- ---------------------------------------------
TRUSTEES AND OFFICERS 30
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- -----------------------------------------------------------
With sales charges (42.39%) (3.86%) (3.66%)
Excluding sales charges (39.03) (2.77) (3.12)
</Table>
(With sales charges)
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
RUSSELL 1000 S&P 500
INVESTOR CLASS GROWTH INDEX INDEX
-------------- ------------ -------
10/31/98 9450 10000 10000
10/31/99 12404 13425 12567
10/31/00 13947 14677 13332
10/31/01 8584 8814 10012
10/31/02 6830 7085 8500
10/31/03 7923 8631 10268
10/31/04 7888 8923 11235
10/31/05 8749 9709 12215
10/31/06 9468 10762 14211
10/31/07 11294 12831 16280
10/31/08 6886 8089 10403
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- -----------------------------------------------------------
With sales charges (42.28%) (3.83%) (3.65%)
Excluding sales charges (38.92) (2.73) (3.10)
</Table>
(With sales charges)
(LINE GRAPH FOR CLASS A SHARES IN $)
<Table>
<Caption>
RUSSELL 1000 S&P 500
CLASS A GROWTH INDEX INDEX
------- ------------ -------
10/31/98 23625 25000 25000
10/31/99 31010 33562 31417
10/31/00 34867 36694 33331
10/31/01 21459 22036 25030
10/31/02 17074 17713 21249
10/31/03 19808 21577 25669
10/31/04 19721 22307 28088
10/31/05 21873 24273 30537
10/31/06 23670 26904 35527
10/31/07 28236 32076 40699
10/31/08 17246 20223 26008
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- -----------------------------------------------------------
With sales charges (42.32%) (3.86%) (3.86%)
Excluding sales charges (39.51) (3.49) (3.86)
</Table>
(With sales charges)
(LINE GRAPH FOR CLASS B SHARES IN $)
<Table>
<Caption>
RUSSELL 1000 S&P 500
CLASS B GROWTH INDEX INDEX
------- ------------ -------
10/31/98 10000 10000 10000
10/31/99 13023 13425 12567
10/31/00 14532 14677 13332
10/31/01 8874 8814 10012
10/31/02 7006 7085 8500
10/31/03 8062 8631 10268
10/31/04 7967 8923 11235
10/31/05 8772 9709 12215
10/31/06 9421 10762 14211
10/31/07 11156 12831 16280
10/31/08 6749 8089 10403
</Table>
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this
paragraph, change in share price, and reinvestment of dividend and capital-
gain distributions. The graphs assume an initial investment of $25,000 for
Class A shares and $10,000 for all other classes and reflect the deduction
of all sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to
a contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed
within the first six years of purchase, and have an annual 12b-1 fee of
1.00%. Class C shares are sold with no initial sales charge, are subject to
a CDSC of 1.00%, if redeemed within one year of purchase, and have an annual
12b-1 fee of 1.00%, Class I shares are sold with no initial sales charge or
CDSC, have no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Performance figures shown reflect nonrecurring
reimbursements from affiliates for professional fees and losses attributable
to shareholder trading arrangements. If these nonrecurring reimbursements
had not been made, the total return (excluding sales charges) would have
been -2.78% for Class A, -3.86% for Class B, -3.62% for
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- -----------------------------------------------------------
With sales charges (40.06%) (3.49%) (3.85%)
Excluding sales charges (39.50) (3.49) (3.85)
</Table>
(With sales charges)
(LINE GRAPH FOR CLASS C SHARES IN $)
<Table>
<Caption>
RUSSELL 1000 S&P 500
CLASS C GROWTH INDEX INDEX
------- ------------ -------
10/31/98 10000 10000 10000
10/31/99 13023 13425 12567
10/31/00 14532 14677 13332
10/31/01 8874 8814 10012
10/31/02 7006 7085 8500
10/31/03 8062 8631 10268
10/31/04 7967 8923 11235
10/31/05 8772 9709 12215
10/31/06 9421 10762 14211
10/31/07 11159 12831 16280
10/31/08 6752 8089 10403
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- -----------------------------------------------------------
(38.64%) (2.32%) (2.88%)
</Table>
(LINE GRAPH FOR CLASS I IN $)
<Table>
<Caption>
RUSSELL 1000 S&P 500
CLASS I GROWTH INDEX INDEX
------- ------------ -------
10/31/98 10000 10000 10000
10/31/99 13141 13425 12567
10/31/00 14779 14677 13332
10/31/01 9059 8814 10012
10/31/02 7222 7085 8500
10/31/03 8393 8631 10268
10/31/04 8372 8923 11235
10/31/05 9315 9709 12215
10/31/06 10139 10762 14211
10/31/07 12168 12831 16280
10/31/08 7466 8089 10403
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS(1) YEARS(1)
Russell 1000(R) Growth Index(4) (36.95%) (1.29%) (2.10%)
S&P 500(R) Index(5) (36.10) 0.26 0.40
Average Lipper large-cap growth fund(6) (38.55) (1.58) (0.71)
</Table>
Class C and -2.32% for Class I for the five-year period ended October 31,
2008, and -3.12% for Class A, -4.04% for Class B, -3.92% for Class C and
-2.88% for Class I for the ten-year period then ended. Investor Class shares
were not affected because the reimbursement occurred prior to the launch of
the share class.
2. Performance figures for Investor Class shares, first offered to the public on
February 28, 2008, include the historical performance of Class A shares
through February 27, 2008, adjusted for differences in certain contractual
expenses and fees. Unadjusted, the performance shown for Investor Class
shares might have been lower.
3. Performance figures for Class I shares, first offered on January 2, 2004,
include the historical performance of Class B shares through December 31,
2003, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
4. The Russell 1000(R) Growth Index is an unmanaged index that measures the
performance of those Russell 1000(R) companies with higher price-to-book
ratios and higher forecasted growth values. The Russell 1000(R) Index is an
unmanaged index that measures the performance of the 1,000 largest U.S.
companies based on total market capitalization. Results assume reinvestment
of all income and capital gains. The Russell 1000(R) Growth Index is
considered to be the Fund's broad-based securities-market index for
comparison purposes. An investment cannot be made directly in an index.
5. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume reinvestment of all
income and capital gains. An investment cannot be made directly in an index.
6. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Capital Appreciation Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $697.80 $6.44 $1,017.50 $ 7.66
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $699.30 $4.91 $1,019.40 $ 5.84
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $695.20 $9.63 $1,013.80 $11.44
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $695.30 $9.63 $1,013.80 $11.44
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $700.40 $3.85 $1,020.60 $ 4.57
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.51% for Investor Class, 1.15% for Class A, 2.26% for Class B and Class C
and 0.90% for Class I) multiplied by the average account value over the
period, divided by 366 and multiplied by 184 (to reflect the one-half year
period). The table above represents actual expenses incurred during the one-
half year period.
mainstayinvestments.com 7
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2008
<Table>
<Caption>
Computers & Peripherals 8.0%
Software 7.1
Energy Equipment & Services 5.6
Biotechnology 5.0
Health Care Equipment & Supplies 4.1
Communications Equipment 4.0
Specialty Retail 3.7
Aerospace & Defense 3.6
Beverages 3.6
Food & Staples Retailing 3.5
Media 3.0
Oil, Gas & Consumable Fuels 2.9
Life Sciences Tools & Services 2.8
Road & Rail 2.8
Household Products 2.6
Internet Software & Services 2.6
Semiconductors & Semiconductor
Equipment 2.6
Tobacco 2.4
Textiles, Apparel & Luxury Goods 2.2
Electronic Equipment & Instruments 1.7
Health Care Providers & Services 1.7
Independent Power Producers & Energy
Traders 1.7
Multiline Retail 1.7
Pharmaceuticals 1.7
Food Products 1.5
Hotels, Restaurants & Leisure 1.1
Machinery 1.1
Chemicals 1.0
Multi-Utilities 0.9
Diversified Financial Services 0.8
Insurance 0.3
Capital Markets 0.1
Exchange Traded Fund 0.9
Short-Term Investment 13.5
Liabilities in Excess of Cash and
Other Assets (1.8)
-----
100.0%
=====
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Microsoft Corp.
2. DIRECTV Group, Inc. (The)
3. Norfolk Southern Corp.
4. Thermo Fisher Scientific, Inc.
5. AutoZone, Inc.
6. International Business Machines Corp.
7. Wal-Mart Stores, Inc.
8. Hewlett-Packard Co.
9. Celgene Corp.
10. Oracle Corp.
</Table>
8 MainStay Capital Appreciation Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS EDMUND C. SPELMAN AND ROBERT J.
CENTRELLA, CFA, OF MACKAY SHIELDS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY CAPITAL APPRECIATION FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Capital Appreciation Fund returned -39.03%
for Investor Class shares,(1) -38.92% for Class A shares, -39.51% for Class B
shares and -39.50% for Class C shares for the 12 months ended October 31, 2008.
Over the same period, the Fund's Class I shares returned -38.64%. All share
classes underperformed the -38.55% return of the average Lipper(2) large-cap
growth fund and the -36.95% return of the Russell 1000(R) Growth Index(3) for
the 12-month reporting period. The Russell 1000(R) Growth Index is the Fund's
broad-based securities-market index. See pages 5 and 6 for Fund returns with
sales charges.
WHAT FACTORS CONTRIBUTED TO THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
Stock selection in the energy, information technology and financials sectors
detracted from the Fund's performance relative to the Russell 1000(R) Growth
Index. An underweight position in the consumer discretionary sector also had a
negative impact on the Fund's relative performance. Even so, favorable stock
selection in industrials, consumer discretionary and telecommunication services
helped the Fund's relative performance.
WHICH INDIVIDUAL SECURITIES WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S
PERFORMANCE DURING THE REPORTING PERIOD?
Even in a broadly declining market, some stocks performed better than others.
The strongest contributors to the Fund's absolute performance were freight
railroad company Norfolk Southern; biopharmaceutical companies Genentech,
Celgene and Gilead Sciences; retailers Autozone, Carmax and Wal-Mart Stores; and
athletic footwear and apparel manufacturer Nike. Despite market weakness, all of
these stocks provided positive returns for the Fund.
DURING THE REPORTING PERIOD, WHICH STOCKS DETRACTED FROM THE FUND'S PERFORMANCE?
Major detractors from the Fund's absolute performance included information
technology companies MEMC Electronics, Microsoft, Apple and NVIDIA. Specialty
metal components and products manufacturer Precision Castparts also detracted,
as did copper and gold mining company Southern Copper. Energy services companies
National Oilwell Varco, Baker-Hughes and Cameron International were all poor
performers, as was electronic-trading exchange company Intercontinental
Exchange.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES AND SALES DURING THE REPORTING
PERIOD?
The Fund established new positions in several stocks during the reporting
period. Among these were tobacco companies Altria and Philip Morris
International and consumer staples companies Colgate-Palmolive, General Mills
and Proctor & Gamble. We also added food retailer Kroger and discount retailer
Wal-Mart Stores; fast-food restaurant company McDonald's; and health care
companies Abbott Labs, Baxter International, Becton Dickinson and St. Jude
Medical. In the information technology sector, we added positions in EMC, IBM,
Intel and Research in Motion.
We eliminated the Fund's positions in retailers Abercrombie & Fitch, J.C.
Penney, Limited and Nordstrom. In the information technology sector, we sold
Applied Materials, BMC Software, Cognizant Technology Solutions and NVIDIA. In
health care, we eliminated Humana and Schering Plough, and in the materials
sector, we sold the Fund's holdings in Allegheny Technologies and Southern
Copper. We also eliminated the Fund's position in telecommunication services
provider AT&T.
HOW DID THE FUND CHANGE ITS SECTOR WEIGHTINGS DURING THE REPORTING PERIOD?
During the 12 months ended October 31, 2008, we significantly increased the
Fund's weightings in consumer staples and health care. These sectors have
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. The principal risk of
growth stocks is that investors expect growth companies to increase their
earnings at a certain rate that is generally higher than the rate expected for
nongrowth companies. If these expectations are not met, the market price of the
stock may decline significantly, even if earnings showed an absolute increase.
Growth company stocks also typically lack the dividend yield that can cushion
stock prices in market downturns.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 6 for more information about Lipper Inc.
3. See footnote on page 6 for more information on the Russell 1000(R) Growth
Index.
mainstayinvestments.com 9
relatively defensive characteristics. In other words, their revenue and earnings
trends tend to be less affected than those of other companies by shifts in the
overall economy. During the reporting period, we significantly decreased the
Fund's weighting in the energy sector.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2008, the Fund was overweight relative to the Russell 1000(R)
Growth Index in the health care, consumer discretionary and consumer staples
sectors. As of the same date, the Fund was underweight in the industrials,
financials and materials sectors.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Capital Appreciation Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 87.4%+
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 3.6%
Precision Castparts Corp. 146,200 $ 9,475,222
United Technologies Corp. 181,700 9,986,232
-------------
19,461,454
-------------
BEVERAGES 3.6%
Coca-Cola Co. (The) 197,600 8,706,256
PepsiCo, Inc. 193,400 11,025,734
-------------
19,731,990
-------------
BIOTECHNOLOGY 5.0%
V Celgene Corp. (a) 186,100 11,958,786
Genentech, Inc. (a) 98,500 8,169,590
Gilead Sciences, Inc. (a) 152,500 6,992,125
-------------
27,120,501
-------------
CAPITAL MARKETS 0.1%
Goldman Sachs Group, Inc.
(The) 9,100 841,750
-------------
CHEMICALS 1.0%
Praxair, Inc. 87,400 5,694,110
-------------
COMMUNICATIONS EQUIPMENT 4.0%
Cisco Systems, Inc. (a) 363,900 6,466,503
QUALCOMM, Inc. 225,600 8,631,456
Research In Motion, Ltd. (a) 134,600 6,787,878
-------------
21,885,837
-------------
COMPUTERS & PERIPHERALS 8.0%
Apple, Inc. (a) 96,500 10,382,435
EMC Corp. (a) 607,100 7,151,638
V Hewlett-Packard Co. 312,800 11,973,984
V International Business
Machines Corp. 155,100 14,419,647
-------------
43,927,704
-------------
DIVERSIFIED FINANCIAL SERVICES 0.8%
JPMorgan Chase & Co. 103,000 4,248,750
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 1.7%
Amphenol Corp. Class A 318,000 9,110,700
-------------
ENERGY EQUIPMENT & SERVICES 5.6%
Baker Hughes, Inc. 89,000 3,110,550
Cameron International Corp.
(a) 281,800 6,836,468
Halliburton Co. 283,500 5,610,465
National Oilwell Varco, Inc.
(a) 215,600 6,444,284
Smith International, Inc. 119,400 4,116,912
Transocean, Inc. (a) 53,400 4,396,422
-------------
30,515,101
-------------
FOOD & STAPLES RETAILING 3.5%
Kroger Co. (The) 227,500 6,247,150
V Wal-Mart Stores, Inc. 229,300 12,797,233
-------------
19,044,383
-------------
FOOD PRODUCTS 1.5%
General Mills, Inc. 118,700 8,040,738
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 4.1%
Baxter International, Inc. 104,700 6,333,303
Becton, Dickinson & Co. 89,100 6,183,540
St. Jude Medical, Inc. (a) 258,300 9,823,149
-------------
22,339,992
-------------
HEALTH CARE PROVIDERS & SERVICES 1.7%
Medco Health Solutions, Inc.
(a) 238,500 9,051,075
-------------
HOTELS, RESTAURANTS & LEISURE 1.1%
McDonald's Corp. 100,800 5,839,344
-------------
HOUSEHOLD PRODUCTS 2.6%
Colgate-Palmolive Co. 104,800 6,577,248
Energizer Holdings, Inc. (a) 41,300 2,017,918
Procter & Gamble Co. (The) 91,200 5,886,048
-------------
14,481,214
-------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.7%
NRG Energy, Inc. (a) 388,800 9,039,600
-------------
INSURANCE 0.3%
Assurant, Inc. 73,100 1,862,588
-------------
INTERNET SOFTWARE & SERVICES 2.6%
Akamai Technologies, Inc. (a) 408,400 5,872,792
Google, Inc. Class A (a) 22,900 8,229,344
-------------
14,102,136
-------------
LIFE SCIENCES TOOLS & SERVICES 2.8%
V Thermo Fisher Scientific,
Inc. (a) 370,700 15,050,420
-------------
MACHINERY 1.1%
Caterpillar, Inc. 54,600 2,084,082
Illinois Tool Works, Inc. 114,400 3,819,816
-------------
5,903,898
-------------
MEDIA 3.0%
V DIRECTV Group, Inc. (The)
(a) 744,500 16,297,105
-------------
MULTI-UTILITIES 0.9%
CenterPoint Energy, Inc. 425,800 4,905,216
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2008, excluding
short-term investment. May be subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 11
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
MULTILINE RETAIL 1.7%
Kohl's Corp. (a) 272,800 $ 9,583,464
-------------
OIL, GAS & CONSUMABLE FUELS 2.9%
Williams Cos., Inc. 406,800 8,530,596
XTO Energy, Inc. 207,375 7,455,131
-------------
15,985,727
-------------
PHARMACEUTICALS 1.7%
Abbott Laboratories 170,900 9,425,135
-------------
ROAD & RAIL 2.8%
V Norfolk Southern Corp. 257,900 15,458,526
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 2.6%
Intel Corp. 690,600 11,049,600
MEMC Electronic Materials,
Inc. (a) 175,000 3,216,500
-------------
14,266,100
-------------
SOFTWARE 7.1%
Autodesk, Inc. (a) 224,350 4,780,899
V Microsoft Corp. 984,000 21,972,720
V Oracle Corp. (a) 652,200 11,928,738
-------------
38,682,357
-------------
SPECIALTY RETAIL 3.7%
V AutoZone, Inc. (a) 115,300 14,676,537
TJX Cos., Inc. 203,800 5,453,688
-------------
20,130,225
-------------
TEXTILES, APPAREL & LUXURY GOODS 2.2%
Coach, Inc. (a) 291,200 5,998,720
NIKE, Inc. Class B 50,100 2,887,263
Polo Ralph Lauren Corp. 72,200 3,405,674
-------------
12,291,657
-------------
TOBACCO 2.4%
Altria Group, Inc. 169,000 3,243,110
Philip Morris International,
Inc. 232,200 10,093,734
-------------
13,336,844
-------------
Total Common Stocks
(Cost $564,409,886) 477,655,641
-------------
EXCHANGE TRADED FUND 0.9% (B)
- ----------------------------------------------------------------
ProShares Ultra S&P 500 147,800 4,735,512
-------------
Total Exchange Traded Fund
(Cost $4,756,257) 4,735,512
-------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT 13.5%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 13.5%
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$73,511,365 (Collateralized
by a Federal Home Loan Bank
Security with a rate of
3.351% and a maturity date
of 01/23/2009, with a
Principal Amount of
$74,985,000 and a Market
Value of $74,985,000) $73,510,752 $ 73,510,752
-------------
Total Short-Term Investment
(Cost $73,510,752) 73,510,752
-------------
Total Investments
(Cost $642,676,895) (c) 101.8% 555,901,905
Liabilities in Excess of
Cash and Other Assets (1.8) (9,738,574)
----- ------------
Net Assets 100.0% $ 546,163,331
===== ============
</Table>
<Table>
(a) Non-income producing security.
(b) Exchange Traded Fund--represents a basket
of securities that are traded on an
exchange.
(c) At October 31, 2008, cost is $642,833,488
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ --
Gross unrealized depreciation (86,931,583)
------------
Net unrealized depreciation $(86,931,583)
============
</Table>
12 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $569,166,143) $482,391,153
Repurchase agreement, at value
(identified cost $73,510,752) 73,510,752
Receivables:
Investment securities sold 4,445,323
Dividends and interest 193,899
Fund shares sold 103,037
Other assets 39,594
------------
Total assets 560,683,758
------------
LIABILITIES:
Payables:
Investment securities purchased 12,432,400
Fund shares redeemed 698,661
Transfer agent (See Note 3) 591,405
Manager (See Note 3) 308,648
Shareholder communication 206,922
NYLIFE Distributors (See Note 3) 203,479
Professional fees 52,747
Custodian 17,869
Trustees 2,231
Accrued expenses 6,065
------------
Total liabilities 14,520,427
------------
Net assets $546,163,331
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited
number of shares authorized $ 253,904
Additional paid-in capital 679,962,459
------------
680,216,363
Accumulated net realized loss on
investments (47,278,042)
Net unrealized depreciation on
investments (86,774,990)
------------
Net assets $546,163,331
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $207,374,854
============
Shares of beneficial interest
outstanding 9,356,796
============
Net asset value per share
outstanding $ 22.16
Maximum sales charge (5.50% of
offering price) 1.29
------------
Maximum offering price per share
outstanding $ 23.45
============
CLASS A
Net assets applicable to
outstanding shares $202,342,901
============
Shares of beneficial interest
outstanding 9,114,388
============
Net asset value per share
outstanding $ 22.20
Maximum sales charge (5.50% of
offering price) 1.29
------------
Maximum offering price per share
outstanding $ 23.49
============
CLASS B
Net assets applicable to
outstanding shares $132,693,025
============
Shares of beneficial interest
outstanding 6,735,333
============
Net asset value and offering price
per share outstanding $ 19.70
============
CLASS C
Net assets applicable to
outstanding shares $ 2,769,208
============
Shares of beneficial interest
outstanding 140,533
============
Net asset value and offering price
per share outstanding $ 19.71
============
CLASS I
Net assets applicable to
outstanding shares $ 983,343
============
Shares of beneficial interest
outstanding 43,353
============
Net asset value and offering price
per share outstanding $ 22.68
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 13
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 7,053,603
Interest 954,454
Income from securities
loaned--net 495,841
-------------
Total income 8,503,898
-------------
EXPENSES:
Manager (See Note 3) 5,070,618
Transfer agent--Investor Class
(See Note 3) 868,990
Transfer agent--Class A (See Note
3) 1,310,323
Transfer agent--Classes B and C
(See Note 3) 1,041,925
Transfer agent--Class I (See Note
3) 1,868
Distribution/Service--Investor
Class (See Note 3) 398,613
Distribution/Service--Class A
(See Note 3) 1,106,105
Service--Class B (See Note 3) 559,266
Service--Class C (See Note 3) 10,168
Distribution--Class B (See Note
3) 1,677,798
Distribution--Class C (See Note
3) 30,503
Shareholder communication 266,431
Professional fees 121,525
Recordkeeping (a) 86,107
Registration 67,065
Trustees 28,602
Custodian 21,381
Miscellaneous 44,763
-------------
Total expenses 12,712,051
-------------
Net investment loss (4,208,153)
-------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments (47,229,395)
Net change in unrealized
appreciation on investments (329,545,539)
-------------
Net realized and unrealized loss on
investments (376,774,934)
-------------
Net decrease in net assets
resulting from operations $(380,983,087)
=============
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
14 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
DECREASE IN NET ASSETS:
Operations:
Net investment loss $ (4,208,153) $ (5,286,395)
Net realized gain (loss)
on investments (47,229,395) 251,499,379
Net change in unrealized
appreciation on
investments (329,545,539) (62,640,510)
-------------------------------
Net increase (decrease)
in net assets resulting
from operations (380,983,087) 183,572,474
-------------------------------
Distributions to shareholders:
From net realized gain on investments:
Class A (45,539,744) --
Class B (20,891,795) --
Class C (362,052) --
Class I (97,120) --
-------------------------------
Total distributions to
shareholders (66,890,711) --
-------------------------------
Capital share transactions:
Net proceeds from sale of
shares 73,500,237 57,847,613
Net asset value of shares
issued to shareholders in
reinvestment of
distributions 65,596,808 --
Cost of shares redeemed (217,837,199) (270,047,730)
-------------------------------
Decrease in net assets
derived from capital
share transactions (78,740,154) (212,200,117)
-------------------------------
Net decrease in net
assets (526,613,952) (28,627,643)
NET ASSETS:
Beginning of year 1,072,777,283 1,101,404,926
-------------------------------
End of year $ 546,163,331 $1,072,777,283
===============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 15
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS CLASS A
-------------- -----------------------------------------------------------------
FEBRUARY 28,
2008**
THROUGH
OCTOBER 31, YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 31.36 $ 38.83 $ 32.55 $ 30.08 $ 27.12 $ 27.24
-------- -------- -------- -------- -------- --------
Net investments loss (a) (0.12) (0.05) (0.09) (0.20) (0.12) (b) (0.13)
Net realized and
unrealized gain (loss)
on investments (9.08) (14.20) 6.37 2.67 (e) 3.08 0.01
-------- -------- -------- -------- -------- --------
Total from investment
operations (9.20) (14.25) 6.28 2.47 2.96 (0.12)
-------- -------- -------- -------- -------- --------
Less distributions:
From net realized gain
on investments -- (2.38) -- -- -- --
-------- -------- -------- -------- -------- --------
Net asset value at end of
period $ 22.16 $ 22.20 $ 38.83 $ 32.55 $ 30.08 $ 27.12
======== ======== ======== ======== ======== ========
Total investment return
(c)(g) (29.30%)(f) (38.92%) 19.29% 8.21% (d)(e) 10.91% (0.44%)
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (0.61%)++ (0.16%) (0.25%) (0.63%) (0.41%)(b) (0.48%)
Net expenses 1.50% ++ 1.23% 1.24% 1.30% 1.27% 1.25%
Expenses (before
reimbursement) 1.50% ++ 1.23% 1.24% 1.31% (d) 1.27% 1.25%
Portfolio turnover rate 44% 44% 91% 23% 27% 28%
Net assets at end of
period (in 000's) $207,375 $202,343 $754,214 $701,374 $220,611 $268,199
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 35.05 $29.60 $27.56 $25.03 $25.33
------- ------ ------ ------ ------
Net investment income
(loss) (a) (0.31) (0.31) (0.39) (0.31)(b) (0.32)
Net realized and
unrealized gain (loss)
on investments (12.65) 5.76 2.43 (e) 2.84 0.02
------- ------ ------ ------ ------
Total from investment
operations (12.96) 5.45 2.04 2.53 (0.30)
------- ------ ------ ------ ------
Less distributions:
From net realized gain
on investments (2.38) -- -- -- --
------- ------ ------ ------ ------
Net asset value at end of
period $ 19.71 $35.05 $29.60 $27.56 $25.03
======= ====== ====== ====== ======
Total investment return
(c)(g) (39.50%) 18.45% 7.40% (d)(e) 10.11% (1.18%)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) (1.12%) (1.00%) (1.35%) (1.16%)(b) (1.23%)
Net expenses 2.15% 1.99% 2.05% 2.02% 2.00%
Expenses (before
reimbursement) 2.15% 1.99% 2.06% (d) 2.02% 2.00%
Portfolio turnover rate 44% 91% 23% 27% 28%
Net assets at end of
period (in 000's) $ 2,769 $5,443 $5,953 $7,120 $8,694
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment loss and the ratio of net investment loss includes $0.05 per
share and 0.18%, respectively as a result of a special one time dividend from
Microsoft Corp.
(c) Total return is calculated exclusive of sales charge and assumes the
reinvestments of dividends and distributions. Class I shares are not subject
to sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The
effect on total return was less than one-hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.08 per
share on net realized gains on investments and the effect on total investment
return was 0.11% for Class A, 0.27% for Class I, 0.72% for Class B and 0.32%
for Class C, respectively.
(f) Total return is not annualized.
(g) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
16 MainStay Capital Appreciation Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- ------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
- ------------------------------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 35.05 $ 29.60 $ 27.56 $ 25.03 $ 25.33
-------- -------- -------- -------- ----------
(0.31) (0.31) (0.38) (0.31) (b) (0.32)
(12.66) 5.76 2.42 (e) 2.84 0.02
-------- -------- -------- -------- ----------
(12.97) 5.45 2.04 2.53 (0.30)
-------- -------- -------- -------- ----------
(2.38) -- -- -- --
-------- -------- -------- -------- ----------
$ 19.70 $ 35.05 $ 29.60 $ 27.56 $ 25.03
======== ======== ======== ======== ==========
(39.51%) 18.41% 7.40% (d)(e) 10.11% (1.18%)
(1.11%) (0.99%) (1.31%) (1.16%)(b) (1.23%)
2.14% 1.99% 2.05% 2.02% 2.00%
2.14% 1.99% 2.06% (d) 2.02% 2.00%
44% 91% 23% 27% 28%
$132,693 $311,590 $394,077 $991,328 $1,134,299
</Table>
<Table>
<Caption>
CLASS I
- ---------------------------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
- ---------------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 39.46 $32.88 $30.21 $27.15 $28.48
------- ------ ------ ------ ------
0.07 0.03 0.14 (0.06) (b) (0.11)
(14.47) 6.55 2.53 (e) 3.12 (1.22)
------- ------ ------ ------ ------
(14.40) 6.58 2.67 3.06 (1.33)
------- ------ ------ ------ ------
(2.38) -- -- -- --
------- ------ ------ ------ ------
$ 22.68 $39.46 $32.88 $30.21 $27.15
======= ====== ====== ====== ======
(38.64%) 20.01% 8.84%(d)(e) 11.27% (4.67%)(f)
0.21% 0.09% 0.44% (0.18%)(b) (0.11%)++
0.79% 0.65% 0.60% 1.04% 0.88% ++
0.79% 0.65% 0.61%(d) 1.04% 0.88% ++
44% 91% 23% 27% 28%
$ 983 $1,531 $ 1 $ 1 $ 1
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 17
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Capital Appreciation Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Class I shares commenced on January 2, 2004.
Investor Class shares commenced on February 28, 2008. Investor Class and Class A
shares are offered at net asset value per share plus an initial sales charge. No
sales charge applies on investments of $1 million or more (and certain other
qualified purchases) in Investor Class and Class A shares, but a contingent
deferred sales charge is imposed on certain redemptions of such shares within
one year of the date of purchase. Class B shares and Class C shares are offered
without an initial sales charge, although a declining contingent deferred sales
charge may be imposed on redemptions made within six years of purchase of Class
B shares and a 1% contingent deferred sales charge may be imposed on redemptions
made within one year of purchase of Class C shares. Class I shares are not
subject to a sales charge. Depending upon eligibility, Class B shares convert to
either Investor Class or Class A shares eight years after the date they were
purchased. Additionally, depending upon eligibility, Investor Class shares may
convert to Class A shares and Class A shares may convert to Investor Class
shares. The five classes of shares have the same voting (except for issues that
relate solely to one class), dividend, liquidation and other rights and bear the
same conditions except that Class B and Class C shares are subject to higher
distribution fee rates than Investor Class and Class A shares under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are
not subject to a distribution or service fee.
The Fund's investment objective is to seek long-term growth of capital. Dividend
income, if any, is an incidental consideration.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Investments
in other mutual funds are valued at their net asset values as of the close of
the New York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor, as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund did not hold
securities that were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as
18 MainStay Capital Appreciation Fund
defined in Note 3(A), determined that the adoption of the Interpretation did not
have an impact on the Fund's financial statements upon adoption. The Manager
continually reviews the Fund's tax positions and such conclusions under the
Interpretation based on factors, including, but not limited to, ongoing analyses
of tax laws and regulations and interpretations thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(I) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred.
mainstayinvestments.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Based on experience, management is of the view that the risk of loss in
connection with these potential indemnification obligations is remote. However,
there can be no assurance that material liabilities related to such obligations
will not arise in the future, which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement")
between NYLIM and the Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual percentage rate of the
Fund's average daily net assets as follows: 0.72% on assets up to $200 million,
0.65% on assets from $200 million to $500 million and 0.50% on assets in excess
of $500 million. For the year ended October 31, 2008, the Manager earned fees
from the Fund in the amount of $5,070,618.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
these services provided to the Fund by the Manager amounted to $86,107 for the
period from November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Investor Class and Class A Plans, the Distributor receives a
monthly distribution fee from the Fund at an annual rate of 0.25% of the average
daily net assets of the Fund's Investor Class and Class A shares, which is an
expense of the Investor Class and Class A shares of the Fund for distribution or
service activities as designated by the Distributor. Pursuant to the Class B and
Class C Plans, the Fund pays the Distributor a monthly distribution fee, which
is an expense of the Class B and Class C shares of the Fund, at the annual rate
of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Plans provide that the Class B and Class C shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B and Class C shares of the Fund. Class I shares are not
subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were
$23,970 and $35,145, respectively for the year ended October 31, 2008. The Fund
was also advised that the Distributor retained contingent deferred sales charges
on redemptions Class A, Class B and Class C shares of $4,831, $329,391, and
$1,647, respectively, for the year ended October 31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it
20 MainStay Capital Appreciation Fund
performs certain services for which NYLIM Service is responsible. Transfer agent
expenses incurred by the Fund for the year ended October 31, 2008 amounted to
$3,223,106.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $213,287 0.1%
- ------------------------------------------------
Class C 59 0.0++
- ------------------------------------------------
Class I 850 0.1
- ------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $30,040.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(47,121,449) $-- $(86,931,583) $(134,053,032)
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sales deferrals.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income and accumulated net
realized gain on investments arising from permanent differences; net assets at
October 31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED NET
UNDISTRIBUTED NET REALIZED
INVESTMENT INCOME GAIN (LOSS) ON ADDITIONAL
(LOSS) INVESTMENTS PAID-IN CAPITAL
$4,208,153 $4,116 $(4,212,269)
------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to net operating loss.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $47,121,449 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2016 $47,121
- ---------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Long-Term Capital Gains $66,890,711 $--
- ----------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $345,957 and $563,214, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 1,007,705 $ 31,627,662
Shares redeemed (1,020,782) (29,895,883)
-------------------------
Net increase (decrease) in
shares outstanding before
conversion (13,077) 1,731,779
Shares converted into
Investor
Class (See Note 1) 9,646,272 285,397,083
Shares converted from
Investor Class (See Note
1) (276,399) (7,744,678)
-------------------------
Net increase 9,356,796 $279,384,184
=========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 720,023 $ 22,321,645
Shares issued to
shareholders in
reinvestment of
distributions 1,271,597 44,620,346
Shares redeemed (4,371,880) (135,220,213)
---------------------------
Net decrease in shares
outstanding before
conversion (2,380,260) (68,278,222)
Shares converted into Class
A (See Note 1) 1,186,618 36,717,568
Shares converted from Class
A (See Note 1) (9,115,846) (269,282,227)
---------------------------
Net decrease (10,309,488) $(300,842,881)
===========================
Year ended October 31,
2007:
Shares sold 952,726 $ 33,359,646
Shares redeemed (5,029,733) (174,626,010)
---------------------------
Net decrease in shares
outstanding before
conversion (4,077,007) (141,266,364)
Shares converted from Class
B (See Note 1) 1,953,467 68,546,841
---------------------------
Net decrease (2,123,540) $ (72,719,523)
===========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 618,992 $ 16,956,722
Shares issued to
shareholders in
reinvestment of
distributions 654,665 20,569,554
Shares redeemed (1,813,698) (49,369,969)
---------------------------
Net decrease in shares
outstanding before
conversion (540,041) (11,843,693)
Shares converted from Class
B (See Note 1) (1,614,407) (45,087,746)
---------------------------
Net decrease (2,154,448) $ (56,931,439)
===========================
Year ended October 31,
2007:
Shares sold 858,897 $ 22,356,105
Shares redeemed (3,126,053) (93,235,807)
---------------------------
Net decrease in shares
outstanding before
conversion (2,267,156) (70,879,702)
Shares reacquired upon
conversion into Class A
(See Note 1) (2,156,653) (68,546,841)
---------------------------
Net decrease (4,423,809) $(139,426,543)
===========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 21,238 $ 564,603
Shares issued to
shareholders in
reinvestment of
distributions 9,857 309,788
Shares redeemed (45,824) (1,271,004)
---------------------------
Net decrease (14,729) $ (396,613)
===========================
Year ended October 31,
2007:
Shares sold 19,744 $ 625,442
Shares redeemed (65,592) (2,049,585)
---------------------------
Net decrease (45,848) $ (1,424,143)
===========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 67,220 $ 2,029,605
Shares issued to
shareholders in
reinvestment of
distributions 2,718 97,120
Shares redeemed (65,383) (2,080,130)
---------------------------
Net increase 4,555 $ 46,595
===========================
Year ended October 31,
2007:
Shares sold 42,222 $ 1,506,420
Shares redeemed (3,459) (136,328)
---------------------------
Net increase 38,763 $ 1,370,092
===========================
</Table>
NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value
22 MainStay Capital Appreciation Fund
measurements already required or permitted by existing standards and is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The changes to
current generally accepted accounting principles from the application of this
Statement relate to the definition of fair value, the methods used to measure
fair value, and the expanded disclosures about fair value measurements. As of
October 31, 2008, Management does not believe the adoption of SFAS No. 157,
effective for the Fund for the fiscal year beginning November 1, 2008, will
impact the amounts reported in the Fund's financial statements. However,
additional disclosures may be required about the inputs used to develop the
measurements and the effect of certain measurements reported in the financial
statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
mainstayinvestments.com 23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Capital Appreciation Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Capital Appreciation Fund of The MainStay Funds as of October 31, 2008,
the results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended,
in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
24 MainStay Capital Appreciation Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Capital Appreciation Fund (the "Fund"), which was
comprised solely of Independent Trustees, unanimously approved the Management
and Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider
mainstayinvestments.com 25
of shareholder services, which has been recognized by independent third-parties
on numerous occasions. The Board noted the role that the MainStay Family of
Funds historically has played in serving the investment needs of New York Life
Insurance Company policyholders, who often maintain smaller account balances
than other retail investors. The Board acknowledged that it had approved NYLIM's
recommendation to create a new "Investor Class" of shares designed principally
to address the higher shareholder-servicing costs typically associated with
smaller shareholder accounts. The Board considered the experience of senior
personnel at NYLIM providing management and administrative services to the Fund,
as well as NYLIM's reputation and financial condition. The Board also reviewed
NYLIM's willingness to invest in personnel designed to benefit the Fund, and
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and MacKay
Shields' method for compensating portfolio managers. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio managers and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position
26 MainStay Capital Appreciation Fund
is important in order for NYLIM to continue to provide high-quality ongoing
services to the Fund and its shareholders. The Board noted, for example,
increased costs borne by NYLIM and its affiliates due to new and ongoing
regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
mainstayinvestments.com 27
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
28 MainStay Capital Appreciation Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $66,890,711
In January 2009, shareholders will receive an IRS From 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
mainstayinvestments.com 29
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
30 MainStay Capital Appreciation Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 31
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
32 MainStay Capital Appreciation Fund
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 33
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO14510 (RECYCLE LOGO) MS308-08 MSCA11-12/08
04
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CONVERTIBLE FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
CONVERTIBLE FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 14
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 20
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 27
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 28
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 32
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 32
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 32
- ---------------------------------------------
TRUSTEES AND OFFICERS 33
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (38.64%) (1.16%) 3.55%
Excluding sales charges (35.07) (0.03) 4.14
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (38.57%) (1.14%) 3.56%
Excluding sales charges (35.00) (0.01) 4.15
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (38.51%) (1.13%) 3.37%
Excluding sales charges (35.55) (0.77) 3.37
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A Shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class
C shares are sold with no initial sales charge, are subject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 1.00%. Performance figures reflect certain fee waivers and/or expense
limitations, without which total returns may have been lower. These fee
waivers and/or expense limitations are contractual and may be modified or
terminated only with the approval of the Board of Trustees. The Manager may
recoup the amount of any management fee waivers or expense reimbursements
from the Fund pursuant to the contract if such action does not cause the Fund
to exceed existing expense limitations and the recoupment is made
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES(3)--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (36.10%) (0.77%) 3.37%
Excluding sales charges (35.51) (0.77) 3.37
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- -----------------------------------------------------------------------------------
Merrill Lynch All Convertible Securities Index(4) (38.50%) (2.39%) 2.73%
Average Lipper convertible securities fund(5) (36.72) (1.56) 2.80
</Table>
within three years after the year in which the Manager incurred the expense.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A shares through February
27, 2008, adjusted for differences in certain contractual fees and expenses.
Unadjusted, the performance shown for Investor Class shares might have been
lower.
3. Performance figures for Class C shares, first offered on September 1, 1998,
include the historical performance of Class B shares through August 31, 1998.
4. The Merrill Lynch All Convertible Securities Index is an unmanaged weighted
index of domestic corporate convertible securities. To be included in the
Index, bonds and preferred stocks must be convertible only to common stock
and have a market value or original par value of at least $50 million.
Results assume reinvestment of all income and capital gains. The Merrill
Lynch All Convertible Securities Index is considered to be the Fund's broad-
based securities-market index for comparison purposes. An investment cannot
be made directly in an index.
5. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND GRAPHS
AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Convertible Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY CONVERTIBLE FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $676.20 $5.39 $1,018.70 $ 6.50
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $676.10 $4.59 $1,019.70 $ 5.53
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $672.70 $8.54 $1,014.90 $10.28
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $673.60 $8.54 $1,014.90 $10.28
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.28% for Investor Class, 1.09% for Class A and 2.03% for Class B and Class
C) multiplied by the average account value over the period, divided by 366
and multiplied by 184 (to reflect the one-half year period). The table above
represents actual expenses incurred during the one-half year period and does
not take into account the Fund's written expense limitation agreement.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2008
(PORTFOLIO COMPOSITION PIE CHART)
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS OR ISSUERS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM
INVESTMENT)
<Table>
1. Transocean, Inc., Series C, 1.50%, due 12/15/37
2. Bank of America Corp. Series L, 7.25%
3. EMC Corp., 1.75% due 12/1/11
4. Citigroup, Inc., 6.50%-8.75%
5. Medtronic, Inc., 1.625% due 4/15/13
6. Teva Pharmaceutical Finance LLC Series A, 0.50%
due 2/1/24
7. Nasdaq Stock Market, Inc. (The), 2.50% due 8/15/13
8. Waste Connections, Inc., 3.75% due 4/1/26
9. Covanta Holding Corp., 1.00% due 2/1/27
10. Schlumberger, Ltd., Series B, 2.125% due 6/1/23
</Table>
8 MainStay Convertible Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGER EDWARD SILVERSTEIN, CFA, OF MACKAY
SHIELDS LLC,
THE FUND'S SUBADVISOR.
HOW DID MAINSTAY CONVERTIBLE FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Convertible Fund returned -35.07% for
Investor Class shares,(1) -35.00% for Class A shares, -35.55% for Class B shares
and -35.51% for Class C shares for the 12 months ended October 31, 2008. All
share classes outperformed the -36.72% return of the average Lipper(2)
convertible securities fund and the -38.50% return of the Merrill Lynch All
Convertible Securities Index(3) for the 12 months ended October 31, 2008. The
Merrill Lynch All Convertible Securities Index is the Fund's broad-based
securities-market index. See pages 5 and 6 for Fund returns with sales charges.
WHAT KEY FACTORS AFFECTED THE MARKET FOR CONVERTIBLE SECURITIES DURING THE
REPORTING PERIOD?
The convertible market's weak performance was primarily the result of a
declining underlying equity market. Convertible bonds also suffered when credit
spreads(4) widened on concerns about the direction of the economy. These
concerns led investors to sell securities that they perceived to be risky.
Convertible-bond prices were further hurt by forced selling of bonds, as hedge
funds were required to dispose of assets to meet investor redemption requests.
These forced sales resulted in declining convertible bond prices, even if the
company's share price was flat or rising.
DURING THE REPORTING PERIOD, WHICH SECTORS OF THE FUND WERE STRONG PERFORMERS
AND WHICH SECTORS WERE WEAK?
While no sector of the convertible market provided positive absolute
performance, some sectors and securities performed better than others. The best-
performing Fund sector in absolute terms was energy. Although energy and
commodity-related investments performed poorly in the final two months of the
reporting period, we sold several of the Fund's energy holdings earlier in the
reporting period at favorable prices. Consumer nondurables and health care were
also strong-performing sectors for the Fund in absolute terms during the
reporting period.
The sectors that detracted most from the Fund's absolute performance included
financials, aviation and automobiles.
WHICH INDIVIDUAL FUND HOLDINGS WERE THE STRONGEST PERFORMERS DURING THE
REPORTING PERIOD?
The Fund's single-best performer during the reporting period was a common stock
holding in oil exploration company Hess. The stock provided a positive return
for the reporting period. The second-best performer was also from the energy
sector--a convertible-bond position in drilling-rig owner Pride International.
In consumer nondurables, the Fund's position in the convertible bonds of Church
& Dwight advanced, and General Mills did relatively well as investors sought out
sectors that were viewed as less likely to be affected by an economic downturn.
For much the same reason, the Fund's convertible bond positions in Teva
Pharmaceutical, Johnson & Johnson and
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. Convertible securities
tend to be subordinate to other debt securities issued by the same company.
Also, issuers of convertible securities may not be as financially strong as
issuers of securities with higher credit ratings and may be more vulnerable to
changes in the economy. If an issuer stops making interest payments, principal
payments or both on its convertible securities, these securities may become
worthless and the Fund could lose its entire investment in them. High-yield
securities ("junk bonds") are generally considered speculative because they
present a greater risk of loss than higher-quality debt securities and may be
subject to greater price volatility. Foreign securities may be subject to
greater risks than U.S. investments, including currency fluctuations, less-
liquid trading markets, greater price volatility, political and economic
instability, less publicly available information, and changes in tax or currency
laws or monetary policy. These risks are likely to be greater in emerging
markets than in developed markets. The Fund may experience a portfolio turnover
rate of more than 100% and may generate taxable short-term capital gains. The
values of debt securities fluctuate depending on various factors including
interest rates, issuer creditworthiness, market conditions and maturities.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 6 for more information about Lipper Inc.
3. See footnote on page 6 for more information on the Merrill Lynch All
Convertible Securities Index.
4. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The terms may also refer to the difference in yield between two specific
securities or types of securities at a given time.
mainstayinvestments.com 9
Medtronic held up better than investments in many other sectors.
WHICH OF THE FUND'S HOLDINGS WERE WEAK PERFORMERS DURING THE REPORTING PERIOD?
A convertible bond position in Triumph Group, a manufacturer of aircraft
components, was the Fund's single-worst performer during the reporting period.
Triumph Group's convertible bonds declined as its customers--the U.S.
airlines--faced pressure from rising fuel prices and were forced to remove many
older planes from service. These developments could have a negative impact on
Triumph's sales and earnings.
In the financials sector, the Fund's underweight position relative to the
Merrill Lynch All Convertible Securities Index helped mitigate losses. Even so,
the Fund's positions in convertible preferred shares of American International
Group (AIG), Citigroup, Bank of America and Lehman Brothers Holdings all
detracted from the Fund's performance. The securities traded down on reports of
the companies' losses from investments in mortgage-related securities, the AIG
bailout and the Lehman Brothers bankruptcy.
A position in General Motors' convertible preferred shares performed poorly when
investors became increasingly concerned that an economic slowdown would affect
new-vehicle sales. General Motors, which relies on light-truck and SUV sales for
the bulk of its profits, was particularly hard-hit when gasoline prices exceeded
$4 a gallon during the reporting period and buyers turned to more fuel-efficient
vehicles.
The Fund's convertible bond position in computer manufacturer EMC also detracted
from the Fund's performance. EMC convertible bonds declined sharply during the
reporting period when VMWare, an EMC subsidiary, reported disappointing sales
and earnings and its CEO unexpectedly resigned from the company.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES AND SALES DURING THE REPORTING
PERIOD?
We initiated positions in convertible preferred shares of Citigroup and Bank of
America. Both companies issued convertible preferred shares earlier in 2008 to
help offset subprime investment losses. The convertible preferred shares pay a
substantial dividend, have what we believed to be reasonable downside
protection, and have the ability to participate in the upside potential of the
underlying common stock should the companies' financial problems ease.
We sold two-thirds of the Fund's common stock position in Costco Wholesale as
the stock reached our price target. We also sold the Fund's position in the
convertible bonds of Walt Disney as the bonds approached the date when the
company could call, or prematurely retire, the bonds. We felt that a call would
depress the price of the bonds, and our assessment proved correct after we sold
the Fund's position.
WERE THERE ANY CHANGES IN THE FUND'S SECTOR WEIGHTINGS DURING THE REPORTING
PERIOD?
The Fund slightly decreased its weighting in the energy sector because of market
depreciation and sales of positions in Pride International, Hess and
Halliburton. The Fund increased its weighting among financial stocks, as we
participated in several large offerings from Citigroup, Bank of America and
Lehman Brothers Holdings.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2008, the Fund was significantly overweight relative to the
Merrill Lynch All Convertible Securities Index in the energy sector and slightly
overweight in health care. On the same date, the Fund was underweight relative
to the benchmark in financials and utilities.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
10 MainStay Convertible Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE SECURITIES 86.2%+
CONVERTIBLE BONDS 70.6%
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 3.0%
L-3 Communications Corp.
3.00%, due 8/1/35 (a) $ 6,455,000 $ 6,196,800
3.00%, due 8/1/35 516,000 495,360
Triumph Group, Inc.
2.625%, due 10/1/26 5,058,000 4,703,940
-------------
11,396,100
-------------
AIRLINES 1.8%
AMR Corp.
4.50%, due 2/15/24 7,071,000 6,699,773
-------------
AUTO MANUFACTURERS 0.3%
Ford Motor Co.
4.25%, due 12/15/36 4,164,000 1,176,330
-------------
AUTO PARTS & EQUIPMENT 0.2%
ArvinMeritor, Inc.
4.00%, due 2/15/27
(zero coupon), beginning
2/15/19 (a) 1,732,000 653,830
4.00%, due 2/15/27 139,000 52,473
-------------
706,303
-------------
BIOTECHNOLOGY 3.9%
Amgen, Inc.
0.125%, due 2/1/11 (a) 4,590,000 4,268,700
0.125%, due 2/1/11 6,067,000 5,642,310
Gilead Sciences, Inc.
0.625%, due 5/1/13 3,854,000 4,803,047
-------------
14,714,057
-------------
COAL 0.8%
Peabody Energy Corp.
4.75%, due 12/15/66 4,128,000 3,059,880
-------------
COMMERCIAL SERVICES 0.7%
Alliance Data Systems Corp.
1.75%, due 8/1/13 (a) 3,721,000 2,781,448
-------------
COMPUTERS 5.6%
CACI International, Inc.
2.125%, due 5/1/14 4,460,000 3,757,550
V EMC Corp.
1.75%, due 12/1/11 (a) 7,215,000 6,908,362
1.75%, due 12/1/11 8,288,000 7,935,760
NetApp, Inc.
1.75%, due 6/1/13 (a) 3,868,000 2,567,385
-------------
21,169,057
-------------
DIVERSIFIED FINANCIAL SERVICES 4.8%
Merrill Lynch & Co., Inc.
(zero coupon), due 3/13/32 5,117,000 5,251,577
V Nasdaq Stock Market, Inc.
(The)
2.50%, due 8/15/13 (a) 17,354,000 13,015,500
-------------
18,267,077
-------------
ELECTRONICS 4.2%
Fisher Scientific
International, Inc.
3.25%, due 3/1/24 9,643,000 11,053,289
Itron, Inc.
2.50%, due 8/1/26 3,855,000 3,199,650
TTM Technologies, Inc.
3.25%, due 5/15/15 2,676,000 1,565,460
-------------
15,818,399
-------------
ENERGY--ALTERNATE SOURCES 3.3%
V Covanta Holding Corp.
1.00%, due 2/1/27 15,110,000 12,560,187
-------------
ENVIRONMENTAL CONTROLS 3.4%
V Waste Connections, Inc.
3.75%, due 4/1/26 (a) 2,510,000 2,591,575
3.75%, due 4/1/26 9,955,000 10,278,537
-------------
12,870,112
-------------
FOOD 2.1%
Spartan Stores, Inc.
3.375%, due 5/15/27 (a) 6,211,000 5,139,603
Tyson Foods, Inc.
3.25%, due 10/15/13 3,745,000 2,907,056
-------------
8,046,659
-------------
HEALTH CARE--PRODUCTS 4.7%
Hologic, Inc.
2.00%, due 12/15/37
(zero coupon), beginning
12/15/13 7,422,000 3,877,995
V Medtronic, Inc.
1.625%, due 4/15/13 (a) 2,230,000 1,934,525
1.625%, due 4/15/13 13,741,000 11,920,317
-------------
17,732,837
-------------
INSURANCE 1.4%
Prudential Financial, Inc.
1.189%, due 12/15/37 (b) 5,852,000 5,332,928
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings or issuers, as of October 31, 2008,
excluding short-term investment. May be subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
INTERNET 0.0%++
At Home Corp.
4.75%, due 12/19/08
(c)(d)(e)(f) $ 9,147,056 $ 915
-------------
OIL & GAS 8.2%
Chesapeake Energy Corp.
2.50%, due 5/15/37 18,115,000 11,435,094
St. Mary Land & Exploration
Co.
3.50%, due 4/1/27 5,229,000 3,614,546
V Transocean, Inc.
Series C
1.50%, due 12/15/37 21,005,000 16,095,081
-------------
31,144,721
-------------
OIL & GAS SERVICES 6.0%
Cameron International Corp.
2.50%, due 6/15/26 10,866,000 10,404,195
V Schlumberger, Ltd.
Series B
2.125%, due 6/1/23 9,134,000 12,079,715
-------------
22,483,910
-------------
PHARMACEUTICALS 6.6%
Teva Pharmaceutical Finance
Co. B.V.
Series D
1.75%, due 2/1/26 7,251,000 7,604,486
V Teva Pharmaceutical
Finance LLC
Series A
0.50%, due 2/1/24 11,730,000 13,504,163
Watson Pharmaceuticals, Inc.
1.75%, due 3/15/23 4,127,000 3,647,236
-------------
24,755,885
-------------
SEMICONDUCTORS 1.7%
Intel Corp.
2.95%, due 12/15/35 5,690,000 4,089,688
ON Semiconductor Corp.
2.625%, due 12/15/26 3,666,000 2,254,590
-------------
6,344,278
-------------
SOFTWARE 2.3%
Sybase, Inc.
1.75%, due 2/22/25 7,551,000 8,532,630
-------------
TELECOMMUNICATIONS 5.6%
Anixter International, Inc.
1.00%, due 2/15/13 8,293,000 5,514,845
Comtech Telecommunications
Corp.
2.00%, due 2/1/24
(zero coupon), beginning
2/1/11 2,817,000 4,355,786
NII Holdings, Inc.
3.125%, due 6/15/12 2,007,000 1,113,885
SBA Communications Corp.
1.875%, due 5/1/13 (a) 15,410,000 10,132,075
-------------
21,116,591
-------------
Total Convertible Bonds
(Cost $352,817,283) 266,710,077
-------------
<Caption>
SHARES
CONVERTIBLE PREFERRED STOCKS 15.6%
- ----------------------------------------------------------------
BANKS 5.4%
V Bank of America Corp.
7.25% Series L 22,908 16,035,600
Wachovia Corp.
7.50% Series L 6,650 4,422,250
-------------
20,457,850
-------------
CHEMICALS 0.9%
Celanese Corp.
4.25% 168,710 3,221,315
-------------
DIVERSIFIED FINANCIAL SERVICES 3.8%
V Citigroup, Inc.
6.50% Series T 420,557 13,546,141
8.75% Series C 45,555 973,510
-------------
14,519,651
-------------
INSURANCE 0.8%
American International Group,
Inc.
8.50% 98,800 439,660
MetLife, Inc.
6.38% 275,900 2,392,053
-------------
2,831,713
-------------
INVESTMENT COMPANY 0.7%
Vale Capital, Ltd.
5.50% Series RIO 95,500 2,697,875
-------------
MINING 0.5%
Freeport-McMoRan Copper &
Gold, Inc.
6.75% 40,375 1,969,493
-------------
PHARMACEUTICALS 1.6%
Schering-Plough Corp.
6.00% 43,300 5,835,974
-------------
</Table>
12 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
TELECOMMUNICATIONS 1.9%
Crown Castle International
Corp.
6.25% 194,000 $ 7,323,500
-------------
Total Convertible Preferred
Stocks
(Cost $99,734,341) 58,857,371
-------------
Total Convertible Securities
(Cost $452,551,624) 325,567,448
-------------
COMMON STOCKS 8.7%
- ----------------------------------------------------------------
ENGINEERING & CONSTRUCTION 0.4%
McDermott International,
Inc.(g) 84,100 1,440,633
-------------
HEALTH CARE--PRODUCTS 2.7%
Boston Scientific Corp. (g) 284,600 2,569,938
Johnson & Johnson 122,000 7,483,480
-------------
10,053,418
-------------
OIL & GAS 0.6%
Frontier Oil Corp. 187,700 2,479,517
-------------
OIL & GAS SERVICES 1.9%
Baker Hughes, Inc. 54,500 1,904,775
Gulf Island Fabrication,
Inc. 16,900 333,099
Halliburton Co. 195,626 3,871,438
ION Geophysical Corp. (g) 192,000 1,259,520
-------------
7,368,832
-------------
RETAIL 1.2%
Costco Wholesale Corp. 77,203 4,401,343
-------------
SOFTWARE 1.1%
Microsoft Corp. 191,600 4,278,428
-------------
TRANSPORTATION 0.8%
Tidewater, Inc. 65,800 2,869,538
-------------
Total Common Stocks
(Cost $50,025,658) 32,891,709
-------------
SHORT-TERM INVESTMENT 4.5%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 4.5%
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$17,184,829 (Collateralized
by a Federal Home Loan Bank
Security with a rate of
3.625% and a maturity date
of 7/1/11, with a
Principal Amount of
$17,250,000 and a Market
Value of $17,530,140) $17,184,686 $ 17,184,686
-------------
Total Short-Term Investment
(Cost $17,184,686) 17,184,686
-------------
Total Investments
(Cost $519,761,968) (h) 99.4% 375,643,843
Cash and Other Assets,
Less Liabilities 0.6 2,392,519
----- ------------
Net Assets 100.0% $ 378,036,362
===== ============
</Table>
<Table>
<Caption>
++ Less than one-tenth of a percent.
(a) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(b) Floating rate. Rate shown is the rate in
effect at October 31, 2008.
(c) Issue in default.
(d) Fair valued security. The total market
value of this security at October 31,
2008 is $915, which represents less than
one-tenth of a percent of the Fund's net
assets.
(e) Illiquid security. The total market
value of this security at October 31,
2008 is $915, which represents less than
one-tenth of a percent of the Fund's net
assets.
(f) Restricted security.
(g) Non-income producing security.
(h) At October 31, 2008, cost is $521,350,911
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 789,314
Gross unrealized depreciation (146,496,382)
-------------
Net unrealized depreciation $(145,707,068)
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $519,761,968) $ 375,643,843
Receivables:
Dividends and interest 2,715,899
Fund shares sold 892,783
Other assets 41,726
-------------
Total assets 379,294,251
-------------
LIABILITIES:
Payables:
Fund shares redeemed 526,174
Transfer agent (See Note 3) 237,032
Manager (See Note 3) 166,072
NYLIFE Distributors (See Note 3) 148,290
Shareholder communication 112,499
Professional fees 47,620
Custodian 13,914
Trustees 1,578
Accrued expenses 4,710
-------------
Total liabilities 1,257,889
-------------
Net assets $ 378,036,362
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 371,884
Additional paid-in capital 528,953,952
-------------
529,325,836
Accumulated distributions in excess
net investment income (158,259)
Accumulated net realized loss on
investments (7,013,090)
Net unrealized depreciation on
investments (144,118,125)
-------------
Net assets $ 378,036,362
=============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 61,439,484
=============
Shares of beneficial interest
outstanding 6,048,507
=============
Net asset value per share
outstanding $ 10.16
Maximum sales charge (5.50% of
offering price) 0.59
-------------
Maximum offering price per share
outstanding $ 10.75
=============
CLASS A
Net assets applicable to
outstanding shares $ 217,028,449
=============
Shares of beneficial interest
outstanding 21,359,799
=============
Net asset value per share
outstanding $ 10.16
Maximum sales charge (5.50% of
offering price) 0.59
-------------
Maximum offering price per share
outstanding $ 10.75
=============
CLASS B
Net assets applicable to
outstanding shares $ 59,070,503
=============
Shares of beneficial interest
outstanding 5,800,462
=============
Net asset value and offering price
per share outstanding $ 10.18
=============
CLASS C
Net assets applicable to
outstanding shares $ 40,497,926
=============
Shares of beneficial interest
outstanding 3,979,665
=============
Net asset value and offering price
per share outstanding $ 10.18
=============
</Table>
14 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 7,125,411
Dividends 6,807,813
Income from securities
loaned--net 172,463
-------------
Total income 14,105,687
-------------
EXPENSES:
Manager (See Note 3) 3,103,991
Transfer agent--Investor Class
(See Note 3) 191,671
Transfer agent--Class A (See Note
3) 671,245
Transfer agent--Classes B and C
(See Note 3) 482,262
Distribution/Service--Investor
Class (See Note 3) 119,456
Distribution/Service--Class A
(See Note 3) 818,559
Service--Class B (See Note 3) 240,973
Service--Class C (See Note 3) 111,992
Distribution--Class B (See Note
3) 722,918
Distribution--Class C (See Note
3) 335,975
Shareholder communication 120,105
Professional fees 99,998
Recordkeeping (a) 59,433
Registration 60,174
Trustees 18,660
Custodian 16,983
Miscellaneous 28,917
-------------
Total expenses before waiver 7,203,312
Expense waiver from Manager (See
Note 3) (89,396)
-------------
Net expenses 7,113,916
-------------
Net investment income 6,991,771
-------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments (6,280,597)
Net change in unrealized
appreciation on investments (208,809,560)
-------------
Net realized and unrealized loss on
investments (215,090,157)
-------------
Net decrease in net assets
resulting from operations $(208,098,386)
=============
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 6,991,771 $ 4,093,198
Net realized gain (loss) on
investments (6,280,597) 64,563,335
Net change in unrealized
appreciation on investments (208,809,560) 21,110,467
----------------------------
Net increase (decrease) in
net assets resulting from
operations (208,098,386) 89,767,000
----------------------------
Dividends and distributions to shareholders:
From net investment income:
Investor Class (659,697) --
Class A (5,407,854) (5,208,343)
Class B (712,437) (901,848)
Class C (353,154) (189,892)
----------------------------
(7,133,142) (6,300,083)
----------------------------
From net realized gain on investments:
Class A (28,302,421) --
Class B (8,663,095) --
Class C (2,495,346) --
----------------------------
(39,460,862) --
----------------------------
Total dividends and
distributions to
shareholders (46,594,004) (6,300,083)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares 195,945,346 47,029,928
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 42,258,636 5,739,980
Cost of shares redeemed (132,717,575) (95,239,290)
----------------------------
Increase (decrease) in
net assets derived from
capital share
transactions 105,486,407 (42,469,382)
----------------------------
Net increase (decrease)
in net assets (149,205,983) 40,997,535
NET ASSETS:
Beginning of year 527,242,345 486,244,810
----------------------------
End of year $ 378,036,362 $527,242,345
============================
Accumulated distributions in
excess of net investment
income at end of year $ (158,259) $ (299,494)
============================
</Table>
16 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS CLASS A
-------------- ------------------------------------------------------
FEBRUARY 28,
2008**
THROUGH
OCTOBER 31, YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 15.00 $ 17.18 $ 14.51 $ 13.28 $ 12.10 $ 11.78
------- -------- -------- -------- ------- -------
Net investment income 0.16 (a) 0.23 (a) 0.16 (a) 0.16 (a) 0.18 (b) 0.15
Net realized and
unrealized gain
(loss) on
investments (4.85) (5.74) 2.74 1.23 1.17 0.34
------- -------- -------- -------- ------- -------
Total from investment
operations (4.69) (5.51) 2.90 1.39 1.35 0.49
------- -------- -------- -------- ------- -------
Less dividends and
distributions:
From net investment
income (0.15) (0.23) (0.23) (0.16) (0.17) (0.17)
From net realized
gain on
investments -- (1.28) -- -- -- --
------- -------- -------- -------- ------- -------
Total dividends and
distributions (0.15) (1.51) (0.23) (0.16) (0.17) (0.17)
------- -------- -------- -------- ------- -------
Net asset value at end
of period $ 10.16 $ 10.16 $ 17.18 $ 14.51 $ 13.28 $ 12.10
======= ======== ======== ======== ======= =======
Total investment
return (d)(e) (31.51%)(c) (35.00%) 20.10% 10.57% 11.21% 4.11%
Ratios (to average net
assets)/Supplemental
Data:
Net investment
income 1.69% ++ 1.57% 1.05% 1.14% 1.38%(b) 1.22%
Net expenses 1.28% ++ 1.13% 1.19% 1.20% 1.20% 1.34%
Expenses (before
waiver/reimburse-
ment) 1.34% ++ 1.13% 1.29% 1.39% 1.38% 1.35%
Portfolio turnover
rate 103% 103% 113% 72% 93% 96%
Net assets at end of
period (in 000's) $61,439 $217,028 $379,148 $340,331 $93,996 $95,015
</Table>
<Table>
<Caption>
CLASS C
------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 17.20 $ 14.53 $ 13.29 $ 12.11 $ 11.79
------- ------- ------- ------- -------
Net investment income 0.11 (a) 0.05 (a) 0.07 (a) 0.08 (b) 0.06
Net realized and
unrealized gain (loss)
on investments (5.74) 2.73 1.22 1.17 0.33
------- ------- ------- ------- -------
Total from investment
operations (5.63) 2.78 1.29 1.25 0.39
------- ------- ------- ------- -------
Less dividends and
distributions:
From net investment
income (0.11) (0.11) (0.05) (0.07) (0.07)
From net realized gain
on investments (1.28) -- -- -- --
------- ------- ------- ------- -------
Total dividends and
distributions (1.39) (0.11) (0.05) (0.07) (0.07)
------- ------- ------- ------- -------
Net asset value at end of
period $ 10.18 $ 17.20 $ 14.53 $ 13.29 $ 12.11
======= ======= ======= ======= =======
Total investment return
(d)(e) (35.51%) 19.27% 9.73% 10.35% 3.32%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 0.75% 0.30% 0.49% 0.63%(b) 0.47%
Net expenses 2.00% 1.94% 1.95% 1.95% 2.09%
Expenses (before
waiver/reimbursement) 2.04% 2.04% 2.14% 2.13% 2.10%
Portfolio turnover rate 103% 113% 72% 93% 96%
Net assets at end of
period (in 000's) $40,498 $31,158 $24,640 $23,992 $27,041
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income and the ratio of net investment income includes $0.01
per share and 0.07%, respectively, as a result of a special one time dividend
from Microsoft Corp.
(c) Total return is not annualized.
(d) Total return is calculated exclusive of sales charge and assumes the
reinvestments of dividends and distributions.
(e) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
18 MainStay Convertible Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
-------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
2008 2007 2006 2005 2004
$ 17.21 $ 14.54 $ 13.29 $ 12.11 $ 11.79
------- -------- -------- -------- --------
0.11 (a) 0.05 (a) 0.09 (a) 0.08 (b) 0.06
(5.75) 2.73 1.21 1.17 0.33
------- -------- -------- -------- --------
(5.64) 2.78 1.30 1.25 0.39
------- -------- -------- -------- --------
(0.11) (0.11) (0.05) (0.07) (0.07)
(1.28) -- -- -- --
------- -------- -------- -------- --------
(1.39) (0.11) (0.05) (0.07) (0.07)
------- -------- -------- -------- --------
$ 10.18 $ 17.21 $ 14.54 $ 13.29 $ 12.11
======= ======== ======== ======== ========
(35.55%) 19.25% 9.81% 10.35% 3.32%
0.72% 0.31% 0.68% 0.63%(b) 0.47%
1.98% 1.94% 1.95% 1.95% 2.09%
2.01% 2.04% 2.14% 2.13% 2.10%
103% 113% 72% 93% 96%
$59,071 $116,937 $121,274 $390,163 $430,326
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 19
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Convertible Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Investor Class shares commenced on February 28,
2008. Investor Class and Class A shares are offered at net asset value per share
plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Investor Class and
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and a 1% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. Depending upon eligibility, Class B shares convert to either
Investor Class or Class A shares eight years after the date they were purchased.
Additionally, depending upon eligibility, Investor Class shares may convert to
Class A shares and Class A shares may convert to Investor Class shares. The four
classes of shares have the same voting (except for issues that relate solely to
one class), dividend, liquidation and other rights and bear the same conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Investor Class and Class A shares under a distribution plan pursuant
to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to seek capital appreciation together with
current income.
The Fund invests in high-yield securities (sometimes called "junk bonds"), which
are generally considered speculative because they present a greater risk of
loss, including default, than higher quality debt securities. These securities
pay investors a premium--a high interest rate or yield--because of the increased
risk of loss. These securities can also be subject to greater price volatility.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or broker selected by the Fund's Manager (as defined in Note 3(A))
in consultation with the Fund's Subadvisor, if any, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques, if
such prices are deemed by the Fund's Manager, in consultation with the Fund's
Subadvisor, if any, to be representative of market values, at the regular close
of trading of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("valuation date").
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange on each valuation date. Securities
that are not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Prices normally are taken from the principal market
in which each security trades.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor ,as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31,
20 MainStay Convertible Fund
2008, the Fund held securities with a value of $915 that were valued in such a
manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3 (A), conclude that such events may
have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund's Board of Trustees, adjust the value of the local price to reflect the
impact on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain thresholds. In such cases, the securities are
fair valued by applying factors provided by a third party vendor in accordance
with the Fund's policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income quarterly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at net asset value, unless the shareholder
elects otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method. Income from payment-in-kind securities is recorded daily based on the
effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
default or bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(I) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund may not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expenses and it may be
difficult to obtain a prompt sale at an acceptable price. (See Note 5.)
(J) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement")
between NYLIM and the Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.60% on assets up to $500 million, 0.55% on assets from
$500 million to $1 billion and 0.50% on assets in excess of $1 billion.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage, other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.28%; Class A, 1.09%; Class B,
2.03%; and Class C, 2.03%. This expense limitation may be
22 MainStay Convertible Fund
modified or terminated only with the approval of the Board of Trustees. NYLIM
may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed the existing expense limitation and the recoupment is
made within three years after the year in which NYLIM incurred the expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $3,103,991 and waived its fees in the amount of $89,396.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2010 2011 TOTAL
$701,502 $291,912 $89,396 $1,082,810
- ---------------------------------------------
</Table>
The Fund had $213,955 of waived fees for which the recoupment period expired
during the year ended October 31, 2008.
Between August 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 1.175%; Class
B, 1.925%; and Class C, 1.925%. Prior to August 1, 2007, NYLIM had a different
expense limitation agreement in place with respect to the Fund.
Effective August 1, 2008, the fee for fund accounting and recordkeeping services
provided is included within the management fee paid by the Fund. Prior to August
1, 2008, the Fund paid the Manager a monthly fee for certain pricing and
recordkeeping services provided under an Accounting Agreement at the annual rate
of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30 of
1% of the next $80 million of average monthly net assets and 1/100 of 1% of any
amount in excess of $100 million of average monthly net assets. Fees for these
services provided to the Fund by the Manager amounted to $59,433 for the period
from November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, SSBT is compensated by NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted distribution plans (the "Plans") in accordance
with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Investor Class and Class A Plans, the Distributor receives a
monthly distribution fee from the Fund at an annual rate of 0.25% of the average
daily net assets of the Fund's Investor Class and Class A shares, which is an
expense of the Investor Class and Class A shares of the Fund for distribution or
service activities as designated by the Distributor. Pursuant to the Class B and
Class C Plans, the Fund pays the Distributor a monthly distribution fee, which
is an expense of the Class B and Class C shares of the Fund, at the annual rate
of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Plans provide that the Class B and Class C shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B and Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were
$15,377 and $128,887, respectively, for the year ended October 31, 2008. The
Fund was also advised that the Distributor retained contingent deferred sales
charges on redemptions of Investor Class, Class A, Class B and Class C shares of
$213, $36,931, $108,496, and $18,023, respectively, for the year ended October
31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $1,345,178.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees on the Statement of Operations.
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $188,523 0.1%
- -------------------------------------------------
Class C 97 0.0++
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $19,154.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(5,424,147) $(158,259) $(145,707,068) $(151,289,474)
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sales deferrals.
The other temporary differences are primarily due to defaulted bond releases.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income and accumulated net
realized gain on investments arising from permanent differences; net assets at
October 31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET NET REALIZED ADDITIONAL
INVESTMENT INCOME GAIN (LOSS) ON PAID-IN
(LOSS) INVESTMENTS CAPITAL
$282,606 $186 $(282,792)
</Table>
The reclassifications for the Fund are primarily due to distribution
redesignations.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $5,424,147 were available as shown in the table below, to the extent provided
by the regulations to offset future realized gains of the Fund through the years
indicated. To the extent that these loss carryforwards are used to offset future
capital gains, it is probable that the capital gains so offset will not be
distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2016 $ 5,424
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distribution paid from:
Ordinary Income $ 7,097,615 $6,300,083
Long-Term Capital Gains 39,460,677 --
- ------------------------------------------------------
$46,558,292 $6,300,083
- ------------------------------------------------------
</Table>
NOTE 5--RESTRICTED SECURITIES:
As of October 31, 2008, the Fund held the following restricted securities:
<Table>
<Caption>
DATE OF PRINCIPAL 10/31/2008 PERCENTAGE OF
SECURITY ACQUISITION AMOUNT COST VALUE NET ASSETS
At Home Corp.
Convertible
Bond 4.75%
due
12/19/08 7/25/01 $9,147,056 $674,023 $915 0.0%++
- ------------------------------------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
NOTE 6--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
24 MainStay Convertible Fund
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $581,185 and $494,297, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 718,275 $10,567,454
Shares issued to
shareholders in
reinvestment of
dividends and
distributions 47,888 650,798
Shares redeemed (698,022) (9,549,768)
---------------------------
Net increase in shares
outstanding before
conversion 68,141 1,668,484
Shares converted into
Investor Class (See Note
1) 6,379,816 90,330,631
Shares converted from
Investor Class (See Note
1) (399,450) (5,314,641)
---------------------------
Net increase 6,048,507 $86,684,474
===========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 8,957,662 $130,210,367
Shares issued to
shareholders in
reinvestment of
dividends and
distributions 2,000,947 30,968,040
Shares redeemed (6,679,538) (92,103,096)
----------------------------
Net increase in shares
outstanding before
conversion 4,279,071 69,075,311
Shares converted into
Class A (See Note 1) 1,071,012 15,308,015
Shares converted from
Class A (See Note 1) (6,060,816) (85,873,196)
----------------------------
Net decrease (710,733) $ (1,489,870)
============================
Year ended October 31,
2007:
Shares sold 2,086,601 $ 33,270,193
Shares issued to
shareholders in
reinvestment of
dividends and
distributions 310,768 4,793,864
Shares redeemed (4,341,826) (67,480,030)
----------------------------
Net decrease in shares
outstanding before
conversion (1,944,457) (29,415,973)
Shares converted from
Class B (See Note 1) 561,439 8,819,241
----------------------------
Net decrease (1,383,018) $(20,596,732)
============================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 972,993 $ 14,307,984
Shares issued to
shareholders in
reinvestment of dividends
and distributions 544,914 8,513,326
Shares redeemed (1,514,802) (21,445,907)
---------------------------
Net increase in shares
outstanding before
conversion 3,105 1,375,403
Shares converted from Class
B (See Note 1) (995,524) (14,450,809)
---------------------------
Net decrease (992,419) $(13,075,406)
===========================
Year ended October 31,
2007:
Shares sold 477,038 $ 7,518,234
Shares issued to
shareholders in
reinvestment of dividends
and distributions 53,451 807,396
Shares redeemed (1,517,761) (23,419,543)
---------------------------
Net decrease in shares
outstanding before
conversion (987,272) (15,093,913)
Shares reacquired upon
conversion into Class A
(See Note 1) (560,204) (8,819,241)
---------------------------
Net decrease (1,547,476) $(23,913,154)
===========================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 2,776,117 $40,859,541
Shares issued to
shareholders in
reinvestment of dividends
and distributions 137,289 2,126,472
Shares redeemed (745,131) (9,618,804)
--------------------------
Net increase 2,168,275 $33,367,209
==========================
Year ended October 31,
2007:
Shares sold 385,392 $ 6,241,501
Shares issued to
shareholders in
reinvestment of dividends
and distributions 9,181 138,720
Shares redeemed (279,142) (4,339,717)
--------------------------
Net increase 115,431 $ 2,040,504
==========================
</Table>
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008,
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Management does not believe the adoption of SFAS No. 157, effective for the Fund
for the fiscal year beginning November 1, 2008, will impact the amounts reported
in the Fund's financial statements. However, additional disclosures may be
required about the inputs used to develop the measurements and the effect of
certain measurements reported in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
26 MainStay Convertible Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Convertible Fund ("the Fund"), one
of the funds constituting The MainStay Funds, as of October 31, 2008, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year 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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Convertible Fund of The MainStay Funds as of October 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
mainstayinvestments.com 27
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Convertible Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management and
Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider
28 MainStay Convertible Fund
of shareholder services, which has been recognized by independent third-parties
on numerous occasions. The Board considered the experience of senior personnel
at NYLIM providing management and administrative services to the Fund, as well
as NYLIM's reputation and financial condition. The Board noted the role that the
MainStay Family of Funds historically has played in serving the investment needs
of New York Life Insurance Company policyholders, who often maintain smaller
account balances than other retail investors. The Board acknowledged that it had
approved NYLIM's recommendation to create a new "Investor Class" of shares
designed principally to address the higher shareholder-servicing costs typically
associated with smaller shareholder accounts. The Board also reviewed NYLIM's
willingness to invest in personnel designed to benefit the Fund, and that NYLIM
also is responsible for paying all of the salaries and expenses for the Fund's
officers. In addition, the Board considered the benefits to shareholders of
being part of the MainStay Family of Funds, including the privilege of
exchanging investments between the same class of shares without the imposition
of a sales charge, as described more fully in the Fund's prospectus. Based on
these considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to continue to
benefit from the nature, extent and quality of these services as a result of
NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
manager, the number of accounts managed by the portfolio manager and MacKay
Shields' method for compensating portfolio manager. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio manager and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position
mainstayinvestments.com 29
is important in order for NYLIM to continue to provide high-quality ongoing
services to the Fund and its shareholders. The Board noted, for example,
increased costs borne by NYLIM and its affiliates due to new and ongoing
regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refundable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
30 MainStay Convertible Fund
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
mainstayinvestments.com 31
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $39,460,677.
For the fiscal year ended October 31, 2008, the Fund designates approximately
$5,756,016 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividends paid by the Fund during the fiscal year ended October 31, 2007,
should be multiplied by 49.5% to arrive at the amount eligible for qualified
interest income and 85.5% for the corporate dividends received deduction.
In January 2009, shareholders will received an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You can obtain and review copies of Form N-Q
by visiting the SEC's Public Reference Room in Washington, DC (information on
the operation of the Public Reference Room may be obtained by calling 1-800-SEC-
0330).
32 MainStay Convertible Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
mainstayinvestments.com 33
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
34 MainStay Convertible Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 35
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
36 MainStay Convertible Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A014511 (RECYCLE LOGO) MS308-08 MSC11-12/08
05
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
EQUITY INDEX FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
EQUITY INDEX FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 8
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 10
- ---------------------------------------------
FINANCIAL STATEMENTS 18
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 22
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 28
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT 29
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 32
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 32
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 32
- ---------------------------------------------
TRUSTEES AND OFFICERS 33
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
CLASS A SHARES--MAXIMUM 3% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
With sales charges (38.34%) (0.98%) (0.62%)
Excluding sales charges (36.44) (0.38) (0.32)
</Table>
(With sales charge)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- --------------------------------------------------------------------------
S&P 500(R) Index(2) (36.10%) 0.26% 0.40%
Average Lipper S&P 500 Index objective fund(3) (36.41) (0.25) (0.06)
</Table>
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund- share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graph assumes an initial investment of $25,000 and
reflects the deduction of all sales charges that would have applied for the
period of investment. Class A shares were sold with a maximum initial sales
charge of 3.00% and an annual 12b-1 fee of 0.25%. Performance figures reflect
certain fee waivers and/or expense limitations, without which total returns
may have been lower. These fee waivers and/or expense limitations are
contractual and may be modified or terminated only with the approval of the
Board of Trustees. The Manager may recoup the amount of certain management
fee waivers or expense reimbursements from the Fund pursuant to the contract
if such action does not cause the Fund to exceed existing expense limitations
and the recoupment is made within three years after the year in which the
Manager incurred the expense.
Performance figures shown reflect nonrecurring reimbursements from affiliates
for professional fees and losses attributable to shareholder trading
arrangements. If these nonrecurring reimbursements had not been made the
total return (excluding sales charges) would have been -0.41% for the five-
year period ended October 31, 2008, and -0.34% for the ten-year period then
ended.
2. "S&P 500(R)" and "S&P(R)" are trademarks of The McGraw-Hill Companies, Inc.,
and have been licensed for use. Standard & Poor's does not sponsor, endorse,
sell or promote the Fund or represent the advisability of investing in the
Fund. The S&P 500(R) Index is an unmanaged index and is widely regarded as
the standard for measuring large-cap U.S. stock-market performance. Results
assume reinvestment of all income and capital gains. The S&P 500(R) Index is
considered to be the Fund's broad-based securities-market index for
comparison purposes. An investment cannot be made directly in an index.
3. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
mainstayinvestments.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY EQUITY INDEX FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARES CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
CLASS A SHARES $1,000.00 $705.40 $2.57 $1,022.10 $3.05
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(0.60% for Class A) multiplied by the average account value over the period,
divided by 366 and multiplied by 184 (to reflect the one-half year period).
The table above represents actual expenses incurred during the one-half year
period and does not take into account the Fund's written expense limitation
agreement.
6 MainStay Equity Index Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2008
<Table>
Oil, Gas & Consumable Fuels 10.3%
Pharmaceuticals 6.8
Diversified Financial Services 4.3
Computers & Peripherals 4.1
Software 3.5
Commercial Banks 3.1
Food & Staples Retailing 2.9
Household Products 2.9
Industrial Conglomerates 2.9
Diversified Telecommunication
Services 2.8
Beverages 2.7
Aerospace & Defense 2.6
Capital Markets 2.4
Communications Equipment 2.4
Media 2.4
Insurance 2.3
Health Care Equipment & Supplies 2.2
Electric Utilities 2.1
Semiconductors & Semiconductor
Equipment 2.1
Energy Equipment & Services 2.0
Chemicals 1.9
Biotechnology 1.8
Health Care Providers & Services 1.8
Food Products 1.7
Tobacco 1.7
Specialty Retail 1.6
Internet Software & Services 1.4
Machinery 1.4
Hotels, Restaurants & Leisure 1.3
Multi-Utilities 1.2
Road & Rail 1.1
Air Freight & Logistics 1.0
Real Estate Investment Trusts 1.0
IT Services 0.8
Multiline Retail 0.7
Consumer Finance 0.6%
Metals & Mining 0.6
Commercial Services & Supplies 0.4
Electrical Equipment 0.4
Household Durables 0.4
Life Sciences Tools & Services 0.4
Textiles, Apparel & Luxury Goods 0.4
Electronic Equipment & Instruments 0.3
Automobiles 0.2
Diversified Consumer Services 0.2
Internet & Catalog Retail 0.2
Paper & Forest Products 0.2
Personal Products 0.2
Wireless Telecommunication Services 0.2
Airlines 0.1
Auto Components 0.1
Construction & Engineering 0.1
Construction Materials 0.1
Containers & Packaging 0.1
Distributors 0.1
Gas Utilities 0.1
Independent Power Producers & Energy
Traders 0.1
Leisure Equipment & Products 0.1
Office Electronics 0.1
Professional Services 0.1
Thrifts & Mortgage Finance 0.1
Trading Companies & Distributors 0.1
Building Products 0.0++
Health Care Technology 0.0++
Real Estate Management & Development 0.0++
Short-Term Investments 6.9
Liabilities in Excess of Cash and
Other Assets (0.1)
-----
100.0%
=====
</Table>
++ Less than one-tenth of a percent.
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. ExxonMobil Corp.
2. General Electric Co.
3. Procter & Gamble Co. (The)
4. Microsoft Corp.
5. Johnson & Johnson
6. AT&T, Inc.
7. Chevron Corp.
8. JPMorgan Chase & Co.
9. International Business Machines Corp.
10. Wal-Mart Stores, Inc.
</Table>
mainstayinvestments.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGER FRANCIS J. OK OF NEW YORK LIFE
INVESTMENT MANAGEMENT LLC, THE FUND'S MANAGER.
HOW DID MAINSTAY EQUITY INDEX FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, Class A shares of MainStay Equity Index Fund
returned -36.44% for the 12 months ended October 31, 2008. The Fund, which
offers only one share class, underperformed the -36.41% return of the average
Lipper(1) S&P 500 Index objective fund and the -36.10% return of the S&P 500(R)
Index(2) for the 12 months ended October 31, 2008. Because the Fund incurs
operating expenses that a hypothetical index does not, there will be times when
the Fund's performance lags that of the Index. The S&P 500(R) Index is the
Fund's broad-based securities-market index. See page 5 for Fund returns with
sales charges.
DURING THE REPORTING PERIOD, WHICH INDUSTRIES HAD THE HIGHEST TOTAL RETURNS AND
WHICH HAD THE LOWEST?
Even in a broadly declining market, some industries performed better than
others. In terms of total return, the best-performing industry in the S&P 500(R)
Index was road & rail, which advanced, followed by biotechnology and household
products. Although biotechnology and household products had negative returns,
both industries substantially outperformed the market as a whole. During the
reporting period, thrifts & mortgage finance recorded the lowest total return of
any industry in the Index. Automobiles had the second-lowest total return,
followed by real estate management & development.
DURING THE REPORTING PERIOD, WHICH INDUSTRIES WERE THE STRONGEST CONTRIBUTORS TO
THE FUND'S PERFORMANCE AND WHICH WERE THE WEAKEST CONTRIBUTORS?
On the basis of impact, which takes weightings and total returns into account,
the industry that made the strongest contribution to the Fund's performance was
road & rail. Although biotechnology and diversified consumer services had
negative total returns, they were the second- and third-strongest contributors
to the Fund's performance. The industry that made the weakest contribution to
the Fund's performance was oil, gas & consumable fuels. The second-weakest
contributor was insurance, followed by capital markets.
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS HAD THE HIGHEST TOTAL
RETURNS AND WHICH HAD THE LOWEST TOTAL RETURNS?
Within the S&P 500(R) Index, the stock with the highest total return during the
12-month reporting period was Rohm & Haas. UST was second, followed by Wm.
Wrigley Jr. All three stocks provided positive total returns for the portion of
the reporting period they were held in the Fund. Wm. Wrigley Jr. was deleted
from the S&P 500(R) Index on October 3, 2008, and was subsequently sold by the
Fund.
The individual Fund holding with the lowest total return during the reporting
period was Lehman Brothers Holdings, followed by Washington Mutual and Freddie
Mac.
WHICH INDIVIDUAL STOCKS WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S
PERFORMANCE DURING THE REPORTING PERIOD AND WHICH WERE THE GREATEST DETRACTORS?
On the basis of impact, which takes weightings and total returns into
consideration, the stocks that made the greatest positive contributions to the
Fund's performance during the reporting period were Wal-Mart Stores, Wells Fargo
& Co. and Amgen. All three stocks had positive total returns for the reporting
period. The weakest contributor was General Electric, followed by American
International Group and Citigroup.
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. The Fund was closed to
new investors and new purchases as of January 1, 2002. Existing shareholders are
permitted to reinvest dividends only. Index funds generally seek to reflect the
performance of an index or an allocation among indices, unlike other funds,
whose objectives may, in some cases, involve seeking to outperform an index or
other benchmark. The Fund seeks to track the performance and weightings of
stocks in the S&P 500(R) Index. The Index itself, however, may change from time
to time as companies merge, divest units, add to their market capitalization or
face financial difficulties. In addition, Standard & Poor's may occasionally
adjust the Index to better reflect the companies that Standard & Poor's believes
are most representative of the makeup of the U.S. economy. The Fund may invest
in derivatives, which may increase the volatility of the Fund's net asset value
and may result in a loss to the Fund.
1. See page 5 for more information on Lipper Inc.
2. See page 5 for more information on the S&P 500(R) Index.
8 MainStay Equity Index Fund
WERE THERE ANY CHANGES TO THE MAKEUP OF THE S&P 500(R) INDEX DURING THE
REPORTING PERIOD?
During the 12-month reporting period, there were 32 additions to the S&P 500(R)
Index and 32 deletions from it. In terms of Index weightings, Transocean and
MasterCard were significant additions to the Index during the reporting period.
On the same basis, ACE Ltd. and Clear Channel were significant deletions.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
mainstayinvestments.com 9
PORTFOLIO OF INVESTMENTS +++ OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 93.2%+
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 2.6%
Boeing Co. (The) 19,688 $ 1,029,092
General Dynamics Corp. 10,566 637,341
Goodrich Corp. 3,327 121,635
Honeywell International,
Inc. 19,799 602,880
L-3 Communications
Holdings, Inc. 3,229 262,098
Lockheed Martin Corp. 8,855 753,118
Northrop Grumman Corp. 8,977 420,931
Precision Castparts Corp. 3,706 240,186
Raytheon Co. 11,088 566,708
Rockwell Collins, Inc. 4,240 157,855
United Technologies Corp. 25,649 1,409,669
-------------
6,201,513
-------------
AIR FREIGHT & LOGISTICS 1.0%
C.H. Robinson Worldwide,
Inc. 4,522 234,149
Expeditors International
of Washington, Inc. 5,667 185,028
FedEx Corp. 8,277 541,067
United Parcel Service,
Inc. Class B 26,814 1,415,243
-------------
2,375,487
-------------
AIRLINES 0.1%
Southwest Airlines Co. 19,520 229,946
-------------
AUTO COMPONENTS 0.1%
Goodyear Tire &
Rubber Co. (The) (a) 6,414 57,213
Johnson Controls, Inc. 15,792 279,992
-------------
337,205
-------------
AUTOMOBILES 0.2%
Ford Motor Co. (a) 60,144 131,716
General Motors Corp. 15,058 87,035
Harley-Davidson, Inc. 6,259 153,220
-------------
371,971
-------------
BEVERAGES 2.7%
Anheuser-Busch Cos., Inc. 19,124 1,186,262
Brown-Forman Corp. Class
B 2,609 118,437
Coca-Cola Co. (The) 52,726 2,323,107
Coca-Cola Enterprises,
Inc. 8,433 84,752
Constellation Brands,
Inc. Class A (a) 5,155 64,644
Dr Pepper Snapple Group,
Inc. (a) 6,702 153,476
Molson Coors Brewing Co.
Class B 4,006 149,664
Pepsi Bottling Group,
Inc. (The) 3,632 83,972
PepsiCo, Inc. 41,523 2,367,226
-------------
6,531,540
-------------
BIOTECHNOLOGY 1.8%
Amgen, Inc. (a) 28,140 1,685,305
Biogen Idec, Inc. (a) 7,720 328,486
Celgene Corp. (a) 12,098 777,417
Genzyme Corp. (a) 7,145 520,728
Gilead Sciences, Inc. (a) 24,467 1,121,812
-------------
4,433,748
-------------
BUILDING PRODUCTS 0.0%++
Masco Corp. 9,575 97,186
-------------
CAPITAL MARKETS 2.4%
American Capital, Ltd. 5,506 77,359
Ameriprise Financial,
Inc. 5,770 124,632
Bank of New York
Mellon Corp. (The) 30,482 993,713
Charles Schwab Corp.
(The) 24,812 474,406
E*TRADE Financial Corp.
(a) 14,288 26,004
Federated Investors, Inc.
Class B 2,337 56,555
Franklin Resources, Inc. 4,050 275,400
Goldman Sachs Group, Inc.
(The) 11,555 1,068,838
Invesco, Ltd. 10,286 153,364
Janus Capital Group, Inc. 4,250 49,895
Legg Mason, Inc. 3,770 83,656
Merrill Lynch & Co., Inc. 40,732 757,208
Morgan Stanley 29,496 515,295
Northern Trust Corp. 5,879 331,047
State Street Corp. 11,483 497,788
T. Rowe Price Group, Inc. 6,882 272,114
-------------
5,757,274
-------------
CHEMICALS 1.9%
Air Products & Chemicals,
Inc. 5,634 327,504
Ashland, Inc. 1,508 34,066
CF Industries Holdings,
Inc. 1,502 96,413
Dow Chemical Co. (The) 24,601 656,109
E.I. du Pont de Nemours &
Co. 23,994 767,808
Eastman Chemical Co. 2,032 82,073
Ecolab, Inc. 4,669 173,967
Hercules, Inc. 2,998 50,396
International Flavors &
Fragrances, Inc. 2,090 66,629
Monsanto Co. 14,628 1,301,599
PPG Industries, Inc. 4,365 216,417
Praxair, Inc. 8,378 545,827
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2008,
excluding short-term investments. May be subject to change daily.
10 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
CHEMICALS (CONTINUED)
Rohm & Haas Co. 3,294 $ 231,733
Sigma-Aldrich Corp. 3,350 146,931
-------------
4,697,472
-------------
COMMERCIAL BANKS 3.1%
BB&T Corp. 14,615 523,948
Comerica, Inc. 4,001 110,388
Fifth Third Bancorp 15,360 166,656
First Horizon National
Corp. 5,365 63,897
Huntington Bancshares,
Inc. 9,738 92,024
KeyCorp 13,156 160,898
M&T Bank Corp. 2,052 166,417
Marshall & Ilsley Corp. 6,900 124,407
National City Corp. 55,666 150,298
PNC Financial Services
Group, Inc. 9,216 614,431
Regions Financial Corp. 18,479 204,932
SunTrust Banks, Inc. 9,407 377,597
U.S. Bancorp 46,333 1,381,187
Wachovia Corp. 57,418 368,049
Wells Fargo & Co. 87,766 2,988,432
Zions Bancorp 3,050 116,236
-------------
7,609,797
-------------
COMMERCIAL SERVICES & SUPPLIES 0.4%
Allied Waste Industries,
Inc. (a) 9,013 93,916
Avery Dennison Corp. 2,832 99,177
Cintas Corp. 3,515 83,306
Pitney Bowes, Inc. 5,526 136,934
R.R. Donnelley & Sons Co. 5,585 92,543
Waste Management, Inc. 13,045 407,395
-------------
913,271
-------------
COMMUNICATIONS EQUIPMENT 2.4%
Ciena Corp. (a) 2,402 23,083
Cisco Systems, Inc. (a) 156,679 2,784,186
Corning, Inc. 41,967 454,503
Harris Corp. 3,569 128,306
JDS Uniphase Corp. (a) 5,702 31,133
Juniper Networks, Inc.
(a) 14,456 270,905
Motorola, Inc. 60,251 323,548
QUALCOMM, Inc. 43,644 1,669,819
Tellabs, Inc. (a) 10,574 44,834
-------------
5,730,317
-------------
COMPUTERS & PERIPHERALS 4.1%
Apple, Inc. (a) 23,497 2,528,042
Dell, Inc. (a) 46,356 563,225
EMC Corp. (a) 55,069 648,713
Hewlett-Packard Co. 64,959 2,486,631
V International Business
Machines Corp. 35,935 3,340,877
Lexmark International,
Inc. Class A (a) 2,340 60,442
NetApp, Inc. (a) 8,708 117,819
QLogic Corp. (a) 3,489 41,938
SanDisk Corp. (a) 5,984 53,198
Sun Microsystems, Inc.
(a) 20,026 92,120
Teradata Corp. (a) 4,747 73,056
-------------
10,006,061
-------------
CONSTRUCTION & ENGINEERING 0.1%
Fluor Corp. 4,761 190,107
Jacobs Engineering Group,
Inc. (a) 3,256 118,616
-------------
308,723
-------------
CONSTRUCTION MATERIALS 0.1%
Vulcan Materials Co. 2,921 158,552
-------------
CONSUMER FINANCE 0.6%
American Express Co. 30,836 847,990
Capital One Financial
Corp. 9,993 390,926
Discover Financial
Services 12,749 156,175
SLM Corp. (a) 12,429 132,618
-------------
1,527,709
-------------
CONTAINERS & PACKAGING 0.1%
Ball Corp. 2,572 87,962
Bemis Co., Inc. 2,651 65,851
Pactiv Corp. (a) 3,482 82,036
Sealed Air Corp. 4,205 71,149
-------------
306,998
-------------
DISTRIBUTORS 0.1%
Genuine Parts Co. 4,303 169,323
-------------
DIVERSIFIED CONSUMER SERVICES 0.2%
Apollo Group, Inc. Class
A (a) 2,825 196,366
H&R Block, Inc. 8,726 172,076
-------------
368,442
-------------
DIVERSIFIED FINANCIAL SERVICES 4.3%
Bank of America Corp. 133,019 3,215,069
CIT Group, Inc. 7,590 31,423
Citigroup, Inc. 144,431 1,971,483
CME Group, Inc. 1,785 503,638
IntercontinentalExchange,
Inc. (a) 2,005 171,548
V JPMorgan Chase & Co. 97,712 4,030,620
Leucadia National Corp. 4,706 126,309
Moody's Corp. 5,250 134,400
NASDAQ OMX Group, Inc.
(The) (a) 3,578 116,142
NYSE Euronext 7,075 213,523
-------------
10,514,155
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES 2.8%
V AT&T, Inc. 156,304 $ 4,184,258
CenturyTel, Inc. 2,722 68,349
Embarq Corp. 3,790 113,700
Frontier Communications
Corp. 8,403 63,947
Qwest Communications
International, Inc. 39,478 112,907
Verizon Communications,
Inc. 75,532 2,241,035
Windstream Corp. 11,692 87,807
-------------
6,872,003
-------------
ELECTRIC UTILITIES 2.1%
Allegheny Energy, Inc. 4,491 135,404
American Electric Power
Co., Inc. 10,699 349,109
Duke Energy Corp. 33,642 551,056
Edison International 8,665 308,387
Entergy Corp. 5,095 397,665
Exelon Corp. 17,483 948,278
FirstEnergy Corp. 8,108 422,913
FPL Group, Inc. 10,864 513,215
Pepco Holdings, Inc. 5,366 110,808
Pinnacle West Capital
Corp. 2,679 84,790
PPL Corp. 9,960 326,887
Progress Energy, Inc. 6,968 274,330
Southern Co. (The) 20,484 703,421
-------------
5,126,263
-------------
ELECTRICAL EQUIPMENT 0.4%
Cooper Industries, Ltd.
Class A 4,628 143,237
Emerson Electric Co. 20,637 675,449
Rockwell Automation, Inc. 3,872 107,138
-------------
925,824
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.3%
Agilent Technologies,
Inc. (a) 9,509 211,005
Amphenol Corp. Class A 4,718 135,171
Jabil Circuit, Inc. 5,586 46,978
Molex, Inc. 3,794 54,671
Tyco Electronics, Ltd. 12,562 244,205
-------------
692,030
-------------
ENERGY EQUIPMENT & SERVICES 2.0%
Baker Hughes, Inc. 8,198 286,520
BJ Services Co. 7,823 100,526
Cameron International
Corp. (a) 5,790 140,465
ENSCO International, Inc. 3,811 144,856
Halliburton Co. 23,322 461,542
Nabors Industries, Ltd.
(a) 7,451 107,145
National Oilwell Varco,
Inc. (a) 11,101 331,809
Noble Corp. 7,158 230,559
Rowan Cos., Inc. 3,006 54,529
Schlumberger, Ltd. 31,905 1,647,893
Smith International, Inc. 5,745 198,088
Transocean, Inc. (a) 8,485 698,570
Weatherford
International, Ltd. (a) 18,103 305,579
-------------
4,708,081
-------------
FOOD & STAPLES RETAILING 2.9%
Costco Wholesale Corp. 11,564 659,264
CVS Caremark Corp. 38,171 1,169,941
Kroger Co. (The) 17,418 478,298
Safeway, Inc. 11,580 246,307
SUPERVALU, Inc. 5,649 80,442
Sysco Corp. 16,011 419,488
V Wal-Mart Stores, Inc. 59,476 3,319,355
Walgreen Co. 26,328 670,311
Whole Foods Market, Inc. 3,731 39,996
-------------
7,083,402
-------------
FOOD PRODUCTS 1.7%
Archer-Daniels-Midland
Co. 17,135 355,208
Campbell Soup Co. 5,632 213,734
ConAgra Foods, Inc. 12,049 209,894
Dean Foods Co. (a) 4,052 88,577
General Mills, Inc. 8,942 605,731
H.J. Heinz Co. 8,306 363,969
Hershey Co. (The) 4,408 164,154
J.M. Smucker Co. (The) 1,568 71,384
Kellogg Co. 6,660 335,797
Kraft Foods, Inc. Class A 40,377 1,176,586
McCormick & Co., Inc. 3,430 115,454
Sara Lee Corp. 18,787 210,039
Tyson Foods, Inc. Class A 7,980 69,745
-------------
3,980,272
-------------
GAS UTILITIES 0.1%
Nicor, Inc. 1,201 55,498
Questar Corp. 4,611 158,895
-------------
214,393
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 2.2%
Baxter International,
Inc. 16,694 1,009,820
Becton, Dickinson & Co. 6,478 449,573
Boston Scientific Corp.
(a) 39,912 360,405
C.R. Bard, Inc. 2,642 233,156
Covidien, Ltd. 13,346 591,094
Hospira, Inc. (a) 4,241 117,985
Intuitive Surgical, Inc.
(a) 1,033 178,492
Medtronic, Inc. 30,009 1,210,263
St. Jude Medical, Inc.
(a) 9,090 345,693
Stryker Corp. 6,580 351,767
Varian Medical Systems,
Inc. (a) 3,321 151,139
Zimmer Holdings, Inc. (a) 5,990 278,116
-------------
5,277,503
-------------
</Table>
12 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
HEALTH CARE PROVIDERS & SERVICES 1.8%
Aetna, Inc. 12,543 $ 311,944
AmerisourceBergen Corp. 4,215 131,803
Cardinal Health, Inc. 9,552 364,886
CIGNA Corp. 7,310 119,153
Coventry Health Care,
Inc. (a) 3,939 51,955
DaVita, Inc. (a) 2,777 157,595
Express Scripts, Inc. (a) 7,244 439,059
Humana, Inc. (a) 4,492 132,918
Laboratory Corp. of
America Holdings (a) 2,958 181,888
McKesson Corp. 7,338 269,965
Medco Health Solutions,
Inc. (a) 13,450 510,428
Patterson Cos., Inc. (a) 2,422 61,349
Quest Diagnostics, Inc. 4,204 196,747
Tenet Healthcare Corp.
(a) 11,033 48,325
UnitedHealth Group, Inc. 32,385 768,496
WellPoint, Inc. (a) 13,600 528,632
-------------
4,275,143
-------------
HEALTH CARE TECHNOLOGY 0.0%++
IMS Health, Inc. 4,837 69,363
-------------
HOTELS, RESTAURANTS & LEISURE 1.3%
Carnival Corp. 11,621 295,173
Darden Restaurants, Inc. 3,735 82,805
International Game
Technology 8,234 115,276
Marriott International,
Inc. Class A 7,860 164,038
McDonald's Corp. 29,913 1,732,860
Starbucks Corp. (a) 19,431 255,129
Starwood Hotels & Resorts
Worldwide, Inc. 4,966 111,934
Wyndham Worldwide Corp. 4,720 38,657
Yum! Brands, Inc. 12,466 361,639
-------------
3,157,511
-------------
HOUSEHOLD DURABLES 0.4%
Black & Decker Corp. 1,595 80,739
Centex Corp. 3,287 40,266
D.R. Horton, Inc. 7,326 54,066
Fortune Brands, Inc. 3,987 152,064
Harman International
Industries, Inc. 1,557 28,602
KB Home 2,002 33,413
Leggett & Platt, Inc. 4,275 74,214
Lennar Corp. Class A 3,760 29,102
Newell Rubbermaid, Inc. 7,370 101,338
Pulte Homes, Inc. 5,682 63,297
Snap-on, Inc. 1,528 56,460
Stanley Works (The) 2,090 68,427
Whirlpool Corp. 1,980 92,367
-------------
874,355
-------------
HOUSEHOLD PRODUCTS 2.9%
Clorox Co. (The) 3,673 223,355
Colgate-Palmolive Co. 13,451 844,185
Kimberly-Clark Corp. 11,043 676,825
V Procter & Gamble Co.
(The) 80,481 5,194,244
-------------
6,938,609
-------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.1%
AES Corp. (The) (a) 17,893 142,607
Constellation Energy
Group, Inc. 4,743 114,828
Dynegy, Inc. Class A (a) 13,446 48,944
-------------
306,379
-------------
INDUSTRIAL CONGLOMERATES 2.9%
3M Co. 18,591 1,195,401
V General Electric Co. 278,388 5,431,350
Textron, Inc. 6,610 116,997
Tyco International, Ltd. 12,629 319,261
-------------
7,063,009
-------------
INSURANCE 2.3%
Aflac, Inc. 12,666 560,850
Allstate Corp. (The) 14,403 380,095
American International
Group, Inc. 71,514 136,592
Aon Corp. 7,385 312,386
Assurant, Inc. 3,154 80,364
Chubb Corp. (The) 9,590 496,954
Cincinnati Financial
Corp. 4,319 112,251
Genworth Financial, Inc.
Class A 11,518 55,747
Hartford Financial
Services Group, Inc.
(The) 8,013 82,694
Lincoln National Corp. 6,831 117,766
Loews Corp. 9,632 319,879
Marsh & McLennan Cos.,
Inc. 13,641 399,954
MBIA, Inc. 5,200 51,116
MetLife, Inc. 20,203 671,144
Principal Financial
Group, Inc. 6,893 130,898
Progressive Corp. (The) 17,967 256,389
Prudential Financial,
Inc. 11,357 340,710
Torchmark Corp. 2,320 96,906
Travelers Cos., Inc.
(The) 15,713 668,588
Unum Group 9,189 144,727
XL Capital, Ltd. Class A 8,300 80,510
-------------
5,496,520
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
INTERNET & CATALOG RETAIL 0.2%
Amazon.com, Inc. (a) 8,496 $ 486,311
Expedia, Inc. (a) 5,565 52,923
-------------
539,234
-------------
INTERNET SOFTWARE & SERVICES 1.4%
Akamai Technologies, Inc.
(a) 4,498 64,681
eBay, Inc. (a) 29,056 443,685
Google, Inc. Class A (a) 6,339 2,277,983
VeriSign, Inc. (a) 5,139 108,947
Yahoo!, Inc. (a) 36,857 472,507
-------------
3,367,803
-------------
IT SERVICES 0.8%
Affiliated Computer
Services, Inc. Class A
(a) 2,587 106,067
Automatic Data
Processing, Inc. 13,534 473,013
Cognizant Technology
Solutions Corp. Class A
(a) 7,756 148,915
Computer Sciences Corp.
(a) 4,025 121,394
Convergys Corp. (a) 3,240 24,916
Fidelity National
Information Services,
Inc. 5,046 76,144
Fiserv, Inc. (a) 4,363 145,550
Mastercard, Inc. Class A 1,924 284,406
Paychex, Inc. 8,534 243,560
Total System Services,
Inc. 5,258 72,245
Unisys Corp. (a) 9,563 14,536
Western Union Co. (The) 19,392 295,922
-------------
2,006,668
-------------
LEISURE EQUIPMENT & PRODUCTS 0.1%
Eastman Kodak Co. 7,665 70,364
Hasbro, Inc. 3,339 97,065
Mattel, Inc. 9,589 144,027
-------------
311,456
-------------
LIFE SCIENCES TOOLS & SERVICES 0.4%
Applied Biosystems, Inc. 4,508 138,982
Millipore Corp. (a) 1,468 76,175
PerkinElmer, Inc. 3,179 57,031
Thermo Fisher Scientific,
Inc. (a) 11,144 452,446
Waters Corp. (a) 2,633 115,325
-------------
839,959
-------------
MACHINERY 1.4%
Caterpillar, Inc. 16,190 617,972
Cummins, Inc. 5,391 139,357
Danaher Corp. 6,786 402,003
Deere & Co. 11,357 437,926
Dover Corp. 4,996 158,723
Eaton Corp. 4,420 197,132
Flowserve Corp. 1,522 86,632
Illinois Tool Works, Inc. 10,636 355,136
Ingersoll-Rand Co., Ltd.
Class A 8,472 156,308
ITT Corp. 4,834 215,113
Manitowoc Co., Inc. (The) 3,465 34,096
PACCAR, Inc. 9,664 282,575
Pall Corp. 3,188 84,195
Parker Hannifin Corp. 4,458 172,837
Terex Corp. (a) 2,585 43,144
-------------
3,383,149
-------------
MEDIA 2.4%
CBS Corp. Class B 18,084 175,596
Comcast Corp. Class A 77,613 1,223,181
DIRECTV Group, Inc. (The)
(a) 15,353 336,077
Gannett Co., Inc. 6,067 66,737
Interpublic Group of
Cos., Inc. (The) (a) 12,673 65,773
McGraw-Hill Cos., Inc.
(The) 8,447 226,717
Meredith Corp. 963 18,653
New York Times Co. (The)
Class A 3,098 30,980
News Corp. Class A 61,065 649,732
Omnicom Group, Inc. 8,479 250,470
Scripps Networks
Interactive Class A (a) 2,390 67,876
Time Warner, Inc. 95,291 961,486
Viacom, Inc. Class B (a) 16,514 333,913
Walt Disney Co. (The) 49,906 1,292,565
Washington Post Co. Class
B 159 67,861
-------------
5,767,617
-------------
METALS & MINING 0.6%
AK Steel Holding Corp. 2,984 41,537
Alcoa, Inc. 21,634 249,007
Allegheny Technologies,
Inc. 2,667 70,782
Freeport-McMoRan Copper &
Gold, Inc. Class B 10,212 297,169
Newmont Mining Corp. 12,146 319,926
Nucor Corp. 8,420 341,094
Titanium Metals Corp. 2,263 21,069
United States Steel Corp. 3,125 115,250
-------------
1,455,834
-------------
MULTI-UTILITIES 1.2%
Ameren Corp. 5,591 181,428
CenterPoint Energy, Inc. 9,091 104,728
CMS Energy Corp. 5,992 61,418
Consolidated Edison, Inc. 7,266 314,763
Dominion Resources, Inc. 15,424 559,583
DTE Energy Corp. 4,338 153,132
Integrys Energy Group,
Inc. 2,033 96,913
NiSource, Inc. 7,294 94,530
</Table>
14 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
MULTI-UTILITIES (CONTINUED)
PG&E Corp. 9,536 $ 349,685
Public Service Enterprise
Group, Inc. 13,524 380,701
Sempra Energy 6,553 279,092
TECO Energy, Inc. 5,658 65,293
Wisconsin Energy Corp. 2,922 127,107
Xcel Energy, Inc. 11,862 206,636
-------------
2,975,009
-------------
MULTILINE RETAIL 0.7%
Big Lots, Inc. (a) 2,182 53,306
Family Dollar Stores,
Inc. 3,715 99,971
J.C. Penney Co., Inc. 5,907 141,295
Kohl's Corp. (a) 8,100 284,553
Macy's, Inc. 11,185 137,464
Nordstrom, Inc. 4,242 76,738
Sears Holdings Corp. (a) 1,513 87,361
Target Corp. 20,071 805,248
-------------
1,685,936
-------------
OFFICE ELECTRONICS 0.1%
Xerox Corp. 23,198 186,048
-------------
OIL, GAS & CONSUMABLE FUELS 10.3%
Anadarko Petroleum Corp. 12,460 439,838
Apache Corp. 8,895 732,325
Cabot Oil & Gas Corp. 2,749 77,164
Chesapeake Energy Corp. 13,863 304,570
V Chevron Corp. 54,492 4,065,103
ConocoPhillips 40,311 2,096,978
CONSOL Energy, Inc. 4,872 152,932
Devon Energy Corp. 11,750 950,105
El Paso Corp. 18,650 180,905
EOG Resources, Inc. 6,617 535,448
V ExxonMobil Corp. 137,764 10,211,068
Hess Corp. 7,528 453,261
Marathon Oil Corp. 18,765 546,062
Massey Energy Co. 2,249 51,929
Murphy Oil Corp. 5,065 256,492
Noble Energy, Inc. 4,593 238,009
Occidental Petroleum
Corp. 21,731 1,206,940
Peabody Energy Corp. 7,233 249,611
Pioneer Natural Resources
Co. 3,174 88,332
Range Resources Corp. 4,125 174,158
Southwestern Energy Co.
(a) 9,128 325,139
Spectra Energy Corp. 16,353 316,103
Sunoco, Inc. 3,108 94,794
Tesoro Corp. 3,668 35,470
Valero Energy Corp. 13,914 286,350
Williams Cos., Inc. 15,327 321,407
XTO Energy, Inc. 14,610 525,230
-------------
24,915,723
-------------
PAPER & FOREST PRODUCTS 0.2%
International Paper Co. 11,371 195,809
MeadWestvaco Corp. 4,543 63,738
Weyerhaeuser Co. 5,619 214,758
-------------
474,305
-------------
PERSONAL PRODUCTS 0.2%
Avon Products, Inc. 11,322 281,125
Estee Lauder Cos., Inc.
(The) Class A 3,054 110,066
-------------
391,191
-------------
PHARMACEUTICALS 6.8%
Abbott Laboratories 40,887 2,254,918
Allergan, Inc. 8,179 324,461
Barr Pharmaceuticals,
Inc. (a) 2,895 186,033
Bristol-Myers Squibb Co. 52,651 1,081,978
Eli Lilly & Co. 26,610 899,950
Forest Laboratories, Inc.
(a) 8,108 188,349
V Johnson & Johnson 74,120 4,546,521
King Pharmaceuticals,
Inc. (a) 6,556 57,627
Merck & Co., Inc. 56,982 1,763,593
Mylan, Inc. (a) 8,098 69,400
Pfizer, Inc. 178,796 3,166,477
Schering-Plough Corp. 43,235 626,475
Watson Pharmaceuticals,
Inc. (a) 2,778 72,700
Wyeth 35,465 1,141,264
-------------
16,379,746
-------------
PROFESSIONAL SERVICES 0.1%
Equifax, Inc. 3,411 88,959
Monster Worldwide, Inc.
(a) 3,297 46,949
Robert Half
International, Inc. 4,147 78,254
-------------
214,162
-------------
REAL ESTATE INVESTMENT TRUSTS 1.0%
Apartment Investment &
Management Co. Class A 2,277 33,312
AvalonBay Communities,
Inc. 2,049 145,520
Boston Properties, Inc. 3,187 225,895
Developers Diversified
Realty Corp. 3,199 42,131
Equity Residential 7,206 251,706
General Growth
Properties, Inc. 6,052 25,055
HCP, Inc. 6,693 200,321
Host Hotels & Resorts,
Inc. 13,816 142,857
Kimco Realty Corp. 6,039 136,361
Plum Creek Timber Co.,
Inc. 4,551 169,661
ProLogis 6,981 97,734
Public Storage 3,331 271,476
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
REAL ESTATE INVESTMENT TRUSTS (CONTINUED)
Simon Property Group,
Inc. 5,985 $ 401,175
Vornado Realty Trust 3,643 257,014
-------------
2,400,218
-------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.0%++
CB Richard Ellis Group,
Inc. Class A (a) 4,575 32,070
Forestar Real Estate
Group, Inc. (a) 1 9
-------------
32,079
-------------
ROAD & RAIL 1.1%
Burlington Northern Santa
Fe Corp. 7,511 668,930
CSX Corp. 10,842 495,696
Norfolk Southern Corp. 9,979 598,141
Ryder System, Inc. 1,501 59,470
Union Pacific Corp. 13,542 904,199
-------------
2,726,436
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 2.1%
Advanced Micro Devices,
Inc. (a) 16,149 56,522
Altera Corp. 8,001 138,817
Analog Devices, Inc. 7,725 165,006
Applied Materials, Inc. 35,684 460,680
Broadcom Corp. Class A
(a) 11,738 200,485
Intel Corp. 149,116 2,385,856
KLA-Tencor Corp. 4,607 107,113
Linear Technology Corp. 5,892 133,631
LSI Corp. (a) 17,118 65,904
MEMC Electronic
Materials, Inc. (a) 6,008 110,427
Microchip Technology,
Inc. 4,897 120,613
Micron Technology, Inc.
(a) 20,241 95,335
National Semiconductor
Corp. 5,185 68,287
Novellus Systems, Inc.
(a) 2,637 41,665
NVIDIA Corp. (a) 14,803 129,674
Teradyne, Inc. (a) 4,491 22,904
Texas Instruments, Inc. 34,865 681,959
Xilinx, Inc. 7,353 135,442
-------------
5,120,320
-------------
SOFTWARE 3.5%
Adobe Systems, Inc. (a) 14,108 375,837
Autodesk, Inc. (a) 5,983 127,498
BMC Software, Inc. (a) 5,054 130,494
CA, Inc. 10,476 186,473
Citrix Systems, Inc. (a) 4,851 125,010
Compuware Corp. (a) 6,779 43,250
Electronic Arts, Inc. (a) 8,480 193,174
Intuit, Inc. (a) 8,538 213,962
V Microsoft Corp. 208,265 4,650,558
Novell, Inc. (a) 9,183 42,793
Oracle Corp. (a) 104,217 1,906,129
Salesforce.com, Inc. (a) 2,768 85,697
Symantec Corp. (a) 22,317 280,748
-------------
8,361,623
-------------
SPECIALTY RETAIL 1.6%
Abercrombie & Fitch Co.
Class A 2,315 67,042
AutoNation, Inc. (a) 2,866 19,690
AutoZone, Inc. (a) 1,111 141,419
Bed Bath & Beyond, Inc.
(a) 6,926 178,483
Best Buy Co., Inc. 8,984 240,861
GameStop Corp. Class A
(a) 4,345 119,010
Gap, Inc. (The) 12,488 161,595
Home Depot, Inc. (The) 45,173 1,065,631
Limited Brands, Inc. 7,590 90,928
Lowe's Cos., Inc. 38,982 845,909
Office Depot, Inc. (a) 7,314 26,330
RadioShack Corp. 3,488 44,158
Sherwin-Williams Co.
(The) 2,624 149,332
Staples, Inc. 18,911 367,441
Tiffany & Co. 3,298 90,530
TJX Cos., Inc. 11,155 298,508
-------------
3,906,867
-------------
TEXTILES, APPAREL & LUXURY GOODS 0.4%
Coach, Inc. (a) 8,960 184,576
Jones Apparel Group, Inc. 2,219 24,653
Liz Claiborne, Inc. 2,521 20,546
NIKE, Inc. Class B 10,435 601,369
Polo Ralph Lauren Corp. 1,512 71,321
VF Corp. 2,317 127,667
-------------
1,030,132
-------------
THRIFTS & MORTGAGE FINANCE 0.1%
Guaranty Financial Group,
Inc. (a) 1 2
Hudson City Bancorp, Inc. 13,822 259,992
MGIC Investment Corp. 2,963 11,496
Sovereign Bancorp, Inc. 14,454 41,917
-------------
313,407
-------------
TOBACCO 1.7%
Altria Group, Inc. 54,782 1,051,267
Lorillard, Inc. (a) 4,626 304,668
Philip Morris
International, Inc. 54,671 2,376,549
Reynolds American, Inc. 4,521 221,348
UST, Inc. 3,924 265,223
-------------
4,219,055
-------------
TRADING COMPANIES & DISTRIBUTORS 0.1%
Fastenal Co. 3,437 138,374
W.W. Grainger, Inc. 1,723 135,376
-------------
273,750
-------------
</Table>
16 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
WIRELESS TELECOMMUNICATION SERVICES 0.2%
American Tower Corp.
Class A (a) 10,478 $ 338,544
Sprint Nextel Corp. 75,912 237,605
-------------
576,149
-------------
Total Common Stocks
(Cost $161,046,881) 225,561,226
-------------
<Caption>
Principal
Amount
SHORT-TERM INVESTMENTS 6.9%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 0.0%++
State Street Bank and
Trust Co. 0.10%, dated
10/31/08
due 11/3/08
Proceeds at Maturity
$57,083
(Collateralized by a
Federal
National Mortgage
Association Security
with a rate of 4.875%
and a maturity date of
4/15/09, with a
Principal Amount of
$60,000 and a Market
Value of $60,674) $ 57,082 57,082
-------------
Total Repurchase
Agreement
(Cost $57,082) 57,082
-------------
U.S. GOVERNMENT 6.9%
United States Treasury
Bills
0.357%, due 1/8/09 (c) 15,500,000 15,489,537
0.482%, due 1/29/09
(b)(c) 1,200,000 1,198,739
-------------
Total U.S. Government
(Cost $16,677,681) 16,688,276
-------------
Total Short-Term
Investments
(Cost $16,734,763) 16,745,358
-------------
Total Investments
(Cost $177,781,644) (e) 100.1% 242,306,584
Liabilities in Excess of
Cash and Other Assets (0.1) (304,256)
----- ------------
Net Assets 100.0% $ 242,002,328
===== ============
<Caption>
CONTRACTS UNREALIZED
LONG DEPRECIATION (D)
FUTURES CONTRACTS (1.0%)
- ----------------------------------------------------------------
Standard & Poor's 500
Index
Mini December 2008 344 $ (2,516,832)
-------------
Total Futures Contracts
(Settlement Value
$16,637,560) $ (2,516,832)
=============
</Table>
<Table>
++ Less than one-tenth of a percent.
+++ On a daily basis NYLIM confirms that the
value of the Fund's liquid assets (liquid
portfolio securities and cash) is
sufficient to cover its potential senior
securities (e.g., futures, swaps,
options).
(a) Non-income producing security.
(b) Represents a security which is
segregated, or partially segregated as
collateral for futures contracts.
(c) Interest rate presented is yield to
maturity.
(d) Represents the difference between the
value of the contracts at the time they
were opened and the value at October 31,
2008.
(e) At October 31, 2008, cost is $183,684,823
for federal income tax purposes and net
unrealized appreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 87,700,554
Gross unrealized depreciation (29,078,793)
------------
Net unrealized appreciation $ 58,621,761
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 17
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $177,781,644) $242,306,584
Receivables:
Dividends and interest 346,720
Variation margin on futures
contracts 98,059
Investment securities sold 684
Other assets 13,789
------------
Total assets 242,765,836
------------
LIABILITIES:
Payables:
Fund shares redeemed 214,418
Investment securities purchased 197,610
Shareholder communication 123,258
Transfer agent (See Note 3) 107,098
NYLIFE Distributors (See Note 3) 51,991
Professional fees 43,965
Custodian 19,331
Trustees 966
Manager (See Note 3) 353
Accrued expenses 4,518
------------
Total liabilities 763,508
------------
Net assets $242,002,328
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized: $ 71,025
Additional paid-in capital 213,829,243
------------
213,900,268
Accumulated undistributed net
investment income 5,949,924
Accumulated net realized loss on
investments and futures
transactions (39,855,972)
Net unrealized appreciation on
investments and futures contracts 62,008,108
------------
Net assets applicable to
outstanding shares $242,002,328
============
Shares of beneficial interest
outstanding 6,905,514
============
Net asset value per share
outstanding (a) $ 35.04
Maximum sales charge (3.00% of
offering price) (a) 1.08
------------
Maximum offering price per share
outstanding (a) $ 36.12
============
</Table>
(a) Adjusted to reflect the cumulative effects of the reverse stock split in
each period, as well as the reverse stock split on December 11, 2008. (See
Note 2(C).)
18 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 7,610,503
Interest 472,642
Income from securities
loaned--net 125,727
-------------
Total income 8,208,872
-------------
EXPENSES:
Manager (See Note 3) 918,844
Distribution/Service (See Note 3) 904,641
Transfer agent (See Note 3) 660,953
Shareholder communication 149,170
Professional fees 78,950
Recordkeeping (b) 48,649
Custodian 34,962
Registration 21,734
Trustees 12,128
Miscellaneous 27,142
-------------
Total expenses before waiver 2,857,173
Expense waiver from Manager (See
Note 3) (686,036)
-------------
Net expenses 2,171,137
-------------
Net investment income 6,037,735
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss) on:
Security transactions 15,664,629
Futures transactions (6,224,662)
-------------
Net realized gain on investments
and futures transactions 9,439,967
-------------
Net change in unrealized
appreciation on:
Security transactions (161,861,759)
Futures contracts (3,810,812)
-------------
Net change in unrealized
appreciation on investments and
futures contracts (165,672,571)
-------------
Net realized and unrealized loss on
investments and futures
transactions (156,232,604)
-------------
Net decrease in net assets
resulting from operations $(150,194,869)
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of $208.
(b) Effective August 1, 2008 the pricing and recordkeeping services fee is
included in the Manager fee.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 19
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 6,037,735 $ 7,195,610
Net realized gain on
investments and futures
transactions 9,439,967 44,708,928
Net change in unrealized
appreciation on investments
and futures contracts (165,672,571) 9,998,849
----------------------------
Net increase (decrease) in
net assets resulting from
operations (150,194,869) 61,903,387
----------------------------
Dividends to shareholders:
From net investment income (5,990,321) (7,520,264)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares 193,539 211,552
Net asset value of shares
issued to shareholders in
reinvestment of dividends 5,766,090 7,246,847
Cost of shares redeemed (66,094,744) (98,489,517)
----------------------------
Decrease in net assets
derived from capital
share transactions (60,135,115) (91,031,118)
----------------------------
Net decrease in net
assets (216,320,305) (36,647,995)
NET ASSETS:
Beginning of year 458,322,633 494,970,628
----------------------------
End of year $ 242,002,328 $458,322,633
============================
Accumulated undistributed net
investment income at end of
year $ 5,949,924 $ 5,990,303
============================
</Table>
20 MainStay Equity Index Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
Year ended October 31,
--------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of year (a) $ 55.90 $ 49.84 $ 43.55 $ 40.73 $ 37.71
-------- -------- -------- -------- --------
Net investment income (a) 0.79 (f) 0.79 (f) 0.76 0.64 (c) 0.29
Net realized and
unrealized gain (loss)
on investments (a) (20.92) 6.04 6.08 (e) 2.62 2.86
-------- -------- -------- -------- --------
Total from investment
operations (a) (20.13) 6.83 6.84 3.26 3.15
-------- -------- -------- -------- --------
Less dividends:
From net investment
income (a) (0.73) (0.77) (0.55) (0.44) (0.13)
-------- -------- -------- -------- --------
Net asset value at end of
year (a) $ 35.04 $ 55.90 $ 49.84 $ 43.55 $ 40.73
======== ======== ======== ======== ========
Total investment return
(b)(g) (36.44%) 13.83% 15.85%(d)(e) 7.97% 8.42%
Ratios (to average net assets)/Supplemental Data:
Net investment income 1.67% 1.51% 1.45% 1.40%(c) 0.73%
Net expenses 0.60% 0.60% 0.64% 0.74% 0.96%
Expenses (before
waiver/reimbursement) 0.79% 0.74% 0.79%(d) 1.03% 1.02%
Portfolio turnover rate 4% 5% 5% 6% 3%
Net assets at end of year
(in 000's) $242,002 $458,323 $494,971 $550,307 $607,542
</Table>
<Table>
(a) Adjusted to reflect cumulative effects of the reverse stock split in each
period, as well as the reverse stock split on December 11, 2008. (See Note 2
(C) on page 22.)
(b) Total return is calculated exclusive of sales charge and assumes the
reinvestments of dividends and distributions.
(c) Net investment income and the ratio of net investment income includes $0.12
per share and 0.29%, respectively as a result of a special one time dividend
from Microsoft Corp.
(d) Includes nonrecurring reimbursements from the Manager for professional fees
costs. The effect on total return was less than one-hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was $0.04 per
share on net realized gains on investments and the effect on total investment
return was 0.12%, respectively.
(f) Per share data based on average shares outstanding during the period.
(g) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Equity Index Fund (the "Fund"). The Board of Trustees of the Trust
approved the closure of the Fund to new investors and new share purchases
effective January 1, 2002. Existing shareholders are permitted to reinvest
dividends only and NYLIFE LLC will continue to honor the unconditional guarantee
associated with the Fund. (See Note 9.)
The Fund's investment objective is to seek to provide investment results that
correspond to the total return performance (reflecting reinvestment of
dividends) of publicly traded common stocks represented by the S&P 500((R)
Index. When formed, the Fund was sub-classified as a "non-diversified" fund,
which meant that it could invest a greater percentage of its assets than other
funds in a particular issuer. However, due to the Fund's principal investment
strategy and investment process, it has historically operated as a "diversified"
fund. Therefore, the Fund will not operate as a "non-diversified" fund without
first obtaining shareholder approval.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Futures
contracts are valued at the last posted settlement price on the market where
such futures are primarily traded. Investments in other mutual funds are valued
at their net asset values as of the close of the New York Stock Exchange on the
date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor ,as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund did not hold
securities that were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined
22 MainStay Equity Index Fund
in accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
The Fund declared a dividend of $0.8554 per share which was paid on December 11,
2008, and also underwent a reverse share split on that day. The reverse share
split rate was 0.97227 per share outstanding calculated on fund shares
outstanding immediately after reinvestment of dividends.
Certain amounts in the Financial Highlights and Notes to Financial Statements
(See Note 9) have been adjusted to reflect the cumulative effects of this
reverse stock split and those that occurred in each of the years presented.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date and
price, or to make or receive a cash payment based on the value of a securities
index. During the period the futures contract is open, changes in the value of
the contract are recognized as unrealized gains or losses by "marking to market"
such contract on a daily basis to reflect the market value of the contract at
the end of each day's trading. The Fund agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments are known as "variation margin". When the
futures contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or cost of) the closing transaction
and the Fund's basis in the contract. The Fund invests in stock index futures
contracts to gain full exposure to changes in stock market prices to fulfill its
investment objectives. The Fund's investment in futures contracts and other
derivatives may increase the volatility of the Fund's net asset value and may
result in a loss to the Fund.
The use of futures contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the Statement of Assets and
Liabilities. The contract or notional amounts and variation margin reflect the
extent of the Fund's involvement in open futures positions. Risks arise from the
possible imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets, and the possible inability of
counterparties to meet the terms of their contracts. However, the Fund's
activities in futures contracts are conducted through regulated exchanges which
minimize counterparty credit risks.
(I) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(J) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER. New York Life Investment Management LLC ("NYLIM" or "Manager"), a
registered investment adviser and an indirect wholly-owned subsidiary of New
York Life Insurance Company ("New York Life"), serves as the Fund's Manager,
pursuant to an Amended and Restated Management Agreement ("Management
Agreement"). The Manager provides offices and conducts clerical, recordkeeping
and bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. The Manager also pays the
salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. The Fund is
advised by NYLIM directly, without a subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.25% on assets up to $1.0 billion, 0.225% on assets from
$1.0 billion to $3.0 billion and 0.20% on assets in excess of $3.0 billion. The
Manager has also contractually agreed to waive its management fee to 0.19% on
assets up to $1.0 billion, to 0.165% on assets from $1.0 billion to $3.0 billion
and to 0.14% on assets in excess of $3.0 billion.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
In addition, NYLIM entered into a written expense limitation agreement under
which it has agreed to waive a portion of the Fund's management fee or reimburse
the expenses of the Fund so that the total ordinary operating expenses (total
ordinary operating expenses excludes taxes, interest, litigation, extraordinary
expenses, brokerage and other transaction expenses relating to the purchase or
sale of portfolio investments) do not exceed 0.60% of the average daily net
assets of the Fund. This expense limitation may be modified or terminated only
with the approval of the Board of Trustees. NYLIM may recoup the amount of
certain management fee waivers or expense reimbursements from the Fund pursuant
to the agreement if such action does not cause the Fund to exceed the existing
expense limitation and the recoupment is made within three years after the year
in which NYLIM incurred the expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $918,844 and waived expenses in the amount of $686,036, of which
$468,922 is subject to recoupment.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2010 2011 TOTAL
$420,903 $403,088 $468,922 $1,292,913
- -----------------------------------------------
</Table>
The Fund had $209,184 of waived fees for which the recoupment period expired
during the year ended October 31, 2008.
Effective August 1, 2008, the fee for fund accounting and recordkeeping services
provided is included within the management fee paid by the Fund. Prior to August
1, 2008, the Fund paid the Manager a monthly fee for certain pricing and
recordkeeping services provided under an Accounting Agreement at the annual rate
of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30 of
1% of the next $80 million of average monthly net assets and 1/100 of 1% of any
amount in excess of $100 million of average monthly net assets. Fees for these
services provided to the Fund by the Manager amounted to $48,649 for the period
November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the
24 MainStay Equity Index Fund
Fund's respective net asset values, and assisting NYLIM in conducting various
aspects of the Fund's administrative operations. For providing these services to
the Fund, State Street Bank and Trust Company is compensated by NYLIM.
(B) DISTRIBUTION FEES. The Trust, on behalf of the Fund, has a Distribution
Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect wholly-
owned subsidiary of New York Life. The Fund has adopted a distribution plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Plan, the Distributor receives a monthly distribution fee from
the Fund at an annual rate of 0.25% of the Fund's average daily net assets,
which is an expense of the Fund, for distribution or service activities as
designated by the Distributor.
The Plan provides that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $660,953.
(D) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(E) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $12,863.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$5,949,924 $(36,469,625) $-- $58,621,761 $28,102,060
</Table>
The difference between book-basis and tax basis unrealized appreciation is
primarily due to wash sales deferrals, mark to market on futures contracts and
return of capital adjustments.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized gain
on investments and additional paid-in capital arising from permanent
differences; net assets at October 31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET UNDISTRIBUTED NET ADDITIONAL
INVESTMENT INCOME REALIZED GAIN (LOSS) PAID-IN
(LOSS) ON INVESTMENTS CAPITAL
$(87,793) $74,011 $13,782
</Table>
The reclassifications for the Fund are primarily due to real estate investment
trust distributions and prior year adjustments.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $36,469,625 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2010 $ 3,978
2011 29,198
2012 3,294
$36,470
- ----------------------------
</Table>
The Fund utilized $5,224,185 of capital loss carryforwards during the year ended
October 31, 2008.
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distribution paid from:
Ordinary Income $5,990,321 $7,520,264
- ------------------------------------------------------
</Table>
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $14,723 and $62,806, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 4,326 (a) $ 193,539
Shares issued to
shareholders in
reinvestment of
dividends 110,207 (a) 5,766,090
Shares redeemed (1,408,730)(a) (66,094,744)
-------------------------------------------
Net decrease (1,294,197) $(60,135,115)
===========================================
Year ended October 31,
2007:
Shares sold 7,072 (a) $ 211,552
Shares issued to
shareholders in
reinvestment of
dividends 145,603 (a) 7,246,847
Shares redeemed (1,882,736)(a) (98,489,517)
-------------------------------------------
Net decrease (1,730,061) $(91,031,118)
===========================================
</Table>
(a) Adjusted to reflect cumulative effects of the reverse stock split in the
period, as well as the reverse stock split on December 11, 2008. (See Note 2
(C).)
NOTE 9--GUARANTEE:
NYLIFE LLC ("NYLIFE"), a wholly-owned subsidiary of New York Life, will
guarantee unconditionally and irrevocably pursuant to a Guaranty Agreement
between NYLIFE and the Fund (the "Guarantee") that if, on the business day
immediately after ten years from the date of purchase (the "Guarantee Date"),
the net asset value ("NAV") of a Fund share plus the value of all dividends and
distributions paid, including cumulative reinvested dividends and distributions
attributable to such share paid during that ten-year period ("Guaranteed
Share"), is less than the price initially paid for the Fund share ("Guaranteed
Amount"), NYLIFE will pay shareholders an amount equal to the difference between
the Guaranteed Amount for each such Guaranteed share outstanding and held by
shareholders as of share and the net asset value of each such of the close of
business on the Guarantee Date. For the services that NYLIM and its affiliates
provide to the Fund, they receive the fees described in the prospectus (see Note
3). Neither NYLIM nor its affiliates receive a separate fee for providing the
Guarantee, although the Guarantee has been considered in connection with the
annual renewal of the management fee. During the year ended October 31, 2008,
NYLIFE made payments totaling $150,769 related to the Guarantee.
NOTE 10--OTHER MATTERS:
In 2004, the Securities and Exchange Commission ("SEC") raised concerns relating
to a guarantee provided to shareholders of the MainStay Equity Index Fund and
the fees and expenses of that Fund, as well as the related guarantee disclosure
to that fund's shareholders. Discussions are in progress with the SEC staff
concerning a resolution of this matter. Management does not expect a material
impact on the Fund as a result of the resolution of this matter.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements, As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
26 MainStay Equity Index Fund
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
NOTE 12--SUBSEQUENT EVENT:
As of January 1, 2009, the portfolio managers who manage the day-to-day
investment operations of the Fund will transition from a division within NYLIM,
currently referred to as NYLIM Equity Investors or Equity Investors Group, into
a wholly-owned subsidiary of NYLIM Holdings LLC. The new legal entity will be
named Madison Square Investors LLC ("MSI"). The creation of MSI is not expected
to impact the portfolio management team or investment strategy of the Fund. The
Board approved the appointment of MSI as a subadvisor to the Fund at a meeting
on September 25, 2008. The Board also approved a new Subadvisory Agreement
between NYLIM and MSI. There will be no change in the management fees paid by
the Fund as a result of this transition.
mainstayinvestments.com 27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Equity Index Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2008, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year 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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Equity Index Fund of The MainStay Funds as of October 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
28 MainStay Equity Index Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Equity Index Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management Agreement
(the "Agreement") for the Fund for one year.
In reaching its decision to approve the Agreement, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management fee and
ordinary operating expenses. The Board also requested and received information
on the profitability of the Fund to NYLIM and its affiliates, discussed in
greater detail below, and responses to a comprehensive list of questions
encompassing a variety of topics prepared on behalf of the Board by independent
legal counsel to the Board.
In determining to approve the Agreement for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM; (ii) the investment
performance of the Fund; (iii) the costs of the services to be provided, and
profits to be realized, by NYLIM and its affiliates from NYLIM's relationship
with the Fund; (iv) the extent to which economies of scale may be realized as
the Fund grows, and the extent to which economies of scale may benefit Fund
investors; and (v) the reasonableness of the Fund's management fee level and
overall total ordinary operating expenses, particularly as compared to similar
portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreement was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreement were based also
on the Board's consideration of the Agreement in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreement is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM
In considering the approval of the Agreement, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles. The Board considered
NYLIM's performance in fulfilling its responsibilities for overseeing the Fund's
legal and compliance environment and for implementing Board directives as they
relate to the Fund. The Board also considered concerns expressed by the staff of
the U.S. Securities and Exchange Commission about certain actions by NYLIM with
respect to the Fund, and NYLIM's responses to those concerns. The Board
considered the scope and quality of NYLIM's services provided to the Fund's
shareholders (including services provided through its affiliate, NYLIM Service
Company LLC), such as the more extensive servicing needs of New York Life agents
and reputation as a high-quality provider of shareholder services, which has
been recognized by independent third-parties on numerous occasions. The Board
noted the role that the MainStay Family of Funds historically has played in
serving the investment needs of New York Life Insurance Company policyholders,
who often maintain smaller account balances than other retail investors. The
Board acknowledged that it had approved NYLIM's recommendation to create a new
"Investor Class" of shares designed
mainstayinvestments.com 29
principally to address the higher shareholder-servicing costs typically
associated with smaller shareholder accounts. The Board considered the
experience of senior personnel at NYLIM providing management and administrative
services to the Fund, as well as NYLIM's reputation and financial condition. The
Board also reviewed NYLIM's willingness to invest in personnel designed to
benefit the Fund, and that NYLIM also is responsible for paying all of the
salaries and expenses for the Fund's officers. The Board further considered
NYLIM's track record and experience in providing investment advisory services to
the Fund. In addition, the Board considered the benefits to shareholders of
being part of the MainStay Family of Funds, including the privilege of
exchanging investments between the same class of shares without the imposition
of a sales charge, as described more fully in the Fund's prospectus. Based on
these considerations, the Board concluded, within the context of its overall
determinations regarding the Agreement, that the Fund is likely to continue to
benefit from the nature, extent and quality of these services as a result of
NYLIM's experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
primarily considered the Fund's investment performance against the S&P 500
Index, the benchmark index it is designed to track.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM concerning Fund investment
performance, as well as discussions between the Fund's portfolio manager and the
Board that occurred at meetings from time to time throughout the year and in
previous years. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record, as opposed
to the Fund's short-term investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreement, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreement and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund. The Board acknowledged that NYLIM must be in a position to pay
and retain experienced professional personnel to provide services to the Fund,
and that NYLIM's ability to maintain a strong financial position is important in
order for NYLIM to continue to provide high-quality ongoing services to the Fund
and its shareholders. The Board noted, for example, increased costs borne by
NYLIM and its affiliates due to new and ongoing regulatory and compliance
requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM from legally permitted "soft-dollar" arrangements
by which brokers provide research and other services to NYLIM in exchange for
commissions paid by the Fund with respect to trades on the Fund's portfolio
securities. The Board also considered that, in addition to fees earned by NYLIM
for managing the Fund, NYLIM affiliates also earn revenues from serving the Fund
in various other capacities, including as transfer agent and distributor. The
information provided to the Board indicated that the profitability to NYLIM and
its affiliates arising directly from these other arrangements was not excessive.
The Board noted
30 MainStay Equity Index Fund
that, although it assessed the overall profitability of the Fund to NYLIM and
its affiliates as part of the annual contract review process, when considering
the reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreement, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreement, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreement, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT FEE AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreement and the Fund's total ordinary operating expenses.
The Board considered information provided by NYLIM on the fees that NYLIM
charges to other investment advisory clients, including institutional separate
accounts and other funds with similar investment objectives as the Fund. In this
regard, the Board took into account the relative scope of services provided to
the Fund as opposed to NYLIM's other investment advisory clients. The Board also
considered comparative data provided by Strategic Insight on the fees and
expense ratios charged by similar mutual funds managed by other investment
advisers. This comparative information assisted the Board in evaluating the
reasonableness of the Fund's management fee when compared to similar fees
charged by NYLIM to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
In assessing the reasonableness of the Fund's management fee and total ordinary
operating expenses, the Board took note of any fee and expense arrangements that
had been negotiated by the Board with NYLIM in recent years and observed that
NYLIM has subsidized the total ordinary operating expenses of the Fund and Fund
share classes through the imposition of expense limitation arrangements that may
be modified only with the prior approval of the Board.
Based on these considerations, the Board concluded that the Fund's management
fee and total ordinary operating expenses were within a range that is
competitive and, within the context of the Board's overall conclusions regarding
the Agreement, supports the conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreement for one year.
mainstayinvestments.com 31
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2008, the Fund designates approximately
$6,688,004 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividends paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 3.1% to arrive at the amount eligible for qualified
interest income and 100.0% for the corporate dividends received deduction.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
32 MainStay Equity Index Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund and the Manager. Each Trustee serves until his or
her successor is elected and qualified or until his or her resignation, death or
removal. The Retirement Policy provides that a Trustee shall tender his or her
resignation upon reaching age 72. A Trustee reaching the age of 72 may continue
for additional one-year periods with the approval of the Board's Nominating and
Governance Committee, except that no Trustee shall serve on the Board past his
or her 75th birthday. Officers serve a term of one year and are elected annually
by the Trustees. The business address of each Trustee and officer listed below
is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
mainstayinvestments.com 33
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. Trustee since Capital Management; since 2007 (3 funds);
NOLAN, 2007 President--Shields/Alli- Director, Eclipse Funds
JR. ance, Alliance Capital Inc. since 2007 (22
11/16/46 Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
34 MainStay Equity Index Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
Expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios); since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 35
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
36 MainStay Equity Index Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
This page intentionally left blank
<Table>
<Caption>
- -------------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO14521 (RECYCLE LOGO) MS308-08 MSEI11-12/08
06
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GOVERNMENT FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GOVERNMENT FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 14
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 20
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 27
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 28
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 32
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 32
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 32
- ---------------------------------------------
TRUSTEES AND OFFICERS 33
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges (1.68%) 2.26% 3.68%
Excluding sales charges 2.96 3.20 4.16
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges (1.52%) 2.29% 3.70%
Excluding sales charges 3.12 3.24 4.17
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges (2.55%) 2.14% 3.40%
Excluding sales charges 2.41 2.49 3.40
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this
paragraph, change in share price, and reinvestment of dividend and capital-
gain distributions. The graphs assume an initial investment of $25,000 for
Class A shares and $10,000 for all other classes and reflect the deduction
of all sales charges that would have applied for the period of investment.
Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds. Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 4.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to
a contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed
within the first six years of purchase, and have an annual 12b-1 fee of
1.00%. Class C shares are sold with no initial sales charge, are subject to
a CDSC of 1.00%, if redeemed within one year of purchase, and have an annual
12b-1 fee of 1.00%. Class I shares are sold with no initial sales charge or
CDSC, have no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Performance figures reflect certain fee waivers
and/or expense limitations, without which total returns may have been lower.
These fee waivers and/or expense limitations are contractual and may be
modified or terminated only with the approval of the Board of Trustees. The
Manager may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the contract if such action does
not cause the Fund to exceed existing expense limitations and the recoupment
is made within three years after the year in which the Manager incurred the
expense.
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------
With sales charges 1.29% 2.47% 3.39%
Excluding sales charges 2.28 2.47 3.39
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE
ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------
3.68% 3.75% 4.54%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ------------------------------------------------------------------------------
Barclays Capital Government Bond Index(4) 6.82% 4.59% 5.34%
Average Lipper general U.S. government fund(5) 1.55 2.85 4.01
</Table>
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A shares through February
27, 2008, adjusted for differences in certain contractual expenses and fees.
Unadjusted the performance shown for Investor Class shares might have been
lower.
3. Performance figures for Class I shares, first offered on January 2, 2004,
include the historical performance of Class B shares through January 1, 2004,
adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
4. Barclays Capital has recently completed its acquisition of Lehman Brothers'
North American Investment Banking and Capital Markets businesses, and as part
of the transaction has changed the name of the index from "Lehman
Brothers(R)" to "Barclays Capital." The Barclays Capital Government Bond
Index is an unmanaged index that consists of all publicly issued,
nonconvertible debt of U.S. government agencies and quasi-federal
corporations, and corporate or foreign debt guaranteed by the U.S.
government.
Results assume reinvestment of all income and capital gains. The Barclays
Capital Government Bond Index is considered to be the Fund's broad-based
securities-market index for comparison purposes. An investment cannot be made
directly in an index.
5. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND GRAPHS
AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Government Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY GOVERNMENT FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS $1,000.00 $990.20 $5.35 $1,019.80 $5.43
- --------------------------------------------------------------------------------------------------------
CLASS A $1,000.00 $992.00 $4.66 $1,020.50 $4.72
- --------------------------------------------------------------------------------------------------------
CLASS B $1,000.00 $987.60 $9.09 $1,016.00 $9.22
- --------------------------------------------------------------------------------------------------------
CLASS C $1,000.00 $986.40 $9.09 $1,016.00 $9.22
- --------------------------------------------------------------------------------------------------------
CLASS I $1,000.00 $993.50 $2.00 $1,023.10 $2.03
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.07% for Investor Class, 0.93% for Class A, 1.82% for Class B and Class C
and 0.40% for Class I) multiplied by the average account value over the
period, divided by 366 and multiplied by 184 (to reflect the one-half year
period). The table above represents the actual expenses incurred during the
one-half year period and does not take into account the Fund's written
expense limitation agreement.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2008
(PORTFOLIO COMPOSITION PIE CHART)
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. United States Treasury Note, 4.75%, due
8/15/17
2. Federal National Mortgage Association
(Mortgage Pass-Through Security), 4.50%,
due 7/1/18
3. United States Treasury Note, 4.50%, due
11/15/15
4. Federal Home Loan Mortgage Corporation,
5.20%, due 3/5/19
5. Federal National Mortgage Association
(Mortgage Pass-Through Security), 5.50%,
due 6/1/33
6. Overseas Private Investment Corporation,
5.142%, due 12/15/23
7. United States Treasury Note, 4.75%, due
5/31/12
8. Federal National Mortgage Association
(Mortgage Pass-Through Security), 5.00%,
due 1/1/36
9. United States Treasury Bond, 8.75%, due
8/15/20
10. Federal National Mortgage Association
(Mortgage Pass-Through Security), 4.50%,
due 11/1/18
</Table>
8 MainStay Government Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS JOSEPH PORTERA AND GARY GOODENOUGH OF
MACKAY SHIELDS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY GOVERNMENT FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK
DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Government Fund returned 2.96% for
Investor Class shares,(1) 3.12% for Class A shares, 2.41% for Class B shares and
2.28% for Class C shares for the 12 months ended October 31, 2008. Over the same
period, the Fund's Class I shares returned 3.68%. All share classes outperformed
the 1.55% return of the average Lipper(2) general U.S. government fund for the
12-month reporting period. All share classes underperformed the 6.82% return of
the Barclays Capital Government Bond Index,(3) the Fund's broad-based
securitiesmarket index, for the 12 months ended October 31, 2008. See pages 5
and 6 for Fund returns with sales charges.
DURING THE REPORTING PERIOD, HOW WAS THE FUND POSITIONED RELATIVE TO ITS PEERS?
As credit channels became impaired and capital constraints forced many
traditional large-scale buyers to the sidelines, we recognized that spreads(4)
were likely to widen for securities that typically provide higher yields than
comparable U.S. Treasury issues. Accordingly, we became increasingly cautious on
spread product (or non-Treasury securities), and we established a more defensive
portfolio posture by raising the Fund's allocation to Treasury securities. We
also reduced the Fund's exposure to debentures and mortgage-backed securities
issued by government housing enterprises and pared back exposure to segments of
the fixed-income market that were less liquid, such as commercial mortgage-
backed securities. These trades benefited the Fund's performance, helping it to
outperform the median Lipper peer fund during the 12-month reporting period.
The Fund's interest-rate positioning generated mixed results during the
reporting period. We anticipated that the turmoil in the financial markets would
drive Treasury yields lower in the second half of the reporting period, and the
Fund benefited by keeping its duration(5) longer than that of the median Lipper
peer fund. However, we did not fully participate in the yield-curve steepening
because our sector positioning tended to give the Fund a bias toward a
flattening yield curve.
HOW DID YOU SEEK TO ENHANCE THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
In the low interest-rate environment that characterized the reporting period, we
looked to improve the Fund's total return by identifying opportunities to add
incremental yield without incurring excessive risk exposure. We utilized five
primary strategies.
First, we favored agency residential mortgage-backed securities over comparable-
duration agency debentures. While these two segments of the market have similar
liquidity, we felt that mortgage-backed securities offered better yield to
compensate for their cash-flow variability. Using advanced analytics, we
selectively purchased mortgage-backed securities that we believed would benefit
the Fund.
Second, we maintained a sizable exposure to callable agency debentures with 7-
to 10-year maturities and first call dates within one to two years. The callable
securities offered significantly higher yields than comparable-duration
noncallable agencies to compensate for the uncertainty of the callable bonds'
cash-flow stream. By focusing on bonds with a high likelihood of being called at
the first opportunity, we sought to capture the majority of the securities'
yield advantage.
Third, we increased the Fund's exposure to higher-coupon residential mortgage-
backed securities. These
Investments in the Fund are not guaranteed, even though the principal or income
of some of the Fund's investments is guaranteed by the U.S. government or its
agencies or instrumentalities. The Fund may invest in derivatives, which may
increase the volatility of the Fund's net asset value and may result in a loss
to the Fund. The Fund may experience a portfolio turnover of more than 100% and
may generate taxable short-term capital gains. The values of debt securities
fluctuate depending on various factors, including interest rates, issuer
creditworthiness, market conditions and maturities. The principal risk of
mortgage dollar rolls is that the security the Fund receives at the end of the
transaction may be worth less than the security the Fund sold to the same
counterparty at the beginning of the transaction.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 6 for more information on Lipper Inc.
3. See footnote on page 6 for more information on the Barclays Capital
Government Bond Index.
4. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The terms may also refer to the difference in yield between two specific
securities or types of securities at a given time.
5. Duration is a measure of the price sensitivity of a fixed-income investment
to changes in interest rates. Duration is expressed as a number of years and
is considered a more accurate sensitivity gauge than average maturity.
mainstayinvestments.com 9
bonds generally benefit from falling mortgage prepayment rates because they earn
more coupon income when their principal balance is not declining rapidly.
Fourth, during the first and second quarters of 2008, market dislocations caused
us to seek to capitalize on opportunities in the municipal auction-rate
securities market, a sector where value has traditionally not been compelling.
We took advantage of upheaval and gridlock in this portion of the market to
purchase short-dated highly rated securities at what we believed to be very
attractive yields.
Fifth, we maintained a modest allocation to shorter-duration asset-backed
securities relative to the Barclays Capital Government Bond Index.
Of these strategies, the first four were successful. While the fifth did add
incremental yield to the Fund, the yield advantage was more than offset by the
wider spreads that negatively affected most non-agency fixed-income securities
during the 12-month reporting period.
WHAT OTHER STRATEGIES DID YOU EMPLOY DURING THE REPORTING PERIOD, AND HOW DID
THEY AFFECT FUND PERFORMANCE?
After the Federal Housing Finance Agency placed Fannie Mae and Freddie Mac into
conservatorship, we unwound some of our earlier trades and reallocated those
assets from Treasurys to agency debentures and mortgage pass-throughs. We did
this to take advantage of the moderating credit risk of agency-related
securities. Our agency-debenture trade helped the Fund's performance, but the
mortgage-pass-through trade has yet to be rewarded. In the latter case, a
sluggish response to the Treasury's new initiatives to lower primary mortgage
rates have not gained sufficient traction to benefit the Fund's overweight
position relative to the Barclays Capital Government Bond Index in mortgage
pass-through securities The Fund also benefited from modest portfolio turnover
during the 12-month reporting period, which helped keep transaction costs low.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Government Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2008
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 92.5%+
ASSET-BACKED SECURITIES 2.7%
- ----------------------------------------------------------------
CONSUMER LOANS 0.6%
Atlantic City Electric
Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 $ 2,275,000 $ 1,927,156
-------------
CREDIT CARDS 0.4%
Chase Issuance Trust
Series 2006-C4, Class C4
4.85%, due 1/15/14 (a) 1,000,000 753,590
Citibank Credit Card Issuance
Trust Series 2006-C4, Class
C4
4.33%, due 1/9/12 (a) 615,000 550,984
-------------
1,304,574
-------------
DIVERSIFIED FINANCIAL SERVICES 1.0%
Massachusetts RRB Special
Purpose Trust
Series 2001-1, Class A
6.53%, due 6/1/15 3,247,313 3,313,033
-------------
HOME EQUITY 0.7%
Citicorp Residential Mortgage
Securities, Inc.
Series 2006-3, Class A3
5.61%, due 11/25/36 (b) 950,000 921,962
Series 2006-1, Class A3
5.706%, due 7/25/36 (b) 1,190,000 1,157,294
-------------
2,079,256
-------------
Total Asset-Backed Securities
(Cost $9,273,009) 8,624,019
-------------
CORPORATE BONDS 1.2%
- ----------------------------------------------------------------
INSURANCE 0.4%
Fund American Cos., Inc.
5.875%, due 5/15/13 1,480,000 1,112,086
-------------
MEDIA 0.8%
TCI Communications, Inc.
8.75%, due 8/1/15 2,795,000 2,631,850
-------------
Total Corporate Bonds
(Cost $4,742,279) 3,743,936
-------------
MORTGAGE-BACKED SECURITIES 1.3%
- ----------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) 1.1%
Banc of America Commercial
Mortgage, Inc.
Series 2005-5, Class A2
5.001%, due 10/10/45 2,060,000 1,936,481
Four Times Square Trust
Series 2006-4TS, Class A
5.401%, due 12/13/28 (c) 620,000 420,331
GS Mortgage Securities Corp.
II
Series 2001-ROCK, Class A1
6.22%, due 5/3/18 (c) 1,035,171 1,056,428
-------------
3,413,240
-------------
RESIDENTIAL MORTGAGE
(COLLATERALIZED MORTGAGE OBLIGATION) 0.2%
Citigroup Mortgage Loan
Trust, Inc.
Series 2006-AR6, Class 1A1
6.06%, due 8/25/36 1,071,789 815,453
-------------
Total Mortgage-Backed
Securities
(Cost $4,849,567) 4,228,693
-------------
MUNICIPAL BOND 0.5%
- ----------------------------------------------------------------
TEXAS 0.5%
Harris County Texas
Industrial Development
Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 (a) 1,720,000 1,702,232
-------------
Total Municipal Bond
(Cost $1,720,911) 1,702,232
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES 86.8%
- ----------------------------------------------------------------
FANNIE MAE
(COLLATERALIZED MORTGAGE OBLIGATION) 0.6%
Series 2006-B1, Class AB
6.00%, due 6/25/16 1,750,491 1,776,897
-------------
FANNIE MAE GRANTOR TRUST
(COLLATERALIZED MORTGAGE OBLIGATION) 1.2%
Series 2003-T1, Class B
4.491%, due 11/25/12 3,865,000 3,845,525
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2008, excluding
short-term investment. May be subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
FANNIE MAE STRIP
(COLLATERALIZED MORTGAGE OBLIGATIONS) 0.2%
Series 360, Class 2, IO
5.00%, due 8/1/35 (d) $ 2,336,410 $ 541,338
Series 361, Class 2, IO
6.00%, due 10/1/35 (d) 410,202 95,902
-------------
637,240
-------------
FEDERAL HOME LOAN BANK 5.6%
4.50%, due 2/20/15 5,100,000 4,947,796
5.00%, due 11/17/17 2,825,000 2,758,658
5.125%, due 8/14/13 5,140,000 5,304,644
5.50%, due 7/15/36 5,400,000 5,220,796
-------------
18,231,894
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION 3.5%
4.75%, due 11/17/15 1,615,000 1,610,317
V 5.20%, due 3/5/19 9,975,000 9,608,957
-------------
11,219,274
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) 10.0%
3.00%, due 8/1/10 3,758,864 3,713,783
4.291%, due 3/1/35 (a) 143,319 142,943
5.00%, due 1/1/20 1,149,065 1,127,594
5.00%, due 6/1/33 5,006,482 4,743,712
5.00%, due 8/1/33 3,612,480 3,426,738
5.00%, due 5/1/36 4,750,236 4,498,573
5.028%, due 6/1/35 (a) 2,337,262 2,342,508
5.50%, due 1/1/21 2,656,462 2,649,621
5.50%, due 11/1/35 1,940,537 1,894,733
5.50%, due 1/1/36 6,347,743 6,197,910
5.50%, due 11/1/36 754,192 736,037
5.654%, due 2/1/37 (a) 415,176 421,090
6.50%, due 4/1/37 684,227 693,891
-------------
32,589,133
-------------
FEDERAL HOUSING ADMINISTRATION 0.5%
Mortgage Equity Conversion
Asset Trust Series 2007-
FF2, Class A
2.80%, due 2/25/42
(a)(c)(e)(f) 1,648,853 1,574,654
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION 0.9%
4.625%, due 5/1/13 2,990,000 2,893,752
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) 33.8%
4.378%, due 4/1/34 (a) 1,302,399 1,306,958
V 4.50%, due 7/1/18 12,515,516 12,027,438
V 4.50%, due 11/1/18 7,800,650 7,496,442
4.72%, due 11/1/34 (a) 531,117 538,323
5.00%, due 9/1/17 4,472,004 4,412,201
5.00%, due 9/1/20 695,633 681,548
V 5.00%, due 1/1/36 8,502,925 8,063,075
5.00%, due 2/1/36 1,991,622 1,888,597
5.00%, due 6/1/36 685,913 650,110
5.00%, due 9/1/36 1,330,935 1,262,087
5.50%, due 1/1/17 341,984 343,347
5.50%, due 2/1/17 7,123,556 7,156,768
5.50%, due 6/1/19 2,347,955 2,349,979
5.50%, due 11/1/19 2,515,160 2,517,328
5.50%, due 4/1/21 5,513,210 5,507,625
V 5.50%, due 6/1/33 9,662,499 9,462,707
5.50%, due 11/1/33 4,255,029 4,167,047
5.50%, due 12/1/33 4,826,876 4,727,070
5.50%, due 6/1/34 1,724,817 1,688,075
5.50%, due 12/1/34 1,014,103 992,500
5.50%, due 3/1/35 3,689,544 3,610,949
5.50%, due 7/1/37 954,460 933,030
6.00%, due 12/1/16 630,404 637,842
6.00%, due 11/1/32 2,167,284 2,176,653
6.00%, due 1/1/33 1,602,774 1,608,200
6.00%, due 3/1/33 1,626,585 1,630,567
6.00%, due 9/1/34 464,871 465,573
6.00%, due 9/1/35 4,114,779 4,117,831
6.00%, due 10/1/35 1,108,467 1,108,756
6.00%, due 6/1/36 3,957,800 3,958,213
6.00%, due 11/1/36 3,967,926 3,968,339
6.00%, due 4/1/37 1,272,608 1,253,452
6.00%, due 12/1/38 TBA (g) 1,550,000 1,549,031
6.50%, due 10/1/31 987,565 1,009,229
6.50%, due 2/1/37 898,857 911,643
6.50%, due 12/1/38 TBA (g) 3,020,000 3,054,917
-------------
109,233,450
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) 2.9%
6.00%, due 8/15/32 1,652,143 1,660,527
6.00%, due 12/15/32 974,859 978,101
6.00%, due 12/1/38 TBA (g) 1,975,000 1,975,000
6.50%, due 8/15/28 559,552 568,140
6.50%, due 4/15/31 1,444,074 1,464,742
6.50%, due 12/1/38 TBA (g) 2,490,000 2,516,456
-------------
9,162,966
-------------
HVIDE VAN OMMEREN TANKERS LLC 1.6%
Series I
7.54%, due 12/14/23 (h) 2,437,000 2,661,301
Series II
7.54%, due 12/14/23 (h) 2,442,000 2,666,762
-------------
5,328,063
-------------
</Table>
12 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
OVERSEAS PRIVATE INVESTMENT CORPORATION 2.6%
V 5.142%, due 12/15/23 (h) $ 8,100,104 $ 8,410,662
-------------
TENNESSEE VALLEY AUTHORITY 4.0%
4.65%, due 6/15/35 (h) 5,605,000 4,731,365
4.75%, due 8/1/13 (h) 4,700,000 4,747,738
6.25%, due 12/15/17 (h) 2,980,000 3,131,083
-------------
12,610,186
-------------
UNITED STATES TREASURY BONDS 5.2%
6.25%, due 8/15/23 515,000 589,595
6.25%, due 5/15/30 5,385,000 6,509,119
6.875%, due 8/15/25 1,410,000 1,756,221
V 8.75%, due 8/15/20 5,860,000 7,942,591
-------------
16,797,526
-------------
UNITED STATES TREASURY NOTES 14.2%
2.00%, due 7/15/14 T.I.P.S.
(i) 4,649,720 4,251,588
3.50%, due 2/15/18 670,000 651,732
4.125%, due 8/31/12 4,475,000 4,812,724
V 4.50%, due 11/15/15 11,340,000 11,996,484
V 4.75%, due 5/31/12 7,650,000 8,358,818
V 4.75%, due 8/15/17 12,650,000 13,389,241
4.875%, due 8/15/16 2,510,000 2,674,915
-------------
46,135,502
-------------
Total U.S. Government &
Federal Agencies
(Cost $283,960,677) 280,446,724
-------------
Total Long-Term Bonds
(Cost $304,546,443) 298,745,604
-------------
SHORT-TERM INVESTMENT 9.7%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 9.7%
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$31,382,711 (Collateralized
by a Federal Home Loan Bank
Security with a rate of
2.673% and a maturity date
of 3/4/09, with a Principal
Amount of $31,935,000 and a
Market Value of
$32,014,838) 31,382,449 31,382,449
-------------
Total Short-Term Investment
(Cost $31,382,449) 31,382,449
-------------
Total Investments
(Cost $335,928,892) (j) 102.2% $ 330,128,053
Liabilities in Excess of
Cash and Other Assets (2.2) (7,235,058)
----- ------------
Net Assets 100.0% $ 322,892,995
===== ============
</Table>
<Table>
+++ On a daily basis NYLIM confirms that the
value of the Fund's liquid assets (liquid
portfolio securities and cash) is
sufficient to cover its potential senior
securities (e.g., futures, swaps,
options).
(a) Floating rate. Rate shown is the rate in
effect at October 31, 2008.
(b) Subprime mortgage investment and other
asset-backed securities. The total market
value of the securities at October 31,
2008 is $2,079,256, which represents 0.7%
of the Fund's net assets.
(c) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(d) Collateralized Mortgage Obligation
Interest Only Strip--Pays a fixed or
variable rate of interest based on
mortgage loans or mortgage pass-through
securities. The principal amount of the
underlying pool represents the notional
amount on which the current interest is
calculated. The value of these stripped
securities may be particularly sensitive
to changes in prevailing interest rates
and are typically more sensitive to
changes in prepayment rates than
traditional mortgage-backed securities.
(e) Illiquid security. The total market
value of this security at October 31,
2008 is $1,574,654, which represents 0.5%
of the Fund's net assets.
(f) Fair valued security. The total market
value of this security at October 31,
2008 is $1,574,654, which represents 0.5%
of the Fund's net assets.
(g) TBA: Securities purchased on a forward
commitment basis with an approximate
principal amount and maturity date. The
actual principal amount and maturity date
will be determined upon settlement. The
market value of these securities at
October 31, 2008 is $9,095,404, which
represents 2.8% of the Fund's net assets.
All or a portion of these securities were
acquired under a mortgage dollar roll
agreement.
(h) United States Government Guaranteed
Security.
(i) Treasury Inflation Protected
Security--Pays a fixed rate of interest
on a principal amount that is
continuously adjusted for inflation based
on the Consumer Price Index-Urban
Consumers.
(j) At October 31, 2008, cost is $335,932,314
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 2,086,274
Gross unrealized depreciation (7,890,535)
-----------
Net unrealized depreciation $(5,804,261)
===========
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $335,928,892) $330,128,053
Cash 5,366
Receivables:
Interest 2,664,617
Fund shares sold 179,069
Other assets 37,001
------------
Total assets 333,014,106
------------
LIABILITIES:
Payables:
Investment securities purchased 9,265,695
Transfer agent (See Note 3) 180,632
Fund shares redeemed 175,349
NYLIFE Distributors (See Note 3) 115,664
Manager (See Note 3) 98,126
Shareholder communication 84,950
Professional fees 43,342
Custodian 15,129
Trustees 862
Accrued expenses 4,696
Dividend payable 136,666
------------
Total liabilities 10,121,111
------------
Net assets $322,892,995
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 396,981
Additional paid-in capital 334,630,215
------------
335,027,196
Accumulated undistributed net
investment income 117,432
Accumulated net realized loss on
investments (6,450,794)
Net unrealized depreciation on
investments (5,800,839)
------------
Net assets $322,892,995
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 61,146,684
============
Shares of beneficial interest
outstanding 7,497,748
============
Net asset value per share
outstanding $ 8.16
Maximum sales charge (4.50% of
offering price) 0.38
------------
Maximum offering price per share
outstanding $ 8.54
============
CLASS A
Net assets applicable to
outstanding shares $182,621,165
============
Shares of beneficial interest
outstanding 22,463,679
============
Net asset value per share
outstanding $ 8.13
Maximum sales charge (4.50% of
offering price) 0.38
------------
Maximum offering price per share
outstanding $ 8.51
============
CLASS B
Net assets applicable to
outstanding shares $ 51,826,228
============
Shares of beneficial interest
outstanding 6,377,309
============
Net asset value and offering price
per share outstanding $ 8.13
============
CLASS C
Net assets applicable to
outstanding shares $ 25,967,032
============
Shares of beneficial interest
outstanding 3,196,802
============
Net asset value and offering price
per share outstanding $ 8.12
============
CLASS I
Net assets applicable to
outstanding shares $ 1,331,886
============
Shares of beneficial interest
outstanding 162,610
============
Net asset value and offering price
per share outstanding $ 8.19
============
</Table>
14 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31,2008
<Table>
INVESTMENT INCOME:
INCOME:
Interest $15,017,548
Income from securities loaned-net 225,950
-----------
Total income 15,243,498
-----------
EXPENSES:
Manager (See Note 3) 1,853,433
Transfer agent--Investor Class
(See Note 3) 145,085
Transfer agent--Class A (See Note
3) 665,112
Transfer agent--Classes B and C
(See Note 3) 258,415
Transfer agent--Class I (See Note
3) 301
Distribution/Service--Investor
Class (See Note 3) 87,361
Distribution/Service--Class A (See
Note 3) 514,257
Service--Class B (See Note 3) 126,321
Service--Class C (See Note 3) 38,033
Distribution--Class B (See Note 3) 378,962
Distribution--Class C (See Note 3) 114,098
Shareholder communication 79,608
Professional fees 78,998
Registration 64,921
Recordkeeping (a) 42,847
Custodian 15,632
Trustees 10,380
Miscellaneous 20,846
-----------
Total expenses before waiver 4,494,610
Expense waiver from Manager (See
Note 3) (938,994)
-----------
Net expenses 3,555,616
-----------
Net investment income 11,687,882
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain on investments 1,835,262
Net change in unrealized
depreciation on investments (5,735,004)
-----------
Net realized and unrealized loss on
investments (3,899,742)
-----------
Net increase in net assets resulting
from
operations $ 7,788,140
===========
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 11,687,882 $ 11,768,893
Net realized gain (loss) on
investments 1,835,262 (154,751)
Net change in unrealized
appreciation (depreciation)
on investments (5,735,004) 1,084,516
---------------------------
Net increase in net assets
resulting from operations 7,788,140 12,698,658
---------------------------
Dividends to shareholders:
From net investment income:
Investor Class (1,344,796) --
Class A (8,368,824) (9,996,496)
Class B (1,635,949) (1,989,403)
Class C (498,514) (208,063)
Class I (4,768) (214)
---------------------------
Total dividends to
shareholders (11,852,851) (12,194,176)
---------------------------
Capital share transactions:
Net proceeds from sale of
shares 119,891,831 28,537,870
Net asset value of shares
issued to shareholders in
reinvestment of dividends 10,127,792 10,626,144
Cost of shares redeemed (88,709,511) (63,344,702)
---------------------------
Increase (decrease) in
net assets derived from
capital share
transactions 41,310,112 (24,180,688)
---------------------------
Net increase (decrease)
in net assets 37,245,401 (23,676,206)
NET ASSETS:
Beginning of year 285,647,594 309,323,800
---------------------------
End of year $322,892,995 $285,647,594
===========================
Accumulated undistributed net
investment income at end of
year $ 117,432 $ 63,360
===========================
</Table>
16 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS CLASS A
-------------- ------------------------------------------------------
FEBRUARY 28,
2008**
THROUGH
OCTOBER 31, YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 8.41 $ 8.21 $ 8.19 $ 8.18 $ 8.40 $ 8.42
------- -------- -------- -------- ------- -------
Net investment income 0.22 (a) 0.33 (a) 0.34 (a) 0.33 (a) 0.26 0.25
Net realized and
unrealized gain (loss)
on investments (0.26) (0.07) 0.03 0.01 (0.21) 0.05
------- -------- -------- -------- ------- -------
Total from investment
operations (0.04) 0.26 0.37 0.34 0.05 0.30
------- -------- -------- -------- ------- -------
Less dividends and
distributions:
From net investment
income (0.21) (0.34) (0.35) (0.33) (0.27) (0.28)
Return of capital -- -- -- -- -- (0.04)
------- -------- -------- -------- ------- -------
Total dividends and
distributions (0.21) (0.34) (0.35) (0.33) (0.27) (0.32)
------- -------- -------- -------- ------- -------
Net asset value at end of
period $ 8.16 $ 8.13 $ 8.21 $ 8.19 $ 8.18 $ 8.40
======= ======== ======== ======== ======= =======
Total investment return
(b)(f) (0.57%)(c) 3.12% 4.67% 4.26% 0.59% 3.60%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 3.89%++ 4.00% 4.16% 4.04% 3.09% 2.96%
Net expenses 1.07%++ 0.97% 1.05% 1.05% 1.05% 1.25%
Expenses (before
waiver/reimbursement) 1.38%++ 1.28% 1.35% 1.34% 1.34% 1.27%
Portfolio turnover rate 51% (d) 51%(d) 11% 83%(d) 164%(d) 110%
Net assets at end of
period (in 000's) $61,147 $182,621 $227,896 $239,392 $76,816 $86,516
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 8.20 $ 8.18 $ 8.17 $ 8.39 $ 8.40
------- ------ ------ ------ ------
Net investment income 0.26 (a) 0.28 (a) 0.26 (a) 0.20 0.17
Net realized and
unrealized gain (loss)
on investments (0.07) 0.03 0.02 (0.21) 0.07
------- ------ ------ ------ ------
Total from investment
operations 0.19 0.31 0.28 (0.01) 0.24
------- ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income (0.27) (0.29) (0.27) (0.21) (0.21)
Return of capital -- -- -- -- (0.04)
------- ------ ------ ------ ------
Total dividends and
distributions (0.27) (0.29) (0.27) (0.21) (0.25)
------- ------ ------ ------ ------
Net asset value at end of
period $ 8.12 $ 8.20 $ 8.18 $ 8.17 $ 8.39
======= ====== ====== ====== ======
Total investment return
(b)(f) 2.28% 3.89% 3.48% (0.17%) 2.92%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 3.16% 3.41% 3.29% 2.34% 2.21%
Net expenses 1.80% 1.80% 1.80% 1.80% 2.00%
Expenses (before
waiver/reimbursement) 2.11% 2.10% 2.09% 2.09% 2.02%
Portfolio turnover rate 51%(d) 11% 83%(d) 164% (d) 110%
Net assets at end of
period (in 000's) $25,967 $7,621 $5,684 $7,772 $8,620
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charge and assumes the
reinvestments of dividends and distributions. Class I shares are not subject
to sales charges.
(c) Total return is not annualized.
(d) The portfolio turnover rates not including mortgage dollar rolls were 43%, 32%
and 31% for the years ended October 31, 2008, October 31, 2006 and October 31,
2005, respectively.
(f) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
18 MainStay Government Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- -------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 8.20 $ 8.19 $ 8.17 $ 8.39 $ 8.40
------- ------- ------- -------- --------
0.26 (a) 0.28 (a) 0.26 (a) 0.20 0.17
(0.06) 0.02 0.03 (0.21) 0.07
------- ------- ------- -------- --------
0.20 0.30 0.29 (0.01) 0.24
------- ------- ------- -------- --------
(0.27) (0.29) (0.27) (0.21) (0.21)
-- -- -- -- (0.04)
------- ------- ------- -------- --------
(0.27) (0.29) (0.27) (0.21) (0.25)
------- ------- ------- -------- --------
$ 8.13 $ 8.20 $ 8.19 $ 8.17 $ 8.39
======= ======= ======= ======== ========
2.41% 3.77% 3.60% (0.17%) 2.92%
3.18% 3.41% 3.29% 2.34% 2.21%
1.79% 1.80% 1.80% 1.80% 2.00%
2.10% 2.10% 2.09% 2.09% 2.02%
51%(d) 11% 83%(d) 164% (d) 110%
$51,826 $50,123 $64,246 $274,566 $333,884
</Table>
<Table>
<Caption>
CLASS I
------------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 8.26 $ 8.24 $ 8.21 $ 8.41 $ 8.44
------ ------ ------ ------ ------
0.35 (a) 0.40 (a) 0.35 (a) 0.37 0.29
(0.04) 0.02 0.03 (0.28) (0.04)
------ ------ ------ ------ ------
0.31 0.42 0.38 0.09 0.25
------ ------ ------ ------ ------
(0.38) (0.40) (0.35) (0.29) (0.28)
-- -- -- -- --
------ ------ ------ ------ ------
(0.38) (0.40) (0.35) (0.29) (0.28)
------ ------ ------ ------ ------
$ 8.19 $ 8.26 $ 8.24 $ 8.21 $ 8.41
====== ====== ====== ====== ======
3.68% 5.31% 4.78% 1.08% 2.99%(c)
4.24% 4.84% 4.52% 3.47% 3.34%++
0.40% 0.42% 0.57% 0.67% 0.87%++
0.99% 1.00% 0.86% 0.96% 0.89%++
51%(d) 11% 83%(d) 164%(d) 110%
$1,332 $ 7 $ 1 $ 16 $ 26
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 19
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Government Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Class I shares commenced on January 2, 2004.
Investor Class shares commenced February 28, 2008. Investor Class and Class A
shares are offered at net asset value per share plus an initial sales charge. No
sales charge applies on investments of $1 million or more (and certain other
qualified purchases) in Investor Class and Class A shares, but a contingent
deferred sales charge is imposed on certain redemptions of such shares within
one year of the date of purchase. Class B shares and Class C shares are offered
without an initial sales charge, although a declining contingent deferred sales
charge may be imposed on redemptions made within six years of purchase of Class
B shares and a 1% contingent deferred sales charge may be imposed on redemptions
made within one year of purchase of Class C shares. Class I shares are not
subject to a sales charge. Depending upon eligibility, Class B shares convert to
either Investor Class or Class A shares eight years after the date they were
purchased. Additionally, depending upon eligibility, Investor Class shares may
convert to Class A shares and Class A shares may convert to Investor Class
shares. The five classes of shares have the same voting (except for issues that
relate solely to one class), dividend, liquidation and other rights and bear the
same conditions except that Class B and Class C shares are subject to higher
distribution fee rates than Investor Class and Class A shares under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are
not subject to a distribution or service fee.
The Fund's investment objective is to seek a high level of current income,
consistent with safety of principal.
The ability of issuers of debt securities held by the Fund to meet their
obligations may be affected by economic developments in a specific country,
industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or broker selected by the Fund's Manager (as defined in Note 3(A))
in consultation with the Fund's Subadvisor, if any, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques, if
such prices are deemed by the Fund's Manager, in consultation with the Fund's
Subadvisor, if any, to be representative of market values, at the regular close
of trading of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("valuation date"). Investments in other
mutual funds are valued at their net asset values as of the close of the New
York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor ,as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund held
securities with a value of $1,574,654 that were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in
20 MainStay Government Fund
filing tax returns (including whether an entity is taxable in a particular
jurisdiction), and requires certain expanded tax disclosures. The Interpretation
became effective for the Fund's 2008 fiscal year, and was applied to all open
tax years as of the date of effectiveness. The Manager, as defined in Note 3(A),
determined that the adoption of the Interpretation did not have an impact on the
Fund's financial statements upon adoption. The Manager continually reviews the
Fund's tax positions and such conclusions under the Interpretation based on
factors, including, but not limited to, ongoing analyses of tax laws and
regulations and interpretations thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income monthly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at net asset value, unless the shareholder
elects otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method and include gains
and losses from repayments of principal on mortgage-backed securities. Interest
income is accrued as earned using the effective interest rate method. Discounts
and premiums on securities purchased, other than short-term securities, for the
Fund are accreted and amortized, respectively, on the effective interest rate
method over the life of the respective securities or, in the case of a callable
security, over the period to the first date of call. Discounts and premiums on
short-term securities are accreted and amortized, respectively, on the straight-
line method. Income from payment-in-kind securities is recorded daily based on
the effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3(B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the Portfolio of Investments and liabilities for such purchase
commitments are included as payables for investments purchased. During the roll
period, the Fund foregoes principal and interest paid on the securities. The
Fund is compensated by the difference between the current sales price and the
forward price for the future as well as by the earnings on the cash proceeds of
the initial sale. MDRs may be renewed without physical delivery of the
securities subject to the contract. The Fund maintains liquid assets from its
portfolio having a value not less than the repurchase price, including accrued
interest. MDR transactions involve certain risks, including the risk that the
MBS returned to the Fund at the end of the roll, while substantially similar,
could be inferior to what was initially sold to the counterparty.
(I) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
loans are collateralized by cash or securities at least equal at all times to
the market value of the securities loaned. Collateral will consist of U.S.
Government securities, cash equivalents or irrevocable letters of credit. The
Fund may bear the risk of delay in recovery of, or loss of rights in, the
securities loaned should the borrower of the securities experience financial
difficulty. The Fund may also record realized gain or loss on securities deemed
sold due to borrower's inability to return securities on loan. The Fund receives
compensation for lending its securities in the form of fees or it retains a
portion of interest on the investment of any cash received as collateral. The
Fund also continues to receive interest and dividends on the securities loaned
and any gain or loss in the market price of the securities loaned that may occur
during the term of the loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(J) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory
Agreement"), between NYLIM and the Subadvisor, NYLIM pays for the services of
the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.60% on assets up to $1.0 billion and 0.55% on assets in
excess of $1.0 billion. NYLIM has contractually agreed to waive its management
fee to 0.50% on assets up to $500 million and 0.475% on assets from $500 million
to $1.0 billion and to 0.45% on assets in excess of $1.0 billion. This waiver
may not be recouped by NYLIM. Prior to August 1, 2008, the Fund was
contractually obligated to pay the Manager at an annual rate of the following:
0.60% on assets up to $500 million and 0.55% on assets in excess of $500
million. NYLIM had also contractually agreed to waive a portion of its
management fee by 0.10% to 0.50% on assets up to $1 billion and to 0.45% on
assets in excess of $1 billion. This waiver may not be recouped by NYLIM.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage and other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.15%; Class A, 1.05%; Class B,
1.90%; Class C, 1.90%; and Class I, 0.40%. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. NYLIM
may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed the existing expense limitation and the recoupment is
made within three years after the year in which NYLIM incurred the expense.
22 MainStay Government Fund
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $1,853,433 and waived expenses in the amount of $938,994, of which
$632,500 is subject to recoupment.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2010 2011 TOTAL
$643,616 $572,938 $632,500 $1,849,054
- --------------------------------------------------
</Table>
The Fund had $302,892 of waived fees for which the recoupment period expired
during the year ended October 31, 2008.
Between August 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 1.05%; Class B,
1.80%; Class C, 1.80%; and Class I, 0.40%. Prior to August 1, 2007, NYLIM had a
different expense limitation agreement in place with respect to the Fund.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under the Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
these services provided to the Fund by the Manager amounted to $42,847 for the
period November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Investor Class and Class A Plans, the Distributor receives a
monthly distribution fee from the Fund at an annual rate of 0.25% of the average
daily net assets of the Fund's Investor Class and Class A shares, which is an
expense of the Investor Class and Class A shares of the Fund for distribution or
service activities as designated by the Distributor. Pursuant to the Class B and
Class C Plans, the Fund pays the Distributor a monthly distribution fee, which
is an expense of the Class B and Class C shares of the Fund, at the annual rate
of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Plans provide that the Class B and Class C shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B and Class C shares of the Fund. Class I shares are not
subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were $7,819
and $21,681, respectively for the year ended October 31, 2008. The Fund was also
advised that the Distributor retained contingent deferred sales charges on
redemptions of Investor Class, Class A, Class B and Class C shares of $15,
$15,929, $81,451, and $4,520 respectively, for the year ended October 31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $1,068,913.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 185 0.0%++
- -------------------------------------------------
Class C 114 0.0++
- -------------------------------------------------
Class I 1,155 0.1
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $11,058.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
AND OTHER TEMPORARY APPRECIATION ACCUMULATED
ORDINARY INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$267,524 $(6,447,372) $(150,092) $(5,804,261) $(12,134,201)
- --------------------------------------------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to dividends payable and wash sale deferrals.
The other temporary differences are primarily due to premium amortization
accruals and dividends payable.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMU-
LATED
UNDIS-
TRIBUTED
NET
INVEST- ACCUMULATED
MENT NET REALIZED ADDITIONAL
INCOME GAIN (LOSS) ON PAID-IN
(LOSS) INVESTMENTS CAPITAL
$219,041 $5,091,026 $(5,310,067)
-----------------------------------------
</Table>
The reclassifications for the Fund are primarily due to paydowns gain (loss) and
expiration of capital loss carryforwards.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $6,447,372 were available as shown in the table below, to the extent provided
by the regulations to offset future realized gains of the Fund through the years
indicated. To the extent that these loss carryforwards are used to offset future
capital gains, it is probable that the capital gains so offset will not be
distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2012 $3,458
2014 2,598
2015 391
$6,447
- ----------------------------
</Table>
The Fund had $5,310,067 of capital loss carryforwards that expired during the
year ended October 31, 2008.
The Fund utilized $1,619,643 of capital loss carryforwards during the year ended
October 31, 2008.
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distribution paid from:
Ordinary Income $11,852,851 $12,194,176
- -------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with
24 MainStay Government Fund
respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of U.S. Government
securities were $152,735 and $139,306, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $19,019 and $11,390, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 1,279,036 $10,698,391
Shares issued to
shareholders in
reinvestment of dividends 148,466 1,229,989
Shares redeemed (769,140) (6,412,328)
-------------------------
Net increase in shares
outstanding before
conversion 658,362 5,516,052
Shares converted into
Investor Class (See Note
1) 7,195,812 60,814,414
Shares converted from
Investor Class (See Note
1) (356,426) (2,981,459)
-------------------------
Net increase 7,497,748 $ 63,349,007
=========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 7,597,458 $ 63,493,082
Shares issued to
shareholders in
reinvestment of dividends 859,598 7,148,881
Shares redeemed (7,554,369) (62,887,830)
-------------------------
Net increase in shares
outstanding before
conversion 902,687 7,754,133
Shares converted into Class
A (See Note 1) 862,898 7,188,662
Shares converted from Class
A (See Note 1) (7,067,799) (59,611,916)
-------------------------
Net decrease (5,302,214) $(44,669,121)
=========================
Year ended October 31, 2007:
Shares sold 2,304,812 $ 18,818,389
Shares issued to
shareholders in
reinvestment of dividends 1,066,942 8,701,939
Shares redeemed (5,708,234) (46,588,858)
-------------------------
Net decrease in shares
outstanding before
conversion (2,336,480) (19,068,530)
Shares converted from Class
B (See Note 1) 877,574 7,137,927
-------------------------
Net decrease (1,458,906) $(11,930,603)
=========================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 2,347,675 $ 19,595,403
Shares issued to
shareholders in
reinvestment of dividends 174,664 1,451,422
Shares redeemed (1,604,437) (13,362,831)
--------------------------
Net increase in shares
outstanding before
conversion 917,902 7,683,994
Shares converted from Class
B (See Note 1) (650,194) (5,409,701)
--------------------------
Net increase 267,708 $ 2,274,293
==========================
Year ended October 31, 2007:
Shares sold 714,220 $ 5,821,888
Shares issued to
shareholders in
reinvestment of dividends 218,018 1,777,860
Shares redeemed (1,791,847) (14,626,201)
--------------------------
Net decrease in shares
outstanding before
conversion (859,609) (7,026,453)
Shares reacquired upon
conversion into Class A
(See Note 1) (877,578) (7,137,927)
--------------------------
Net decrease (1,737,187) $ (14,164,380)
==========================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 2,958,867 $24,715,399
Shares issued to
shareholders in
reinvestment of dividends 35,284 292,732
Shares redeemed (726,669) (6,016,010)
-------------------------
Net increase 2,267,482 $ 18,992,121
=========================
Year ended October 31, 2007:
Shares sold 477,586 $ 3,887,622
Shares issued to
shareholders in
reinvestment of dividends 17,939 146,131
Shares redeemed (260,842) 2,125,616
-------------------------
Net increase 234,683 $ 6,159,369
=========================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 164,808 $1,389,556
Shares issued to shareholders
in reinvestment of dividends 581 4,768
Shares redeemed (3,664) (30,512)
----------------------
Net increase 161,725 $ 1,363,812
======================
Year ended October 31, 2007:
Shares sold 1,219 $ 9,971
Shares issued to shareholders
in reinvestment of dividends 26 214
Shares redeemed (489) (4,027)
----------------------
Net increase 756 $ 6,158
======================
</Table>
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
26 MainStay Government Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Government Fund ("the Fund"), one
of the funds constituting The MainStay Funds, as of October 31, 2008, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year 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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Government Fund of The MainStay Funds as of October 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
mainstayinvestments.com 27
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Government Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management and
Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider of shareholder services, which has been recognized by
28 MainStay Government Fund
independent third-parties on numerous occasions. The Board noted the role that
the MainStay Family of Funds historically has played in serving the investment
needs of New York Life Insurance Company policyholders, who often maintain
smaller account balances than other retail investors. The Board acknowledged
that it had approved NYLIM's recommendation to create a new "Investor Class" of
shares designed principally to address the higher shareholder-servicing costs
typically associated with smaller shareholder accounts. The Board considered the
experience of senior personnel at NYLIM providing management and administrative
services to the Fund, as well as NYLIM's reputation and financial condition. The
Board also reviewed NYLIM's willingness to invest in personnel designed to
benefit the Fund, and that NYLIM also is responsible for paying all of the
salaries and expenses for the Fund's officers. In addition, the Board considered
the benefits to shareholders of being part of the MainStay Family of Funds,
including the privilege of exchanging investments between the same class of
shares without the imposition of a sales charge, as described more fully in the
Fund's prospectus. Based on these considerations, the Board concluded, within
the context of its overall determinations regarding the Agreements, that the
Fund is likely to continue to benefit from the nature, extent and quality of
these services as a result of NYLIM's experience, personnel, operations and
resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and MacKay
Shields' method for compensating portfolio managers. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio managers and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position is important in order for NYLIM to continue to provide
mainstayinvestments.com 29
high-quality ongoing services to the Fund and its shareholders. The Board noted,
for example, increased costs borne by NYLIM and its affiliates due to new and
ongoing regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the
30 MainStay Government Fund
total ordinary operating expenses of the Fund and Fund share classes through the
imposition of expense limitation arrangements that may be modified only with the
prior approval of the Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
mainstayinvestments.com 31
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For State individual income tax purposes, the Fund hereby designates 31.92% of
the ordinary income dividends paid during its fiscal year ended October 31, 2008
as attributable to interest income from Direct Obligations of the United States.
Such dividends may be exempt from individual income tax purposes in most states
including New York, California and District of Columbia. Consult your tax
advisor for further details.
The dividends paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 97.2% to arrive at the amount eligible for qualified
interest income.
In January 2009, shareholders will receive on IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by the
shareholders in calendar year 2008. The amounts that will be reported on such
1099-DIV will be the amounts you are to use on your federal income tax return
and will differ from the amounts which we must report for the Fund's fiscal year
ended October 31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
32 MainStay Government Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
mainstayinvestments.com 33
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
34 MainStay Government Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 35
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
36 MainStay Government Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
This page intentionally left blank
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A014515 (RECYCLE LOGO) MS308-08 MSG11-12/08
07
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
HIGH YIELD CORPORATE BOND FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
HIGH YIELD CORPORATE BOND FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 22
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 28
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 36
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 37
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 40
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 40
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 40
- ---------------------------------------------
TRUSTEES AND OFFICERS 41
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
A 2% REDEMPTION FEE WILL BE IMPOSED ON REDEMPTIONS MADE WITHIN 60 DAYS OF
PURCHASE. PERFORMANCE DATA SHOWN DOES NOT REFLECT THIS FEE, WHICH WOULD LOWER
PERFORMANCE.
INVESTOR CLASS SHARES(2)--MAXIMUM 4.5% INITIAL SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (25.54%) 0.87% 4.32%
Excluding sales charges (22.03) 1.80 4.80
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH
YIELD CORPORATE CREDIT SUISSE
BOND FUND HIGH YIELD
-INVESTOR CLASS INDEX
--------------- -------------
10/31/98 9550 10000
10778 10554
10902 10473
10326 10512
9709 10505
13958 13810
15708 15600
16629 16152
18222 17813
19573 19184
10/31/08 15260 14412
</Table>
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (25.51%) 0.87% 4.32%
Excluding sales charges (22.00) 1.81 4.80
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH
YIELD CORPORATE
BOND FUND CREDIT SUISSE
- CLASS HIGH YIELD
A INDEX
--------------- -------------
10/31/98 23875 25000
26945 26385
27256 26183
25814 26279
24271 26262
34896 34524
39269 38999
41572 40379
45556 44533
48932 47960
10/31/08 38166 36031
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (26.09%) 0.77% 4.03%
Excluding sales charges (22.47) 1.06 4.03
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH
YIELD CORPORATE
BOND FUND CREDIT SUISSE
- CLASS HIGH YIELD
B INDEX
--------------- -------------
10/31/98 10000 10000
11208 10554
11247 10473
10565 10512
9883 10505
14085 13810
15726 15600
16518 16152
17991 17813
19153 19184
10/31/08 14849 14412
</Table>
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A Shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 4.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class
C shares are sold with no initial sales charge, are subject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 1.00%. Class I shares are sold with no initial sales charge or CDSC, have
no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A shares through February
27, 2008, adjusted for differences in certain contractual fees and expenses.
Unadjusted, the performance shown for Investor Class shares might have been
lower.
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES(3)--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (23.32%) 1.06% 4.03%
Excluding sales charges (22.60) 1.06 4.03
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH
YIELD CORPORATE
BOND FUND CREDIT SUISSE
- CLASS HIGH YIELD
C INDEX
--------------- -------------
10/31/98 10000 10000
11208 10554
11247 10473
10565 10512
9883 10505
14085 13810
15726 15600
16518 16152
17990 17813
19183 19184
10/31/08 14848 14412
</Table>
CLASS I SHARES(4)--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
(21.63%) 2.09% 5.08%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH
YIELD CORPORATE
BOND FUND CREDIT SUISSE
- CLASS HIGH YIELD
I INDEX
--------------- -------------
10/31/98 10000 10000
11318 10554
11475 10473
10882 10512
10269 10505
14797 13810
16687 15600
17708 16152
19483 17813
20943 19184
10/31/08 16412 14412
</Table>
CLASS R2 SHARES(5)--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
(21.82%) 1.76% 4.73%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY HIGH
YIELD CORPORATE
BOND FUND CREDIT SUISSE
- CLASS HIGH YIELD
R3 INDEX
--------------- -------------
10/31/98 10000 10000
11281 10554
11394 10473
10773 10512
10143 10505
14551 13810
16352 15600
17287 16152
18951 17813
20307 19184
10/31/08 15877 14412
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ---------------------------------------------------------------------
Credit Suisse High Yield Index(6) (24.87%) 0.86% 3.72%
Average Lipper high current yield fund(7) (25.13) (0.26) 2.01
</Table>
3. Performance figures for Class C shares, first offered to the public on
September 1, 1998, include the historical performance of Class B shares
through August 31, 1998. Unadjusted, the performance shown for Class C shares
might have been lower.
4. Performance figures for Class I shares, first offered to the public on
January 2, 2004, include the historical performance of Class B shares through
December 31, 2003, adjusted for differences in certain contractual expenses
and fees. Unadjusted, the performance shown for Class I shares might have
been lower.
5. Class R2 shares were first offered to the public on December 14, 2007, but
did not commence investment operations until May 1, 2008. Performance figures
for Class R2 shares include historic performance of Class B shares through
April 30, 2008, adjusted for differences in certain contractual expenses and
fees. Unadjusted, the performance shown for Class R2 shares might have been
lower.
6. The Credit Suisse High Yield Index is an unmanaged, market-weighted index
that consists of publicly traded bonds rated below BBB by Standard & Poor's
and below Baa by Moody's. Results assume reinvestment of all income and
capital gains. The Credit Suisse High Yield Index is considered to be the
Fund's broad-based securities-market index for comparison purposes. An
investment cannot be made directly in an index.
7. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay High Yield Corporate Bond Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY HIGH YIELD CORPORATE BOND
FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARES CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $796.60 $5.28 $1,019.30 $5.94
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $797.30 $4.97 $1,019.60 $5.58
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $794.50 $8.66 $1,015.50 $9.73
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $794.50 $8.62 $1,015.50 $9.68
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $800.00 $3.85 $1,020.90 $4.32
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $798.70 $5.38 $1,019.20 $6.04
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.17% for Investor Class, 1.10% for Class A, 1.92% for Class B, 1.91% for
Class C, 0.85% for Class I and 1.19% for Class R2) multiplied by the average
account value over the period, divided by 366 and multiplied by 184 (to
reflect the one-half year period). The table above represents actual expenses
incurred during the one-half year period.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2008
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Corporate
Bonds 67.00
Loan
Assign-
ments &
Partici-
pations 10.70
Yankee
Bonds 10.00
Short-Term
Invest-
ments 7.00
Common
Stocks 0.90
Preferred
Stock 0.90
Foreign
Bond 0.60
Convert-
ible
Bonds 0.40
Convert-
ible
Pre-
ferred
Stock 0.40
Warrants++ 0.00
Cash and
Other
Assets,
Less
Liabili-
ties 2.10
</Table>
++ Less than one-tenth of a percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN ISSUERS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. SunGard Data Systems, Inc., 4.553%-10.625%, due
8/15/13-5/15/15
2. HCA, Inc., 5.762%-8.75%, due 9/1/10-11/18/13
3. Georgia-Pacific Corp., 7.00%-8.875%,
due 1/15/15-5/15/31
4. American Real Estate Partners, L.P./American
Real Estate Finance Corp., 7.125%-8.125%,
due 6/1/12-2/15/13
5. Lucent Technologies, Inc., 5.50%-6.50%, due
11/15/08-3/15/29
6. Biomet, Inc., 10.00%-11.625%, due 10/15/17
7. Community Health Systems, Inc., 5.161%-8.875%,
due 7/25/14-7/15/15
8. NXP B.V./NXP Funding LLC, 7.875%, due 10/15/14
9. Qwest Corp., 6.95%-8.875%, due 6/30/10-11/10/26
10. TXU Corp., 6.437%-6.659%, due 10/10/14
</Table>
8 MainStay High Yield Corporate Bond Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGER J. MATTHEW PHILO, CFA, OF MACKAY SHIELDS
LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY HIGH YIELD CORPORATE BOND FUND PERFORM RELATIVE TO ITS PEERS
AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay High Yield Corporate Bond Fund returned
- -22.03% for Investor Class shares,(1) -22.00% for Class A shares, -22.47% for
Class B shares and -22.60% for Class C shares for the 12 months ended October
31, 2008. Over the same period, the Fund's Class I shares returned -21.63% and
Class R2 shares(2) returned -21.82%. All share classes outperformed the -25.13%
return of the average Lipper(3) high current yield fund and the -24.87% return
of the Credit Suisse High Yield Index(4) for the 12 months ended October 31,
2008. The Credit Suisse High Yield Index is the Fund's broad-based securities-
market index. See pages 5 and 6 for Fund returns with sales charges.
WHAT FACTORS INFLUENCED THE HIGH-YIELD CORPORATE BOND MARKET AS A WHOLE DURING
THE REPORTING PERIOD?
The high-yield corporate bond market was affected by a risk-laden macroeconomic
environment. The combination of a housing collapse, overleveraged banks and
overextended consumers contributed to a global credit crisis, which in turn
pushed the U.S. economy into severe difficulties. Although the corporate default
rate was relatively benign during the reporting period, the market's apparent
anticipation of a rising default rate put significant pressure on the high-yield
corporate bond market in the last months of the reporting period.
WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
The Fund's performance relative to its benchmark and peers resulted from our
bottom-up investment style, which focused on individual companies to determine
risk-group weightings in the context of historical yield spreads.(5) Throughout
the reporting period, the Fund was more conservatively positioned than the
Credit Suisse High Yield Index and remained underweight relative to the Index in
lower-rated high-yield securities. Although increased economic risks were
rapidly developing, we believed that these risks were not adequately discounted
into the high-yield market and that many high-yield securities failed to provide
adequate compensation for the risks they contained. Our positioning contributed
positively to the Fund's relative results, as lower-quality bonds underperformed
higher-quality high-yield bonds in the Fund during the reporting period.
HOW DID YOU POSITION THE FUND FROM AN INDUSTRY PERSPECTIVE?
During the reporting period, we increased the Fund's exposure to the health care
and gaming sectors. In health care, the medical products industry was among the
Fund's larger weightings. We believed that the nondiscretionary nature of these
products made them more resistant to an economic downturn. Over the same period,
we decreased the Fund's exposure to airlines and media. The media sector was
burdened by a very weak advertising environment, as growth slowed in most major
media, especially print.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
We added to or established meaningful positions in the fixed-income securities
of medical products
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. The values of debt
securities fluctuate depending on various factors, including interest rates,
issuer creditworthiness, market conditions and maturities. High-yield securities
("junk bonds") are generally considered speculative because they present a
greater risk of loss than higher-quality debt securities and may be subject to
greater price volatility. Foreign securities may be subject to greater risks
than U.S. investments, including currency fluctuations, less-liquid trading
markets, greater price volatility, political and economic instability, less
publicly available information, and changes in tax or currency laws or monetary
policy. These risks are likely to be greater in emerging markets than in
developed markets.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. Performance for Class R2 shares prior to 12/14/07, the date the shares were
first offered, includes the historical performance of Class B shares adjusted
to reflect the differences in fees and expenses for such shares.
3. See footnote on page 6 for more information on Lipper Inc.
4. See footnote on page 6 for more information on the Credit Suisse High Yield
Index.
5. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The terms may also refer to the difference in yield between two specific
securities or types of securities at a given time.
mainstayinvestments.com 9
manufacturer Biomet, electric power utility TXU, medical device manufacturer
ReAble Therapeutics and integrated telecommunications/media company Videotron.
We reduced or eliminated significant positions in the securities of Northwest
Airlines and Delta Air Lines before and after Northwest was acquired by Delta,
directory publisher Idearc, arts & crafts retailer Michaels Stores and food
producer Pilgrim's Pride. All of these position changes contributed positively
to the Fund's relative performance during the reporting period.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
The Fund's weightings are a result of our bottom-up security selection process.
As of October 31, 2008, the Fund was overweight in health care, utilities and
gaming relative to the Credit Suisse High Yield Index. As of the same date, the
Fund was underweight in the retail, housing, consumer and service sectors. As
employment, credit availability and income came under greater downward pressure,
steering away from sectors more directly connected to the consumer proved to be
a successful strategy. Indeed, all of these weightings benefited the Fund during
the 12-month reporting period.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
10 MainStay High Yield Corporate Bond Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 88.7%+
CONVERTIBLE BONDS 0.4%
- ------------------------------------------------------------------
INSURANCE 0.0%++
Conseco, Inc.
3.50%, due 9/30/35
(zero coupon), beginning
9/30/10 (a)(b) $ 2,940,000 $ 1,106,175
--------------
INTERNET 0.0%++
At Home Corp.
4.75%, due 12/31/49
(c)(d)(e)(f) 61,533,853 6,153
--------------
MEDIA 0.4%
Sinclair Broadcast Group,
Inc.
3.00%, due 5/15/27 17,060,000 13,136,200
--------------
Total Convertible Bonds
(Cost $19,736,836) 14,248,528
--------------
CORPORATE BONDS 67.0%
- ------------------------------------------------------------------
ADVERTISING 1.2%
Interpublic Group of Cos.,
Inc.
6.25%, due 11/15/14 16,435,000 10,929,275
7.25%, due 8/15/11 10,195,000 8,461,850
Lamar Media Corp.
6.625%, due 8/15/15 17,363,000 12,761,805
Series C
6.625%, due 8/15/15 2,765,000 2,032,275
7.25%, due 1/1/13 6,070,000 4,764,950
--------------
38,950,155
--------------
AEROSPACE & DEFENSE 0.7%
BE Aerospace, Inc.
8.50%, due 7/1/18 8,490,000 7,301,400
Hawker Beechcraft
Acquisition Co.
LLC/Hawker Beechcraft
Co.
8.50%, due 4/1/15 8,545,000 5,127,000
9.75%, due 4/1/17 5,430,000 3,040,800
Sequa Corp.
11.75%, due 12/1/15 (a) 10,730,000 6,652,600
--------------
22,121,800
--------------
AGRICULTURE 0.5%
Reynolds American, Inc.
7.625%, due 6/1/16 10,605,000 8,700,066
7.75%, due 6/1/18 10,705,000 8,567,940
--------------
17,268,006
--------------
AIRLINES 0.5%
DAE Aviation Holdings,
Inc.
11.25%, due 8/1/15 (a) 13,130,000 9,847,500
Delta Air Lines, Inc.
(Escrow Shares)
(zero coupon), due
12/31/08 (g) 5,175,000 109,969
2.875%, due 2/6/24 (g) 7,201,000 162,022
2.875%, due 2/18/24
(a)(g) 4,190,000 94,275
8.00%, due 6/3/23 (b)(g) 13,575,000 305,437
8.00%, due 6/3/23 (g) 10,459,000 235,327
8.30%, due 12/15/29 (g) 11,297,000 240,061
9.25%, due 3/15/22 (g) 9,000,000 191,250
9.75%, due 5/15/21 (g) 2,115,000 44,944
10.00%, due 8/15/49 (g) 8,195,000 174,144
10.375%, due 2/1/11 (g) 6,515,000 138,444
10.375%, due 12/15/22
(g) 15,160,000 322,150
Northwest Airlines, Inc.
Series 2001-1, Class 1B
7.691%, due 10/1/18 3,775,045 2,265,027
Series 2002-1, Class IC2
9.055%, due 5/20/12 4,762,965 3,334,076
Northwest Airlines, Inc.
(Escrow Shares)
7.625%, due 11/15/23 (g) 11,810,900 44,291
7.875%, due 12/31/08 (g) 8,723,000 10,904
8.70%, due 12/31/08 (g) 445,000 556
8.875%, due 12/31/08 (g) 5,229,300 6,537
9.875%, due 3/15/37 (g) 18,534,200 23,168
10.00%, due 2/1/09 (g) 14,683,200 18,354
--------------
17,568,436
--------------
APPAREL 0.4%
Unifi, Inc.
11.50%, due 5/15/14 18,980,000 13,665,600
--------------
AUTO MANUFACTURERS 0.4%
Daimler Finance North
America LLC
7.30%, due 1/15/12 8,170,000 6,659,057
Ford Motor Co.
7.45%, due 7/16/31 15,380,000 4,844,700
General Motors Corp.
6.75%, due 5/1/28 2,195,000 515,825
--------------
12,019,582
--------------
AUTO PARTS & EQUIPMENT 1.9%
Allison Transmission, Inc.
11.25%, due 11/1/15
(a)(h) 12,030,000 6,375,900
American Tire
Distributors, Inc.
10.133%, due 4/1/12 (i) 4,635,000 3,615,300
10.75%, due 4/1/13 7,245,000 5,542,425
FleetPride Corp.
11.50%, due 10/1/14 (a) 17,535,000 15,781,500
</Table>
+ Percentages indicated are based on Fund net assets.
Among the Fund's 10 largest issuers, as of October 31, 2008, excluding short-
term investments. May be subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayfunds.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
AUTO PARTS & EQUIPMENT (CONTINUED)
Goodyear Tire & Rubber Co.
(The)
6.678%, due 12/1/09 (i) $ 2,120,000 $ 1,942,450
8.625%, due 12/1/11 10,073,000 8,511,685
Lear Corp.
Series B
8.50%, due 12/1/13 5,690,000 2,162,200
8.75%, due 12/1/16 16,880,000 6,245,600
Tenneco Automotive, Inc.
8.625%, due 11/15/14 14,555,000 6,877,237
10.25%, due 7/15/13 5,427,000 4,612,950
--------------
61,667,247
--------------
BEVERAGES 0.3%
Constellation Brands, Inc.
7.25%, due 5/15/17 13,065,000 10,843,950
--------------
BUILDING MATERIALS 0.9%
Compression Polymers Corp.
10.50%, due 7/1/13 5,660,000 3,650,700
Texas Industries, Inc.
7.25%, due 7/15/13 (a) 32,197,000 25,274,645
--------------
28,925,345
--------------
CHEMICALS 1.1%
Equistar Chemicals, L.P.
7.55%, due 2/15/26 11,985,000 5,573,025
MacDermid, Inc.
9.50%, due 4/15/17 (a) 10,300,000 5,459,000
Millennium America, Inc.
7.625%, due 11/15/26 12,635,000 2,527,000
Mosaic Global Holdings,
Inc.
7.375%, due 12/1/14 (a) 3,900,000 3,409,306
7.625%, due 12/1/16 (a) 5,090,000 4,444,949
Phibro Animal Health Corp.
10.00%, due 8/1/13 (a) 8,648,000 7,350,800
Tronox Worldwide
LLC/Tronox Finance Corp.
9.50%, due 12/1/12
(b)(e) 29,371,000 6,461,620
--------------
35,225,700
--------------
COAL 0.2%
Peabody Energy Corp.
7.375%, due 11/1/16 2,185,000 1,846,325
7.875%, due 11/1/26 7,080,000 5,540,100
--------------
7,386,425
--------------
COMMERCIAL SERVICES 3.3%
Cardtronics, Inc.
9.25%, due 8/15/13 23,125,000 18,153,125
El Comandante Capital
Corp.
(Escrow Shares)
(zero coupon), due
12/31/50 (c)(d)(g) 21,941,051 1,579,756
Great Lakes Dredge & Dock
Corp.
7.75%, due 12/15/13 14,650,000 10,548,000
iPayment, Inc.
9.75%, due 5/15/14 16,404,000 12,303,000
Knowledge Learning Corp.,
Inc.
7.75%, due 2/1/15 (a) 24,640,000 19,219,200
Language Line, Inc.
11.125%, due 6/15/12 16,664,000 15,914,120
Lender Processing
Services, Inc.
8.125%, due 7/1/16 10,600,000 9,063,000
Rural/Metro Corp.
9.875%, due 3/15/15 12,020,000 9,796,300
Service Corp.
International
7.375%, due 10/1/14 6,645,000 5,432,287
7.625%, due 10/1/18 6,850,000 5,377,250
--------------
107,386,038
--------------
COMPUTERS 1.5%
V SunGard Data Systems,
Inc.
4.875%, due 1/15/14 12,070,000 9,293,900
9.125%, due 8/15/13 19,335,000 16,048,050
10.625%, due 5/15/15 (a) 29,453,000 24,887,785
--------------
50,229,735
--------------
DISTRIBUTION & WHOLESALE 0.3%
ACE Hardware Corp.
9.125%, due 6/1/16 (a) 13,318,000 9,988,500
--------------
DIVERSIFIED FINANCIAL SERVICES 0.8%
AmeriCredit Corp.
8.50%, due 7/1/15 (b) 20,295,000 14,866,087
LaBranche & Co., Inc.
11.00%, due 5/15/12 10,010,000 8,908,900
Nuveen Investments, Inc.
10.50%, due 11/15/15 (a) 8,530,000 2,303,100
Ucar Finance, Inc.
10.25%, due 2/15/12 626,000 596,265
--------------
26,674,352
--------------
ELECTRIC 3.7%
AES Eastern Energy, L.P.
Series 1999-A
9.00%, due 1/2/17 15,767,179 16,555,538
Series 1999-B
9.67%, due 1/2/29 16,820,000 15,138,000
Energy Future Holdings
Corp.
10.875%, due 11/1/17 (a) 30,710,000 23,646,700
ESI Tractebel Acquisition
Corp.
Class B
7.99%, due 12/30/11 5,678,000 5,223,760
NRG Energy, Inc.
7.25%, due 2/1/14 14,805,000 12,954,375
7.375%, due 2/1/16 1,090,000 940,125
</Table>
12 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
ELECTRIC (CONTINUED)
NSG Holdings LLC/NSG
Holdings, Inc.
7.75%, due 12/15/25 (a) $ 4,360,000 $ 3,662,400
PNM Resources, Inc.
9.25%, due 5/15/15 8,710,000 7,142,200
Public Service Co. of New
Mexico
7.95%, due 5/15/18 7,590,000 6,192,506
Reliant Energy Mid-
Atlantic Power Holdings
LLC
Series C
9.681%, due 7/2/26 3,700,000 3,367,000
Reliant Energy, Inc.
7.625%, due 6/15/14 3,780,000 2,910,600
7.875%, due 6/15/17 30,195,000 23,099,175
Western Resources, Inc.
7.125%, due 8/1/09 50,000 49,901
--------------
120,882,280
--------------
ENERGY--ALTERNATE SOURCES 0.0%++
Salton Sea Funding Corp.
Series E
8.30%, due 5/30/11 (c) 17,434 18,739
--------------
ENTERTAINMENT 2.9%
Chukchansi Economic
Development Authority
8.00%, due 11/15/13 (a) 6,480,000 3,434,400
Gaylord Entertainment Co.
6.75%, due 11/15/14 13,826,000 8,865,922
8.00%, due 11/15/13 12,600,000 8,599,500
Isle of Capri Casinos,
Inc.
7.00%, due 3/1/14 24,230,000 11,751,550
Jacobs Entertainment, Inc.
9.75%, due 6/15/14 16,000,000 6,880,000
Mohegan Tribal Gaming
Authority
6.375%, due 7/15/09 7,598,000 6,686,240
6.875%, due 2/15/15 2,380,000 1,380,400
8.00%, due 4/1/12 18,250,000 13,413,750
Penn National Gaming, Inc.
6.75%, due 3/1/15 18,440,000 14,291,000
6.875%, due 12/1/11 9,535,000 8,057,075
Pinnacle Entertainment,
Inc.
8.25%, due 3/15/12 3,530,000 2,444,525
8.75%, due 10/1/13 7,155,000 5,402,025
Speedway Motorsports, Inc.
6.75%, due 6/1/13 2,340,000 1,778,400
United Artists Theatre
Circuit, Inc.
Series BA7
9.30%, due 7/1/15 (c)(d) 1,805,429 1,083,258
--------------
94,068,045
--------------
ENVIRONMENTAL CONTROLS 0.6%
Geo Sub Corp.
11.00%, due 5/15/12 21,865,000 18,694,575
--------------
FINANCE--AUTO LOANS 1.4%
Ford Motor Credit Co. LLC
5.70%, due 1/15/10 1,825,000 1,354,694
7.375%, due 10/28/09 8,215,000 6,819,304
7.875%, due 6/15/10 13,470,000 9,050,278
General Motors Acceptance
Corp. LLC
6.75%, due 12/1/14 47,719,000 24,097,856
7.25%, due 3/2/11 8,778,000 5,401,806
--------------
46,723,938
--------------
FINANCE--OTHER SERVICES 1.3%
V American Real Estate
Partners,
L.P./American Real
Estate Finance Corp.
7.125%, due 2/15/13 39,835,000 25,096,050
8.125%, due 6/1/12 26,125,000 17,765,000
--------------
42,861,050
--------------
FOOD 0.6%
ASG Consolidated LLC/ASG
Finance, Inc.
(zero coupon), due
11/1/11
11.50%, beginning
11/1/08 3,745,000 3,239,425
Dole Food Co., Inc.
7.25%, due 6/15/10 128,000 93,440
8.625%, due 5/1/09 4,230,000 3,807,000
Stater Brothers Holdings
7.75%, due 4/15/15 13,600,000 11,152,000
--------------
18,291,865
--------------
FOREST PRODUCTS & PAPER 2.4%
Bowater, Inc.
9.375%, due 12/15/21 21,466,000 5,581,160
9.50%, due 10/15/12 270,000 75,600
Domtar Corp.
7.875%, due 10/15/11 21,655,000 18,623,300
V Georgia-Pacific Corp.
7.00%, due 1/15/15 (a) 5,760,000 4,233,600
7.125%, due 1/15/17 (a) 14,855,000 10,324,225
7.25%, due 6/1/28 2,370,000 1,374,600
7.75%, due 11/15/29 74,000 44,400
8.00%, due 1/15/24 15,193,000 9,647,555
8.875%, due 5/15/31 29,615,000 19,101,675
NewPage Corp.
10.00%, due 5/1/12 15,120,000 10,281,600
--------------
79,287,715
--------------
GAS 0.2%
MXEnergy Holdings, Inc.
10.625%, due 8/1/11 (i) 12,830,000 7,056,500
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayfunds.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
HAND & MACHINE TOOLS 0.4%
Baldor Electric Co.
8.625%, due 2/15/17 $ 9,015,000 $ 6,896,475
Thermadyne Holdings Corp.
9.50%, due 2/1/14 7,325,000 5,713,500
--------------
12,609,975
--------------
HEALTH CARE--PRODUCTS 3.9%
V Biomet, Inc.
10.00%, due 10/15/17 14,520,000 13,358,400
10.375%, due 10/15/17
(h) 6,560,000 5,461,200
11.625%, due 10/15/17 22,750,000 19,792,500
Catalent Pharma Solutions,
Inc.
9.50%, due 4/15/15 19,235,000 11,156,300
Cooper Cos., Inc. (The)
7.125%, due 2/15/15 8,175,000 6,540,000
DJO Finance LLC/DJO
Finance Corp.
10.875%, due 11/15/14 20,197,000 16,258,585
Hanger Orthopedic Group,
Inc.
10.25%, due 6/1/14 17,675,000 16,084,250
Invacare Corp.
9.75%, due 2/15/15 17,120,000 15,408,000
ReAble Therapeutics
Finance LLC/ReAble
Therapeutics Finance
Corp.
11.75%, due 11/15/14 16,134,000 11,455,140
Universal Hospital
Services, Inc.
6.303%, due 6/1/15 (i) 305,000 207,400
8.50%, due 6/1/15 (h) 785,000 628,000
VWR Funding, Inc.
Series B
10.25%, due 7/15/15 (h) 15,190,000 9,038,050
--------------
125,387,825
--------------
HEALTH CARE--SERVICES 3.0%
Alliance Imaging, Inc.
Series B
7.25%, due 12/15/12 29,996,000 25,796,560
Centene Corp.
7.25%, due 4/1/14 6,047,000 4,867,835
V Community Health
Systems, Inc.
8.875%, due 7/15/15 19,255,000 16,126,062
V HCA, Inc.
6.30%, due 10/1/12 12,845,000 8,798,825
6.75%, due 7/15/13 9,545,000 6,108,800
8.75%, due 9/1/10 3,280,000 2,886,400
Psychiatric Solutions,
Inc.
7.75%, due 7/15/15 12,445,000 10,236,013
Skilled Healthcare Group,
Inc.
11.00%, due 1/15/14 5,899,000 5,220,615
Vanguard Health Holding
Co. II LLC
9.00%, due 10/1/14 20,220,000 16,782,600
--------------
96,823,710
--------------
HOLDING COMPANY--DIVERSIFIED 0.6%
Leucadia National Corp.
7.125%, due 3/15/17 3,345,000 2,859,975
8.125%, due 9/15/15 14,255,000 12,615,675
Susser Holdings LLC
10.625%, due 12/15/13 6,221,000 5,287,850
--------------
20,763,500
--------------
HOUSEHOLD PRODUCTS & WARES 0.7%
ACCO Brands Corp.
7.625%, due 8/15/15 19,250,000 11,068,750
Jarden Corp.
7.50%, due 5/1/17 10,490,000 7,815,050
Libbey Glass, Inc.
9.928%, due 6/1/11 (i) 6,825,000 4,402,125
--------------
23,285,925
--------------
INSURANCE 1.8%
Crum & Forster Holdings
Corp.
7.75%, due 5/1/17 37,380,000 25,979,100
HUB International
Holdings, Inc.
9.00%, due 12/15/14 (a) 27,840,000 20,880,000
Lumbermens Mutual Casualty
Co.
8.30%, due 12/1/37
(a)(e) 8,525,000 85,250
8.45%, due 12/1/97
(a)(e) 2,575,000 25,750
9.15%, due 7/1/26 (a)(e) 42,123,000 421,230
USI Holdings Corp.
6.679%, due 11/15/14
(a)(i) 6,375,000 4,024,219
9.75%, due 5/15/15 (a) 11,390,000 7,175,700
--------------
58,591,249
--------------
INTERNET 0.4%
Expedia, Inc.
8.50%, due 7/1/16 (a) 15,300,000 11,322,000
--------------
IRON & STEEL 0.4%
Allegheny Ludlum Corp.
6.95%, due 12/15/25 14,390,000 11,989,733
Allegheny Technologies,
Inc.
8.375%, due 12/15/11 210,000 218,838
--------------
12,208,571
--------------
LEISURE TIME 0.1%
Town Sports International,
Inc.
(zero coupon), due
2/1/14
11.00%, beginning 2/1/09 4,645,000 4,087,600
--------------
LODGING 1.8%
Boyd Gaming Corp.
6.75%, due 4/15/14 9,805,000 6,177,150
7.125%, due 2/1/16 2,306,000 1,429,720
7.75%, due 12/15/12 23,420,000 19,204,400
Majestic Star Casino LLC
9.50%, due 10/15/10 10,165,000 3,964,350
</Table>
14 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
LODGING (CONTINUED)
MGM Mirage, Inc.
7.50%, due 6/1/16 $ 6,373,000 $ 3,760,070
13.00%, due 11/15/13 2,930,000 2,585,725
MTR Gaming Group, Inc.
Series B
9.00%, due 6/1/12 6,005,000 3,332,775
9.75%, due 4/1/10 4,945,000 3,461,500
San Pasqual Casino
8.00%, due 9/15/13 (a) 250,000 192,500
Seminole Hard Rock
Entertainment, Inc./
Seminole Hard Rock
International LLC
5.319%, due 3/15/14
(a)(i) 11,650,000 7,689,000
Wynn Las Vegas Capital
Corp.
6.625%, due 12/1/14 1,535,000 1,132,063
Wynn Las Vegas LLC
6.625%, due 12/1/14 6,820,000 5,029,750
--------------
57,959,003
--------------
MEDIA 3.3%
Charter Communications
Operating LLC
8.00%, due 4/30/12 (a) 12,205,000 9,397,850
CSC Holdings, Inc.
6.75%, due 4/15/12 4,055,000 3,507,575
8.50%, due 6/15/15 (a) 5,230,000 4,419,350
CW Media Holdings, Inc.
13.50%, due 8/15/15
(a)(h) 5,290,000 3,438,500
Houghton Mifflin Harcourt
Publishing Co.
7.20%, due 3/15/11 9,530,000 9,053,500
HSN, Inc.
11.25%, due 8/1/16 (a) 17,515,000 14,537,450
ION Media Networks, Inc.
8.003%, due 1/15/12
(a)(i) 16,465,000 9,055,750
11.003%, due 1/15/13
(a)(h)(i) 7,689,807 2,691,432
LBI Media, Inc.
8.50%, due 8/1/17 (a) 10,020,000 6,012,000
Morris Publishing Group
LLC
7.00%, due 8/1/13 20,894,000 2,089,400
Rainbow National Services
LLC
8.75%, due 9/1/12 (a) 10,205,000 8,980,400
10.375%, due 9/1/14 (a) 27,995,000 24,355,650
Vertis, Inc.
18.50%, due 10/1/12 (h) 9,565,000 6,504,200
Ziff Davis Media, Inc.
Escrow Shares
(zero coupon), due
5/1/12 (c)(d) 12,615,000 788,438
8.801%, due 7/15/11
(c)(d)(i)(g) 3,310,281 2,813,739
--------------
107,645,234
--------------
METAL FABRICATE & HARDWARE 0.8%
Metals USA, Inc.
11.125%, due 12/1/15 6,580,000 4,606,000
Mueller Water Products,
Inc.
7.375%, due 6/1/17 15,100,000 9,890,500
Neenah Foundary Co.
9.50%, due 1/1/17 16,650,000 9,906,750
--------------
24,403,250
--------------
MINING 0.6%
Freeport-McMoRan Copper &
Gold, Inc.
7.084%, due 4/1/15 (i) 4,095,000 3,192,790
8.25%, due 4/1/15 6,505,000 5,204,000
8.375%, due 4/1/17 12,675,000 9,949,875
--------------
18,346,665
--------------
MISCELLANEOUS--MANUFACTURING 1.4%
Actuant Corp.
6.875%, due 6/15/17 11,390,000 9,738,450
Polypore, Inc.
8.75%, due 5/15/12 6,940,000 5,552,000
RBS Global, Inc./Rexnord
Corp.
9.50%, due 8/1/14 26,935,000 18,585,150
Sally Holdings LLC
9.25%, due 11/15/14 7,550,000 6,040,000
SPX Corp.
7.625%, due 12/15/14 (a) 6,850,000 5,754,000
--------------
45,669,600
--------------
OIL & GAS 6.5%
Chaparral Energy, Inc.
8.50%, due 12/1/15 18,583,000 9,477,330
8.875%, due 2/1/17 20,435,000 10,421,850
Chesapeake Energy Corp.
6.50%, due 8/15/17 34,820,000 25,636,225
6.625%, due 1/15/16 4,920,000 3,843,750
6.875%, due 11/15/20 4,180,000 2,957,350
Forest Oil Corp.
7.25%, due 6/15/19 4,000,000 2,720,000
7.25%, due 6/15/19 (a) 3,870,000 2,631,600
8.00%, due 12/15/11 4,460,000 3,969,400
Frontier Oil Corp.
8.50%, due 9/15/16 8,075,000 7,025,250
Hilcorp Energy I,
L.P./Hilcorp Finance Co.
7.75%, due 11/1/15 (a) 11,605,000 8,239,550
9.00%, due 6/1/16 (a) 9,005,000 6,573,650
Linn Energy LLC
9.875%, due 7/1/18 (a) 13,660,000 9,220,500
Mariner Energy, Inc.
7.50%, due 4/15/13 17,985,000 12,409,650
Newfield Exploration Co.
6.625%, due 9/1/14 1,990,000 1,537,275
6.625%, due 4/15/16 9,820,000 7,266,800
7.125%, due 5/15/18 19,975,000 14,107,344
Parker Drilling Co.
9.625%, due 10/1/13 9,710,000 8,107,850
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayfunds.com 15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
OIL & GAS (CONTINUED)
PetroHawk Energy Corp.
7.875%, due 6/1/15 (a) $ 6,695,000 $ 4,535,863
Petroquest Energy, Inc.
10.375%, due 5/15/12 14,675,000 11,079,625
Regency Energy
Partners/Regency Energy
Finance Corp.
8.375%, due 12/15/13 10,764,000 8,180,640
SandRidge Energy, Inc.
8.00%, due 6/1/18 (a) 10,490,000 6,975,850
Stone Energy Corp.
6.75%, due 12/15/14 8,685,000 5,558,400
8.25%, due 12/15/11 8,360,000 6,855,200
United Refining Co.
10.50%, due 8/15/12 7,175,000 5,058,375
Venoco, Inc.
8.75%, due 12/15/11 6,289,000 4,606,692
W&T Offshore, Inc.
8.25%, due 6/15/14 (a) 9,465,000 6,246,900
Whiting Petroleum Corp.
7.00%, due 2/1/14 14,185,000 10,071,350
7.25%, due 5/1/13 5,875,000 4,406,250
--------------
209,720,519
--------------
OIL & GAS SERVICES 0.8%
Allis-Chalmers Energy,
Inc.
8.50%, due 3/1/17 8,765,000 5,259,000
9.00%, due 1/15/14 14,270,000 9,275,500
Complete Production
Services, Inc.
8.00%, due 12/15/16 11,850,000 8,058,000
Helix Energy Solutions
Group, Inc.
9.50%, due 1/15/16 (a) 5,995,000 3,836,800
--------------
26,429,300
--------------
PACKAGING & CONTAINERS 0.3%
Owens-Brockway Glass
Container, Inc.
6.75%, due 12/1/14 9,310,000 8,053,150
--------------
PHARMACEUTICALS 0.2%
NBTY, Inc.
7.125%, due 10/1/15 2,415,000 1,811,250
Warner Chilcott Corp.
8.75%, due 2/1/15 6,026,000 5,302,880
--------------
7,114,130
--------------
PIPELINES 3.2%
ANR Pipeline Co.
7.375%, due 2/15/24
11.50%, beginning
11/1/11 2,555,000 2,158,047
9.625%, due 11/1/21 19,281,000 19,993,626
Cedar Brakes II LLC
9.875%, due 9/1/13 (a) 17,857,086 18,514,763
Copano Energy LLC/Copano
Energy Finance Corp.
7.75%, due 6/1/18 (a) 21,920,000 15,124,800
El Paso Natural Gas Co.
7.50%, due 11/15/26 2,835,000 2,160,817
7.625%, due 8/1/10 8,175,000 7,979,397
8.375%, due 6/15/32 11,060,000 8,933,394
MarkWest Energy Partners,
L.P./MarkWest Energy
Finance Corp.
Series B
6.875%, due 11/1/14 5,525,000 3,991,812
8.50%, due 7/15/16 20,670,000 15,192,450
8.75%, due 4/15/18 4,796,000 3,453,120
Southern Natural Gas Co.
7.35%, due 2/15/31 1,895,000 1,389,643
8.00%, due 3/1/32 1,420,000 1,097,064
Tennessee Gas Pipeline Co.
7.625%, due 4/1/37 3,265,000 2,395,335
--------------
102,384,268
--------------
REAL ESTATE INVESTMENT TRUSTS 1.6%
Host Hotels & Resorts,
L.P.
6.875%, due 11/1/14 6,500,000 4,842,500
Host Marriott, L.P.
6.375%, due 3/15/15 3,085,000 2,236,625
Series Q
6.75%, due 6/1/16 13,090,000 9,490,250
Series M
7.00%, due 8/15/12 1,290,000 1,044,900
Omega Healthcare
Investors, Inc.
7.00%, due 4/1/14 19,305,000 16,023,150
Trustreet Properties, Inc.
7.50%, due 4/1/15 19,240,000 19,129,332
--------------
52,766,757
--------------
RETAIL 1.6%
Asbury Automotive Group,
Inc.
7.625%, due 3/15/17 1,000,000 440,000
8.00%, due 3/15/14 1,535,000 767,500
Autonation, Inc.
7.00%, due 4/15/14 2,103,000 1,366,950
Harry & David Holdings,
Inc.
9.00%, due 3/1/13 3,870,000 1,857,600
Rite Aid Corp.
7.50%, due 3/1/17 11,280,000 7,106,400
8.625%, due 3/1/15 26,245,000 9,316,975
9.375%, due 12/15/15 1,160,000 429,200
9.50%, due 6/15/17 6,875,000 2,475,000
Star Gas Partners, L.P./
Star Gas Finance Co.
Series B
10.25%, due 2/15/13 23,620,000 17,242,600
</Table>
16 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
RETAIL (CONTINUED)
Toys "R" Us, Inc.
7.625%, due 8/1/11 $ 15,615,000 $ 10,149,750
--------------
51,151,975
--------------
SOFTWARE 0.6%
Open Solutions, Inc.
9.75%, due 2/1/15 (a) 9,755,000 4,145,875
SS&C Technologies, Inc.
11.75%, due 12/1/13 15,440,000 14,513,600
--------------
18,659,475
--------------
TELECOMMUNICATIONS 3.9%
Centennial Cellular
Operating Co./Centennial
Communications Corp.
10.125%, due 6/15/13 20,977,000 18,564,645
Centennial Communications
Corp./Cellular Operating
Co. LLC/
Puerto Rico Operations
8.125%, due 2/1/14 2,385,000 2,039,175
GCI, Inc.
7.25%, due 2/15/14 7,080,000 5,664,000
iPCS, Inc.
4.926%, due 5/1/13 (i) 2,000,000 1,540,000
V Lucent Technologies,
Inc.
5.50%, due 11/15/08 8,959,000 8,779,820
6.45%, due 3/15/29 46,776,000 22,920,240
6.50%, due 1/15/28 15,100,000 7,399,000
PAETEC Holding Corp.
9.50%, due 7/15/15 9,815,000 5,570,013
Qwest Communications
International, Inc.
7.25%, due 2/15/11 12,620,000 10,190,650
Series B
7.50%, due 2/15/14 18,105,000 12,447,187
V Qwest Corp.
7.20%, due 11/10/26 6,685,000 4,311,825
7.50%, due 10/1/14 6,400,000 4,928,000
7.50%, due 6/15/23 335,000 216,075
8.875%, due 3/15/12 13,755,000 12,035,625
Sprint Nextel Corp.
6.00%, due 12/1/16 12,435,000 8,611,237
Windstream Regatta
Holdings, Inc.
11.00%, due 12/1/17 (a) 5,630,000 2,646,100
--------------
127,863,592
--------------
TEXTILES 1.1%
INVISTA
9.25%, due 5/1/12 (a) 43,530,000 36,129,900
--------------
TRANSPORTATION 0.6%
Atlantic Express
Transportation Corp.
11.626%, due 4/15/12 (i) 7,340,000 3,633,300
KAR Holdings, Inc.
8.75%, due 5/1/14 8,520,000 5,538,000
10.00%, due 5/1/15 20,200,000 11,413,000
--------------
20,584,300
--------------
TRUCKING & LEASING 0.3%
Greenbrier Cos., Inc.
8.375%, due 5/15/15 14,702,000 11,210,275
--------------
Total Corporate Bonds
(Cost $2,987,057,566) 2,178,977,326
--------------
FOREIGN BOND 0.6%
- ------------------------------------------------------------------
MEDIA (0.6%)
Shaw Communications, Inc.
7.50%, due 11/20/13 C$ 22,825,000 18,965,032
--------------
Total Foreign Bond
(Cost $17,891,800) 18,965,032
--------------
LOAN ASSIGNMENTS & PARTICIPATIONS 10.7% (J)
- ------------------------------------------------------------------
AEROSPACE & DEFENSE 0.3%
DAE Aviation Holdings,
Inc.
Tranche B2 Term Loan
7.17%, due 7/31/14 $ 5,841,889 4,264,579
Tranche B1 Term Loan
7.366%, due 7/31/14 5,911,101 4,315,104
--------------
8,579,683
--------------
AUTOMOBILE 1.1%
DaimlerChrysler Financial
Services Americas LLC
2nd Lien Term Loan
9.32%, due 8/3/12 31,045,000 13,168,265
Ford Motor Co.
Term Loan
6.963%, due 12/16/13 11,200,000 6,152,003
Navistar International
Corp.
Term Loan B
6.421%, due 1/3/12 17,600,000 12,056,000
Revolver
6.723%, due 1/19/12 6,400,000 4,384,000
--------------
35,760,268
--------------
BROADCASTING 0.6%
Nielsen Finance LLC
Dollar Term Loan
4.80%, due 8/9/13 27,435,000 19,766,918
--------------
BUILDINGS & REAL ESTATE 0.3%
LNR Property Corp.
Tranche A1 Term Loan
6.04%, due 7/12/09 2,490,400 1,270,104
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayfunds.com 17
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED)
BUILDINGS & REAL ESTATE (CONTINUED)
LNR Property Corp. (continued)
Initial Tranche B Term
Loan
6.04%, due 7/12/11 $ 18,994,800 $ 9,782,322
--------------
11,052,426
--------------
DIVERSIFIED/CONGLOMERATE SERVICE 0.6%
V SunGard Data Systems,
Inc.
Incremental Term Loan
4.553%, due 2/28/14 24,602,635 18,759,509
--------------
FINANCE 0.7%
Lender Processing
Services, Inc.
Term Loan A
5.618%, due 7/2/13 25,776,667 24,230,067
--------------
HEALTHCARE, EDUCATION & CHILDCARE 2.8%
Capella Healthcare, Inc.
1st Lien Term Loan
7.204%, due 3/2/15 7,979,900 6,623,317
V Community Health
Systems, Inc.
New Term Loan B
5.161%, due 7/25/14 27,942,317 22,315,433
Fresenius Medical Care
Holdings, Inc.
Term Loan
4.997%, due 3/31/13 6,283,887 5,291,033
V HCA, Inc.
Term Loan A
5.762%, due 11/16/12 7,844,719 6,595,448
Term Loan B
6.012%, due 11/18/13 31,243,500 25,709,495
Talecris Biotherapeutics,
Inc.
1st Lien Term Loan
6.31%, due 12/6/13 7,368,750 6,447,656
2nd Lien Term Loan
9.31%, due 12/6/14 14,995,000 13,045,650
Warner Chilcott Corp.
Tranche B Term Loan
5.505%, due 1/18/12 4,063,791 3,303,862
Tranche C Term Loan
5.762%, due 1/18/12 1,524,774 1,239,641
--------------
90,571,535
--------------
LEISURE, AMUSEMENT, MOTION PICTURES, ENTERTAINMENT 0.1%
Town Sports International,
Inc.
Term Loan
4.75%, due 2/27/14 6,757,102 4,054,260
--------------
MACHINERY 0.2%
BHM Technologies LLC
Revolver
2.359%, due 11/20/08 (k) 893,914 858,158
1st Lien Term Loan
6.50%, due 7/21/13 21,900,766 4,927,672
--------------
5,785,830
--------------
RETAIL STORE 0.7%
Neiman Marcus Group, Inc.
(The)
Term Loan B
5.565%, due 4/6/13 12,259,494 9,194,620
Toys "R" Us (Delaware),
Inc.
Term Loan
9.588%, due 1/19/13 18,220,000 13,095,625
--------------
22,290,245
--------------
TELECOMMUNICATIONS 1.1%
Alltel Communications,
Inc.
Term Loan B3
5.50%, due 5/15/15 21,265,200 20,248,468
V Qwest Corp.
Term Loan B
6.95%, due 6/30/10 18,000,000 16,709,994
--------------
36,958,462
--------------
UTILITIES 2.2%
Calpine Corp.
1st Priority Term Loan
6.645%, due 3/29/14 41,387,250 33,006,332
V TXU Corp.
Term Loan B3
6.437%, due 10/10/14 15,497,850 12,024,395
Term Loan B2
6.659%, due 10/10/14 31,739,400 24,743,496
--------------
69,774,223
--------------
Total Loan Assignments &
Participations
(Cost 456,676,941) 347,583,426
--------------
YANKEE BONDS 10.0% (L)
- ------------------------------------------------------------------
ADVERTISING 0.1%
Virgin Media Finance PLC
9.125%, due 8/15/16 5,540,000 3,656,400
--------------
BIOTECHNOLOGY 0.5%
FMC Finance III S.A.
6.875%, due 7/15/17 21,925,000 17,430,375
--------------
CHEMICALS 0.3%
Nova Chemicals Corp.
5.953%, due 11/15/13 (i) 11,645,000 7,802,150
6.50%, due 1/15/12 1,965,000 1,552,350
--------------
9,354,500
--------------
</Table>
18 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
COMMERCIAL SERVICES 0.1%
Quebecor World, Inc.
8.75%, due 3/15/16
(a)(e) $ 460,000 $ 64,400
9.75%, due 1/15/15
(a)(e) 26,020,000 3,642,800
--------------
3,707,200
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.3%
Digicel, Ltd.
9.25%, due 9/1/12 (a) 12,255,000 9,558,900
--------------
ELECTRIC 0.7%
Intergen N.V.
9.00%, due 6/30/17 (a) 29,015,000 23,212,000
--------------
ELECTRONICS 1.2%
V NXP B.V./NXP Funding
LLC
7.875%, due 10/15/14 77,312,000 38,269,440
--------------
ENTERTAINMENT 0.2%
Galaxy Entertainment
Finance Co., Ltd.
9.875%, due 12/15/12 (a) 19,395,000 7,370,100
--------------
FOREST PRODUCTS & PAPER 0.9%
Bowater Canada Finance
7.95%, due 11/15/11 1,700,000 527,000
Catalyst Paper Corp.
7.375%, due 3/1/14 5,405,000 2,810,600
Series D
8.625%, due 6/15/11 10,075,000 5,944,250
Smurfit Capital Funding
PLC
7.50%, due 11/20/25 26,050,000 19,016,500
--------------
28,298,350
--------------
INSURANCE 0.3%
Fairfax Financial
Holdings, Ltd.
7.375%, due 4/15/18 (b) 6,117,000 4,648,920
7.75%, due 7/15/37 4,810,000 3,126,500
8.30%, due 4/15/26 2,375,000 1,781,250
--------------
9,556,670
--------------
MEDIA 2.0%
CanWest MediaWorks, Inc.
8.00%, due 9/15/12 10,279,790 6,579,066
CanWest MediaWorks, L.P.
9.25%, due 8/1/15 (a) 10,200,000 6,222,000
Quebecor Media, Inc.
7.75%, due 3/15/16 14,495,000 10,037,788
7.75%, due 3/15/16 22,075,000 15,286,937
Sun Media Corp.
7.625%, due 2/15/13 40,000 33,600
Videotron Ltee
6.875%, due 1/15/14 2,851,000 2,366,330
Videotron, Ltd.
9.125%, due 4/15/18 (a) 29,300,000 26,003,750
--------------
66,529,471
--------------
PHARMACEUTICALS 0.2%
Angiotech Pharmaceuticals,
Inc.
6.56%, due 12/1/13 (i) 9,770,000 5,959,700
--------------
TELECOMMUNICATIONS 2.8%
Inmarsat Finance PLC
(zero coupon), due
11/15/12 10.375%,
beginning 11/15/08 22,335,000 17,756,325
Intelsat Subsidiary
Holding Co., Ltd.
8.50%, due 1/15/13 (a) 25,720,000 22,376,400
Millicom International
Cellular S.A.
10.00%, due 12/1/13 25,130,000 19,601,400
Nortel Networks, Ltd.
6.875%, due 9/1/23 3,000,000 1,110,000
10.75%, due 7/15/16 18,145,000 9,571,487
10.75%, due 7/15/16 (a) 14,595,000 7,698,863
Rogers Wireless, Inc.
8.00%, due 12/15/12 1,180,000 1,100,350
9.625%, due 5/1/11 10,427,000 10,847,948
Satelites Mexicanos S.A.
de C.V.
12.512%, due 11/30/11
(i) 1,926,800 1,040,472
--------------
91,103,245
--------------
TRANSPORTATION 0.4%
CEVA Group PLC
10.00%, due 9/1/14 (a) 10,180,000 7,329,600
Kansas City Southern de
Mexico S.A. de C.V.
7.375%, due 6/1/14 6,619,000 5,179,367
--------------
12,508,967
--------------
Total Yankee Bonds
(Cost $482,042,995) 326,515,318
--------------
Total Long-Term Bonds
(Cost $3,963,406,138) 2,886,289,630
--------------
<Caption>
SHARES
COMMON STOCKS 0.9%
- ------------------------------------------------------------------
ADVERTISING 0.0%++
Vertis Holdings, Inc.
(c)(d)(g) 10,372 104
--------------
AIRLINES 0.3%
Delta Air Lines, Inc. (g) 977,140 10,728,997
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayfunds.com 19
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
COMMERCIAL SERVICES 0.0%++
Dinewise, Inc. (c)(d)(g) 8,434,374 $ 84,344
--------------
MACHINERY--CONSTRUCTION & MINING 0.0%++
Joy Global, Inc. 18,081 523,987
--------------
MEDIA 0.2%
Adelphia (Escrow Shares)
(c) 12,365,000 12
Adelphia Contingent Value
Vehicle (c)(d)(g) 15,507,390 155,074
AH Belo Corp. Class A 86,040 284,793
Haights Cross
Communications, Inc.
(c)(d)(f) 1,630,227 5,542,772
Ziff Davis Media, Inc.
(Physical certificates)
(c)(d)(g) 24,932 249
--------------
5,982,900
--------------
RETAIL 0.2%
Star Gas Partners, L.P.
(g) 2,392,690 5,311,772
--------------
SOFTWARE 0.1%
Quadramed Corp. (c)(g) 326,739 1,944,097
--------------
TELECOMMUNICATIONS 0.1%
Loral Space &
Communications, Ltd. (g) 327,283 3,763,754
Remote Dynamics, Inc. (g) 18 0(n)
--------------
3,763,754
--------------
Total Common Stocks
(Cost $92,938,804) 28,339,955
--------------
CONVERTIBLE PREFERRED STOCK 0.4%
- ------------------------------------------------------------------
SOFTWARE 0.4%
QuadraMed Corp. (a)(c)(f)
5.50% 950,000 12,435,500
--------------
Total Convertible
Preferred Stock
(Cost $22,798,000) 12,435,500
--------------
PREFERRED STOCK 0.9%
- ------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS 0.9%
Sovereign Real Estate
Investment Corp.
12.00% (a)(c) 29,881 28,461,653
--------------
Total Preferred Stock
(Cost $26,447,356) 28,461,653
--------------
<Caption>
NUMBER OF
WARRANTS VALUE
WARRANTS 0.0%++
- ------------------------------------------------------------------
MEDIA 0.0%++
Haights Cross
Communications, Inc.
Strike Price $0.01
Expire 12/10/11
(c)(d)(f)(g) 13,754 $ 46,626
--------------
Total Warrants
(Cost $4,097) 46,626
--------------
<Caption>
SHARES
SHORT-TERM INVESTMENTS 7.0%
- ------------------------------------------------------------------
INVESTMENT COMPANY 0.5%
State Street Navigator
Securities Lending Prime
Portfolio (m) 18,446,698 18,446,698
--------------
Total Investment Company
(Cost $18,446,698) 18,446,698
--------------
<Caption>
PRINCIPAL
AMOUNT
REPURCHASE AGREEMENT 6.5%
State Street Bank and
Trust Co. 0.10%, dated
10/31/08
due 11/3/08
Proceeds at Maturity
$210,369,605
(Collateralized by a
Federal Home Loan Bank
Security with a rate of
3.351% and a maturity
date of 1/23/09, with a
Principal Amount of
$214,580,000 and a
Market Value of
$214,580,000) $ 210,367,852 210,367,852
--------------
Total Repurchase Agreement
(Cost $210,367,852) 210,367,852
--------------
Total Short-Term
Investments
(Cost $228,814,550) 228,814,550
--------------
Total Investments
(Cost $4,334,408,945)
(o) 97.9% 3,184,387,914
Cash and Other Assets,
Less Liabilities 2.1 68,647,727
----- ------------
Net Assets 100.0% $3,253,035,641
===== ============
</Table>
20 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
<Table>
++ Less than one-tenth of a percent.
(a) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(b) Represents a security, or a portion
thereof, which is out on loan. The
aggregate market value of such securities
is $18,116,261; cash collateral of
$18,446,698 (included in liabilities) was
received with which the Fund purchased
highly liquid short-term investments.
(c) Illiquid security. The total market
value of these securities at October 31,
2008 is $54,960,514, which represents
1.7% of the Fund's net assets.
(d) Fair valued security. The total market
value of these securities at October 31,
2008 is $12,100,513 which represents 0.4%
of the Fund's net assets.
(e) Issue in default.
(f) Restricted security.
(g) Non-income producing security.
(h) PIK ("Payment in Kind") - interest or
dividend payment is made with additional
securities.
(i) Floating rate. Rate shown is the rate in
effect at October 31, 2008.
(j) Floating Rate Loan - generally pays
interest at rates which are periodically
re-determined at a margin above the
London Inter-Bank Offered Rate ("LIBOR")
or other short-term rates. The rate shown
is the rate(s) in effect at October 31,
2008. Floating Rate Loans are generally
considered restrictive in that the Fund
is ordinarily contractually obligated to
receive consent from the Agent Bank
and/or borrower prior to disposition of a
Floating Rate Loan.
(k) This security has additional commitments
and contingencies. Principal amount and
value exclude unfunded commitment.
(l) Yankee Bond - dollar-denominated bond
issued in the United States by a foreign
bank or corporation.
(m) Represents a security, or a portion
thereof purchased with cash collateral
received for securities on loan.
(n) Less than one dollar.
(o) At October 31, 2008, cost is
$4,342,874,287 for federal income tax
purposes and net unrealized depreciation
is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 15,007,431
Gross unrealized depreciation (1,173,493,804)
---------------
Net unrealized depreciation $(1,158,486,373)
===============
</Table>
The following abbreviation is used in the above portfolio:
<Table>
C$ --Canadian Dollar
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayfunds.com 21
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $4,334,408,945)
including $18,116,261 market
value of securities loaned $ 3,184,387,914
Cash denominated in foreign
currency (identified cost
$863,145) 710,222
Cash 183,090
Receivables:
Dividends and interest 93,125,030
Fund shares sold 18,638,366
Investment securities sold 14,904,472
Other assets 98,109
---------------
Total assets 3,312,047,203
---------------
LIABILITIES:
Unrealized depreciation on
unfunded commitments 2,491,037
Securities lending collateral 18,446,698
Payables:
Investment securities purchased 18,954,035
Fund shares redeemed 6,703,464
Manager (See Note 3) 1,626,486
Transfer agent (See Note 3) 1,397,193
NYLIFE Distributors (See Note 3) 1,099,217
Shareholder communication 538,738
Professional fees 373,666
Custodian 77,494
Trustees 12,004
Accrued expenses 15,738
Dividend payable 7,275,792
---------------
Total liabilities 59,011,562
---------------
Net assets $ 3,253,035,641
===============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 7,082,576
Additional paid-in capital 5,095,087,461
---------------
5,102,170,037
Accumulated distributions in
excess of net investment income (14,731,278)
Accumulated net realized loss on
investments and foreign currency
transactions (681,732,022)
Net unrealized depreciation on
investments (1,150,021,031)
Net unrealized depreciation on
unfunded commitments (2,491,037)
Net unrealized depreciation on
translation of other assets and
liabilities in foreign
currencies (159,028)
---------------
Net assets $ 3,253,035,641
===============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 201,850,348
===============
Shares of beneficial interest
outstanding 43,623,945
===============
Net asset value per share
outstanding $ 4.63
Maximum sales charge (4.50% of
offering price) 0.22
---------------
Maximum offering price per share
outstanding $ 4.85
===============
CLASS A
Net assets applicable to
outstanding shares $ 1,835,089,517
===============
Shares of beneficial interest
outstanding 399,300,791
===============
Net asset value per share
outstanding $ 4.60
Maximum sales charge (4.50% of
offering price) 0.22
---------------
Maximum offering price per share
outstanding $ 4.82
===============
CLASS B
Net assets applicable to
outstanding shares $ 431,397,943
===============
Shares of beneficial interest
outstanding 94,370,574
===============
Net asset value and offering price
per share outstanding $ 4.57
===============
CLASS C
Net assets applicable to
outstanding shares $ 276,417,979
===============
Shares of beneficial interest
outstanding 60,443,341
===============
Net asset value and offering price
per share outstanding $ 4.57
===============
CLASS I
Net assets applicable to
outstanding shares $ 508,239,171
===============
Shares of beneficial interest
outstanding 110,510,139
===============
Net asset value and offering price
per share outstanding $ 4.60
===============
CLASS R2
Net assets applicable to
outstanding shares $ 40,683
===============
Shares of beneficial interest
outstanding 8,848
===============
Net asset value and offering price
per share outstanding $ 4.60
===============
</Table>
22 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 345,392,059
Dividends 2,135,803
Income from securities loaned-
net 1,800,582
---------------
Total income 349,328,444
---------------
EXPENSES:
Manager (See Note 3) 23,211,532
Distribution/Service--Investor
Class (See Note 3) 352,264
Distribution/Service--Class A
(See Note 3) 6,217,887
Service--Class B (See Note 3) 1,627,681
Service--Class C (See Note 3) 926,799
Distribution/Service--Class R2
(See Note 3) 38
Transfer agent--Investor Class
(See Note 3) 351,848
Transfer agent--Class A (See
Note 3) 4,490,050
Transfer agent--Classes B and C
(See Note 3) 2,232,939
Transfer agent--Classes I and R2
(See Note 3) 1,132,656
Distribution--Class B (See Note
3) 4,883,042
Distribution--Class C (See Note
3) 2,780,397
Shareholder communication 1,285,936
Professional fees 1,222,969
Recordkeeping (a) 337,588
Registration 160,212
Trustees 139,936
Custodian 96,024
Shareholder service--Class R2
(See Note 3) 15
Miscellaneous 179,486
---------------
Total expenses 51,629,299
---------------
Net investment income 297,699,145
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions $ (82,551,413)
Foreign currency transactions 314,914
---------------
Net realized loss on investments
and foreign currency
transactions (82,236,499)
---------------
Net change in unrealized
appreciation (depreciation) on:
Security transactions and
unfunded commitments (1,161,223,364)
Translation of other assets and
liabilities in foreign
currencies and foreign
currency forward contracts (345,270)
---------------
Net change in unrealized
appreciation on investments,
unfunded commitments and foreign
currency transactions (1,161,568,634)
---------------
Net realized and unrealized loss
on investments, unfunded
commitments and foreign currency
transactions (1,243,805,133)
---------------
Net decrease in net assets
resulting from operations $ (946,105,988)
===============
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayfunds.com 23
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 297,699,145 $ 311,090,714
Net realized gain (loss)
on investments and
foreign currency
transactions (82,236,499) 32,258,127
Net change in unrealized
appreciation on
investments, unfunded
commitments and foreign
currency transactions (1,161,568,634) (35,887,346)
---------------------------------
Net increase (decrease)
in net assets resulting
from operations (946,105,988) 307,461,495
---------------------------------
Dividends and distributions to shareholders:
From net investment income:
Investor Class (10,306,868) --
Class A (180,897,572) (201,074,715)
Class B (41,712,167) (58,146,580)
Class C (24,044,538) (26,633,406)
Class I (39,100,496) (19,653,124)
Class R2 (1,209) --
---------------------------------
(296,062,850) (305,507,825)
---------------------------------
Return of capital:
Investor Class (315,923) --
Class A (5,544,831) --
Class B (1,278,552) --
Class C (737,008) --
Class I (1,198,500) --
Class R2 (37) --
---------------------------------
(9,074,851) --
---------------------------------
Total dividends and
distributions to
shareholders (305,137,701) (305,507,825)
---------------------------------
Capital share transactions:
Net proceeds from sale of
shares 1,094,308,642 1,182,140,958
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 216,335,785 211,122,679
Cost of shares redeemed
(a) (1,368,617,284) (1,245,670,610)
---------------------------------
Increase (decrease) in
net assets derived
from capital share
transactions (57,972,857) 147,593,027
---------------------------------
Net increase (decrease)
in net assets (1,309,216,546) 149,546,697
NET ASSETS:
Beginning of year 4,562,252,187 4,412,705,490
---------------------------------
End of year $ 3,253,035,641 $ 4,562,252,187
=================================
Accumulated distributions
in excess of net
investment income at end
of year $ (14,731,278) $ (14,070,040)
=================================
</Table>
(a) Cost of shares redeemed net of redemption fees of $359,519 and $212,054 for
the years ended October 31, 2008 and 2007 (See Note 2(L)).
24 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
This page intentionally left blank
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------
FEBRUARY 28,
2008** CLASS A
THROUGH ---------------------------------------------------------------------
OCTOBER 31, YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 5.97 $ 6.35 $ 6.33 $ 6.22 $ 6.32 $ 6.05
-------- ---------- ---------- ---------- ---------- ----------
Net investment income 0.28 (a) 0.43 (a) 0.45 (a) 0.42 (a) 0.45 0.46 (a)
Net realized and
unrealized gain (loss)
on investments (1.33) (1.74) 0.01 0.15 (e) (0.09) 0.25
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.00 +++ 0.00 +++ 0.00 +++ (0.00)+++ 0.00 +++ 0.02
-------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations (1.05) (1.31) 0.46 0.57 0.36 0.73
-------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
From net investment
income (0.28) (0.43) (0.44) (0.41) (0.46) (0.46)
Return of capital (0.01) (0.01) -- (0.05) -- --
-------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions (0.29) (0.44) (0.44) (0.46) (0.46) (0.46)
-------- ---------- ---------- ---------- ---------- ----------
Redemption fee (a) 0.00 +++ 0.00 +++ 0.00 +++ 0.00 +++ 0.00 +++ 0.00 +++
-------- ---------- ---------- ---------- ---------- ----------
Net asset value at end of
period $ 4.63 $ 4.60 $ 6.35 $ 6.33 $ 6.22 $ 6.32
======== ========== ========== ========== ========== ==========
Total investment return
(b)(c) (18.54%)(f) (22.00%) 7.41% 9.58%(d)(e) 5.86% 12.53%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 7.31% ++ 7.33% 6.95% 6.77% 7.10% 7.44%
Net expenses 1.16% ++ 1.07% 1.04% 1.06% 1.02% 1.01%
Expenses (before
reimbursement) 1.16% ++ 1.07% 1.04% 1.07%(d) 1.02% 1.01%
Portfolio turnover rate 29% 29% 49% 58% 35% 41%
Net assets at end of
period (in 000's) $201,850 $1,835,090 $2,887,965 $2,806,800 $1,381,080 $1,279,164
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 6.31 $ 6.30 $ 6.19 $ 6.30 $ 6.04
-------- -------- -------- -------- --------
Net investment income 0.38 (a) 0.40 (a) 0.38 (a) 0.40 0.42 (a)
Net realized and
unrealized gain (loss)
on investments (1.73) 0.00 +++ 0.15 (e) (0.09) 0.24
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.00 +++ 0.00 +++ (0.00)+++ 0.00 +++ 0.02
-------- -------- -------- -------- --------
Total from investment
operations (1.35) 0.40 0.53 0.31 0.68
-------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.38) (0.39) (0.37) (0.42) (0.42)
Return of capital (0.01) -- (0.05) -- --
-------- -------- -------- -------- --------
Total dividends and
distributions (0.39) (0.39) (0.42) (0.42) (0.42)
-------- -------- -------- -------- --------
Redemption fee (a) 0.00 +++ 0.00 +++ 0.00 +++ 0.00 +++ 0.00 +++
-------- -------- -------- -------- --------
Net asset value at end of
period $ 4.57 $ 6.31 $ 6.30 $ 6.19 $ 6.30
======== ======== ======== ======== ========
Total investment return
(b)(c) (22.60%) 6.63% 8.91%(d)(e) 5.04% 11.65%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 6.54% 6.20% 6.02% 6.35% 6.69%
Net expenses 1.86% 1.79% 1.81% 1.77% 1.76%
Expenses (before
reimbursement) 1.86% 1.79% 1.82%(d) 1.77% 1.76%
Portfolio turnover rate 29% 49% 58% 35% 41%
Net assets at end of
period (in 000's) $276,418 $422,348 $421,855 $401,923 $419,496
</Table>
<Table>
** Commencement of operations.
++ Annualized.
+++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charge and assumes the
reinvestments of dividends and distributions. Class I and Class R2 shares are
not subject to sales charges.
(c) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
(d) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
$0.01 per share on net realized gains on investments and the effect on total
investment return was less than 0.01%, respectively.
(f) Total return is not annualized.
</Table>
26 MainStay High Yield Corporate Bond Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
--------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
2008 2007 2006 2005 2004
$ 6.31 $ 6.30 $ 6.19 $ 6.30 $ 6.04
-------- -------- ---------- ---------- ----------
0.38 (a) 0.40 (a) 0.38 (a) 0.40 0.42 (a)
(1.73) 0.00 ++ 0.15 (e) (0.08) 0.24
0.00++ 0.00 ++ (0.00)++ 0.00 ++ 0.02
-------- -------- ---------- ---------- ----------
(1.35) 0.40 0.53 0.32 0.68
-------- -------- ---------- ---------- ----------
(0.38) (0.39) (0.37) (0.43) (0.42)
(0.01) -- (0.05) -- --
-------- -------- ---------- ---------- ----------
(0.39) (0.39) (0.42) (0.43) (0.42)
-------- -------- ---------- ---------- ----------
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
-------- -------- ---------- ---------- ----------
$ 4.57 $ 6.31 $ 6.30 $ 6.19 $ 6.30
======== ======== ========== ========== ==========
(22.47%) 6.46% 8.92%(d)(e) 5.04% 11.65%
6.53% 6.19% 6.02% 6.35% 6.69%
1.86% 1.79% 1.81% 1.77% 1.76%
1.86% 1.79% 1.82%(d) 1.77% 1.76%
29% 49% 58% 35% 41%
$431,398 $811,937 $1,067,018 $2,486,331 $2,814,176
</Table>
<Table>
<Caption>
CLASS I CLASS R2
---------------------------------------------------------- -----------
JANUARY 2, MAY 1,
2004** 2008**
THROUGH THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31,
-------------------------------------------------------------------------
2008 2007 2006 2005 2004 2008
$ 6.35 $ 6.34 $ 6.22 $ 6.32 $ 6.24 $ 5.99
-------- -------- -------- ------- ------- -------
0.44 (a) 0.47 (a) 0.44 (a) 0.48 0.41 (a) 0.21 (a)
(1.73) 0.00 ++ 0.16 (0.10) 0.07 (1.38)
0.00++ 0.00 ++ (0.00)++ 0.00 ++ 0.00 ++ 0.00++
-------- -------- -------- ------- ------- -------
(1.29) 0.47 0.60 0.38 0.48 (1.17)
-------- -------- -------- ------- ------- -------
(0.45) (0.46) (0.43) (0.48) (0.40) (0.21)
(0.01) -- (0.05) -- -- (0.01)
-------- -------- -------- ------- ------- -------
(0.46) (0.46) (0.48) (0.48) (0.40) (0.22)
-------- -------- -------- ------- ------- -------
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
-------- -------- -------- ------- ------- -------
$ 4.60 $ 6.35 $ 6.34 $ 6.22 $ 6.32 $ 4.60
======== ======== ======== ======= ======= =======
(21.63%) 7.49% 10.02%(d)(e)6.12% 7.97%(f) (20.13%)(f)
7.57% 7.26% 7.03% 7.31% 7.79%++ 7.48% ++
0.87% 0.79% 0.80% 0.81% 0.66%++ 1.20% ++
0.87% 0.79% 0.81% 0.81% 0.66%++ 1.20% ++
29% 49% 58% 35% 41% 29%
$508,239 $440,002 $117,032 $68,659 $22,868 $ 41
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
27
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay High Yield Corporate Bond Fund (the "Fund"), a diversified fund.
The Fund currently offers six classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Class I shares commenced on January 2, 2004.
Class R2 shares were first offered to the public on December 14, 2007, but did
not commence operations until May 1, 2008. Class R2 shares commenced on December
14, 2007. Investor Class shares commenced on February 28, 2008. Investor Class
and Class A shares are offered at net asset value per share plus an initial
sales charge. No sales charge applies on investments of $1 million or more (and
certain other qualified purchases) in Investor Class and Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and a 1% contingent deferred sales charge
may be imposed on redemptions made within one year of purchase of Class C
shares. Class I and Class R2 shares are not subject to a sales charge. Depending
upon eligibility, Class B shares convert to either Investor Class or Class A
shares eight years after the date they were purchased. Additionally, depending
upon eligibility, Investor Class shares may convert to Class A shares and Class
A shares may convert to Investor Class shares. The six classes of shares have
the same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and bear the same conditions except that Class B
and Class C shares are subject to higher distribution fee rates than Investor
Class, Class A and Class R2 shares under a distribution plan pursuant to Rule
12b-1 under the 1940 Act. Class I shares are not subject to a distribution or
service fee. Class R2 shares are authorized to pay to the Manager, as defined in
Note 3, its affiliates, or third-party service providers, as compensation for
services rendered to shareholders of Class R2 shares, a shareholder service fee.
The Fund's investment objective is to seek maximum current income through
investment in a diversified portfolio of high-yield debt securities. Capital
appreciation is a secondary objective.
The Fund invests in high-yield securities (sometimes called "junk bonds"), which
are generally considered speculative because they present a greater risk of
loss, including default, than higher quality debt securities. These securities
pay investors a premium--a high interest rate or yield--because of the increased
risk of loss. These securities can also be subject to greater price volatility.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or broker selected by the Fund's Manager (as defined in Note 3(A))
in consultation with the Fund's Subadvisor, if any, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques, if
such prices are deemed by the Fund's Manager, in consultation with the Fund's
Subadvisor, if any, to be representative of market values, at the regular close
of trading of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("valuation date").
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange on each valuation date. Securities
that are not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Prices normally are taken from the principal market
in which each security trades. Investments in other mutual funds are valued at
their net asset values as of the close of the New York Stock Exchange on the
date of valuation.
Loan assignments, participations and commitments are valued at the average of
bid quotations obtained from a pricing service. The Trust has engaged an
independent pricing service to provide market value quotations from dealers in
loans. As of October 31, 2008, 100% of total investments in loans were valued
based on prices from such services.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other
28 MainStay High Yield Corporate Bond Fund
temporary cash investments which mature in 60 days or less are valued at
amortized cost. The amortized cost method involves valuing a security at its
cost on the date of purchase and thereafter assuming a constant amortization to
maturity of the difference between the principal amount due at maturity and
cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor ,as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund held
securities with a value of $12,100,513 that were valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3 (A), conclude that such events may
have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund's Board of Trustees, adjust the value of the local price to reflect the
impact on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain thresholds. In such cases, the securities are
fair valued by applying factors provided by a third party vendor in accordance
with the Fund's policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income monthly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at net asset value, unless the shareholder
elects otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
The Fund may place a debt obligation on non-accrual status and reduce related
interest income by ceasing current accruals and writing off interest receivables
when the collection of all or a portion of interest has become doubtful based on
consistently applied procedures. A debt obligation is removed from non-accrual
status when the issuer resumes interest payments or when collectibility of
interest is reasonably assured.
mainstayinvestments.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
assignments and loan participations. Loan assignments and participations
("loans") are agreements to make money available (a "commitment") to a borrower
in a specified amount, at a specified rate and within a specified time. Such
loans are typically senior, secured and collateralized in nature. The Fund
records an investment when the borrower withdraws money and records interest as
earned. These loans pay interest at rates that are periodically reset by
reference to a base lending rate plus a spread. These base lending rates are
generally the prime rate offered by a designated U.S. bank or the London
InterBank Offered Rate ("LIBOR").
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. For example, the Fund may be
contractually obligated to receive approval from the agent bank and/or borrower
prior to the sale of these investments.
The Fund assumes the credit risk of the borrower, the selling participant and
any other persons interpositioned between the Fund and the borrower
("intermediate participants"). In the event that the borrower, selling
participant or intermediate participants become insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
borrower. At any point in time, up to the maturity date of the issue, the
borrower may demand the unfunded portion. These unfunded amounts are marked to
market and recorded in the Statement of Assets and Liabilities. (See Note 5.)
(I) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date, and
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities that are denominated in foreign currency amounts are
presented at the exchange rates and market values at the close of the period.
The realized and unrealized changes in net assets arising from fluctuations in
exchange rates and market prices of securities are not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(J) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and idemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience
30 MainStay High Yield Corporate Bond Fund
financial difficulty. The Fund may also record realized gain or loss on
securities deemed sold due to borrower's inability to return securities on loan.
The Fund receives compensation for lending its securities in the form of fees or
it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(K) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund may not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expenses and it may be
difficult to obtain a prompt sale at an acceptable price. (See Note 6.)
(L) REDEMPTION FEE. The Fund imposes a 2.00% redemption fee on redemptions
(including exchanges) of Fund shares made within 60 days of their date of
purchase for any class. The redemption fee is designed to offset brokerage
commissions and other costs associated with short-term trading and is not
assessed on shares acquired through the reinvestment of dividends or
distributions paid by the Fund. The redemption fees are included in the
Statement of Changes in Net Assets' shares redeemed amount and retained by the
Fund.
(M) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement")
between NYLIM and the Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.60% on assets up to $500 million, 0.55% on assets from
$500 million to $5 billion and 0.525% on assets in excess of $5 billion.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $23,211,532.
Effective August 1, 2008, the fee for fund accounting and recordkeeping services
provided is included within the management fee paid by the Fund. Prior to August
1, 2008, the Fund paid the Manager a monthly fee for certain pricing and
recordkeeping services provided under the Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
these services provided to the Fund by the Manager amounted to $337,588 for the
period November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general
mainstayinvestments.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ledger and sub-ledger accounts for the calculation of the Fund's respective net
asset values, and assisting NYLIM in conducting various aspects of the Fund's
administrative operations. For providing these services to the Fund, State
Street Bank and Trust Company is compensated by NYLIM.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to each class of shares, other than Class I shares, has adopted
distribution plans (the "Plans") in accordance with the provisions of Rule 12b-1
under the 1940 Act.
Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor
receives a monthly distribution fee from the Fund at an annual rate of 0.25% of
the average daily net assets of the Fund's Investor Class, Class A and Class R2
shares, which is an expense of the Investor Class, Class A and Class R2 shares
of the Fund for distribution or service activities as designated by the
Distributor. Pursuant to the Class B and Class C Plans, the Fund pays the
Distributor a monthly distribution fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Plans provide that the
Class B and Class C shares of the Fund also incur a service fee at the annual
rate of 0.25% of the average daily net asset value of the Class B and Class C
shares of the Fund. Class I shares are not subject to a distribution or service
fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R2 shares, the
Manager has agreed to provide, through its affiliates or independent third
parties, various shareholder and administrative support services to shareholders
of the Class R2 shares. For its services, the Manager is entitled to a
Shareholder Service Fee accrued daily and paid monthly at an annual rate of
0.10% of the average daily net assets attributable to the Class R2 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were
$30,903 and $391,680, respectively, for the year ended October 31, 2008. The
Fund was also advised that the Distributor retained contingent deferred sales
charges on redemptions of Investor Class, Class A, Class B and Class C shares of
$31, $10,580, $421,273 and $29,180, respectively, for the year ended October 31,
2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $8,207,493.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees on the Statement of Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 191,562 0.0%++
- ----------------------------------------------------
Class C 87 0.0++
- ----------------------------------------------------
Class I 4,779,344 0.9
- ----------------------------------------------------
Class R2 19,810 48.7
- ----------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $150,510.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(677,403,540) $(10,594,418) $(1,161,136,438) $(1,849,134,396)
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sales deferrals, premium amortization adjustments,
partnership adjustments and adjustments as a result of securities in default.
The other temporary differences are primarily due to distribution payable and
defaulted bond interest.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments
32 MainStay High Yield Corporate Bond Fund
arising from permanent differences; net assets at October 31, 2008 are not
affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED NET
UNDISTRIBUTED NET REALIZED ADDITIONAL
INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$6,777,318 $2,030,834 $(8,808,152)
--------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to premium amortization
adjustments, foreign currency gain (loss), paydown gain (loss), adjustments as a
result of consent payments and return of capital distributions.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $677,403,540 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2009 $ 82,452
2010 169,120
2011 306,034
2014 34,845
2016 84,953
- -----------------------------
$677,404
- -----------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Ordinary Income $296,062,850 $305,507,825
Return of Capital 9,074,851 --
- ------------------------------------------------------
$305,137,701 $305,507,825
- ------------------------------------------------------
</Table>
NOTE 5--COMMITMENTS AND CONTINGENCIES:
At October 31, 2008, the Fund had unfunded loan commitments pursuant to the
following loan agreements:
<Table>
<Caption>
UNFUNDED UNREALIZED
BORROWER COMMITMENT DEPRECIATION
BHM Technologies LLC
Revolver
2.359%, due 11/20/08 $3,314,732 $ (132,589)
- -----------------------------------------------------
Community Health Systems,
Inc. Delayed Draw Term
Loan 1.00%, due 7/25/14 1,949,553 (373,432)
- -----------------------------------------------------
Lender Processing
Services, Inc. Revolver
0.50%, due 7/2/13 5,166,667 (1,291,666)
- -----------------------------------------------------
LNR Property Corp.
Tranche A2 Term Loan
0.50%, due 7/12/09 1,415,000 (693,350)
- -----------------------------------------------------
$(2,491,037)
- -----------------------------------------------------
</Table>
The commitment is available until maturity date of the security.
NOTE 6--FOREIGN CURRENCY AND RESTRICTED SECURITIES:
As of October 31, 2008, the Fund held the following foreign currency:
<Table>
<Caption>
CURRENCY COST VALUE
Canadian Dollar CAD 856,030 $863,145 $710,222
- ---------------------------------------------------------
</Table>
mainstayinvestments.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of October 31, 2008, the Fund held the following restricted securities:
<Table>
<Caption>
PRINCIPAL
AMOUNT/
NUMBER OF PERCENTAGE
DATE(S) OF WARRANTS/ 10/31/08 OF NET
SECURITY ACQUISITION SHARES COST VALUE ASSETS
At Home Corp.
Convertible Bond 7/25/01 $61,533,853 $ 0 $ 6,153 0.0%++
- ----------------------------------------------------------------------------------------------------------
Haights Cross Communications, Inc.
Common Stock 8/31/07 1,630,227 18,548,475 5,542,772 0.2
Warrants 1/22/04-9/6/07 13,754 4,097 46,626 0.0++
- ----------------------------------------------------------------------------------------------------------
QuadraMed Corp.
Convertible Preferred Stock 5.50% 6/16/04 950,000 22,798,000 12,435,500 0.4
- ----------------------------------------------------------------------------------------------------------
$41,350,572 $18,031,051 0.6
- ----------------------------------------------------------------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
NOTE 7--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 8--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008 these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008 the commitment fee was 0.06% of the average commitment amount.
Such commitment fees are allocated among the funds based upon net assets and
other factors. Interest on any revolving credit loan is charged based upon the
Federal Funds Advances rate. There were no borrowings made or outstanding with
respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 9--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $1,133,497 and $1,068,721 respectively.
NOTE 10--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 4,557,981 $ 26,497,030
Shares issued to
shareholders in
reinvestment of dividends 1,631,896 9,176,570
Shares redeemed (5,564,259) (31,581,862)
---------------------------
Net increase in shares
outstanding before
conversion 625,618 4,091,738
Shares converted into
Investor Class (See Note
1) 45,857,130 268,437,800
Shares converted from
Investor Class (See Note
1) (2,858,803) (16,336,797)
---------------------------
Net increase 43,623,945 $256,192,741
===========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 91,709,161 $ 530,946,871
Shares issued to
shareholders in
reinvestment of
dividends 22,806,805 131,870,658
Shares redeemed (141,198,113) (817,912,644)
----------------------------
Net decrease in shares
outstanding before
conversion (26,682,147) (155,095,115)
Shares converted into
Class A (See Note 1) 15,310,981 89,852,082
Shares converted from
Class A (See Note 1) (44,367,759) (257,708,595)
----------------------------
Net decrease (55,738,925) $(322,951,628)
============================
Year ended October 31,
2007:
Shares sold 99,431,054 $ 643,211,359
Shares issued to
shareholders in
reinvestment of
dividends 22,052,905 141,725,453
Shares redeemed (129,932,472) (834,750,297)
----------------------------
Net decrease in shares
outstanding before
conversion (8,448,513) (49,813,485)
Shares converted from
Class B (See Note 1) 20,205,663 130,264,283
----------------------------
Net increase 11,757,150 $ 80,450,798
============================
</Table>
34 MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 6,132,253 $ 35,711,486
Shares issued to
shareholders in
reinvestment of
dividends 5,017,413 28,939,798
Shares redeemed (31,105,623) (179,967,645)
----------------------------
Net decrease in shares
outstanding before
conversion (19,955,957) (115,316,361)
Shares converted from
Class B (See Note 1) (14,287,468) (84,244,490)
----------------------------
Net decrease (34,243,425) $(199,560,851)
============================
Year ended October 31,
2007:
Shares sold 8,400,322 $ 53,824,167
Shares issued to
shareholders in
reinvestment of
dividends 5,964,250 38,174,939
Shares redeemed (34,820,997) (223,014,325)
----------------------------
Net decrease in shares
outstanding before
conversion (20,456,425) (131,015,219)
Shares reacquired upon
conversion into Class A
(See Note 1) (20,300,177) (130,264,283)
----------------------------
Net decrease (40,756,602) $(261,279,502)
============================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 13,274,273 $ 76,853,924
Shares issued to
shareholders in
reinvestment of
dividends 2,587,539 14,868,368
Shares redeemed (22,299,748) (127,662,758)
----------------------------
Net decrease (6,437,936) $ (35,940,466)
============================
Year ended October 31,
2007:
Shares sold 16,916,900 $ 108,719,617
Shares issued to
shareholders in
reinvestment of
dividends 2,477,332 15,848,601
Shares redeemed (19,460,584) (124,344,149)
----------------------------
Net increase (decrease) (66,352) $ 224,069
============================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 72,666,498 $ 424,248,877
Shares issued to
shareholders in
reinvestment of
dividends 5,491,601 31,479,145
Shares redeemed (36,892,114) (211,492,375)
----------------------------
Net increase 41,265,985 $ 244,235,647
============================
Year ended October 31,
2007:
Shares sold 58,245,898 $ 376,385,815
Shares issued to
shareholders in
reinvestment of
dividends 2,404,837 15,373,686
Shares redeemed (9,878,201) (63,561,839)
----------------------------
Net increase 50,772,534 $ 328,197,662
============================
<Caption>
CLASS R2 SHARES AMOUNT
Period ended October 31,
2008 (b):
Shares sold 8,617 $ 50,454
Shares issued to
shareholders in
reinvestment of
dividends 231 1,246
----------------------------
Net increase 8,848 $ 51,700
============================
</Table>
(b) Class R2 was seeded April 30, 2008. Investment operations did not commence
until May 1, 2008.
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
mainstayinvestments.com 35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay High Yield Corporate Bond Fund
("the Fund"), one of the funds constituting The MainStay Funds, as of October
31, 2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay High Yield Corporate Bond Fund of The MainStay Funds as of October 31,
2008, the results of its operations for the year then ended, the changes in its
net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended,
in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
36 MainStay High Yield Corporate Bond Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay High Yield Corporate Bond Fund (the "Fund"), which was
comprised solely of Independent Trustees, unanimously approved the Management
and Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider of shareholder services, which has been recognized by
independent third-parties on numerous occasions. The Board noted the role that
the MainStay Family of Funds historically has played in serving the investment
needs of New York Life Insurance Company policyholders, who often maintain
smaller account balances than other retail investors. The Board acknowledged
that it had approved NYLIM's recommendation to create a new "Investor Class" of
shares designed principally to address the higher
mainstayinvestments.com 37
shareholder-servicing costs typically associated with smaller shareholder
accounts. The Board considered the experience of senior personnel at NYLIM
providing management and administrative services to the Fund, as well as NYLIM's
reputation and financial condition. The Board also reviewed NYLIM's willingness
to invest in personnel designed to benefit the Fund, and that NYLIM also is
responsible for paying all of the salaries and expenses for the Fund's officers.
In addition, the Board considered the benefits to shareholders of being part of
the MainStay Family of Funds, including the privilege of exchanging investments
between the same class of shares without the imposition of a sales charge, as
described more fully in the Fund's prospectus. Based on these considerations,
the Board concluded, within the context of its overall determinations regarding
the Agreements, that the Fund is likely to continue to benefit from the nature,
extent and quality of these services as a result of NYLIM's experience,
personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
manager, the number of accounts managed by the portfolio manager and MacKay
Shields' method for compensating portfolio manager. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio manager and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position is important in order for NYLIM to continue to provide high-
quality ongoing services to the Fund and its shareholders. The Board noted, for
example, increased costs borne by NYLIM and its affiliates due to new and
ongoing regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other
38 MainStay High Yield Corporate Bond Fund
profitability methodologies may also be reasonable, the Board concluded that the
profitability methodology presented by NYLIM to the Board with respect to the
Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
mainstayinvestments.com 39
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2008, the Fund designates approximately
$335,847 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividends paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 96.5% for qualified interest income and 0.1% for the
corporate dividends received deduction.
In January 2009, shareholders will receive on IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
40 MainStay High Yield Corporate Bond Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
mainstayinvestments.com 41
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
42 MainStay High Yield Corporate Bond Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 43
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
44 MainStay High Yield Corporate Bond Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A014644 (RECYCLE LOGO) MS308-08 MSHY11-12/08
08
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
INTERNATIONAL EQUITY FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
INTERNATIONAL EQUITY FUND
The MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 15
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 22
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 32
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 33
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 37
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 37
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 37
- ---------------------------------------------
TRUSTEES AND OFFICERS 38
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
A REDEMPTION FEE OF 2% WILL BE APPLIED TO SHARES THAT ARE REDEEMED WITHIN 60
DAYS OF PURCHASE. PERFORMANCE DATA SHOWN DOES NOT REFLECT THE DEDUCTION OF THIS
FEE, WHICH WOULD LOWER PERFORMANCE.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
With sales charges (36.49%) 4.48% 2.96%
Excluding sales charges (32.79) 5.67 3.54
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
With sales charges (36.37%) 4.52% 2.97%
Excluding sales charges (32.67) 5.71 3.56
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
With sales charges (36.36%) 4.52% 2.77%
Excluding sales charges (33.36) 4.85 2.77
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class
C shares are sold with no initial sales charge, are subject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 1.00%. Class I shares are sold with no initial sales charge or CDSC, have
no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Class R1 shares are sold with no initial sales
charge or CDSC, and have no annual 12b-1 fee. Class R2 shares are sold with
no initial sales charge or CDSC,
THE FOOTNOTES ON THE NEXT TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ---------------------------------------------------------
With sales charges (33.92%) 4.85% 2.77%
Excluding sales charges (33.32) 4.85 2.77
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ------------------------------------------------
(32.44%) 6.25% 3.90%
</Table>
(PERFORMANCE GRAPH)
CLASS R1 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ------------------------------------------------
(32.53%) 6.07% 3.76%
</Table>
(PERFORMANCE GRAPH)
and have an annual 12b-1 fee of 0.25%. Class R1 and R2 shares are available
only through corporate-sponsored retirement programs, which include certain
minimum program requirements. Class R3 shares are sold with no initial sales
charge or CDSC, have an annual 12b-1 fee of 0.50%, and are available in
certain individual retirement accounts or in certain retirement plans.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. These fee waivers and/or
expense limitations are contractual and may be modified or terminated only
with the approval of the Board of Trustees. The Manager may recoup the amount
of certain management fee waivers or expense reimbursements from the Fund
pursuant to the contract if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years
after the year in which the Manager incurred the expense. Performance figures
shown reflect nonrecurring reimbursements from affiliates for professional
fees and losses attributable to shareholder trading arrangements. If these
nonrecurring reimbursements had not been made the total return (excluding
sales charges) would have been 5.63% for Class A, 4.76% for Class B, 4.80%
for Class C, 6.23% for Class I, 6.04% for Class R1 and 5.85% for Class R2 for
the five-year period ended October 31, 2008, and 3.52% for Class A, 2.72% for
Class B, 2.74% for Class C, 3.89% for Class I, 3.75% for Class R1 and 3.53%
for Class R2 for the ten-year period then ended. Investor Class and Class R3
shares were not affected, because the reimbursement occurred prior to the
launch of these share classes.
2. Performance figures for Investor Class shares, first offered to the public on
February 28, 2008, include the historical performance of Class A shares
through February 27, 2008, adjusted for differences in certain contractual
expenses and fees. Unadjusted, the performance shown for Investor Class
shares might have been lower.
THE FOOTNOTES ON THE PRECEDING PAGE AND THE NEXT PAGE ARE AN INTEGRAL PART OF
THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay International Equity Fund
CLASS R2 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ------------------------------------------------
(32.63%) 5.90% 3.56%
</Table>
(PERFORMANCE GRAPH)
CLASS R3 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------
(32.86%) 5.45% 3.27%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- -------------------------------------------------------------------------------
MSCI EAFE(R) Index(5) (46.62%) 3.60% 1.67%
Average Lipper international multi-cap core fund(6) (47.01) 3.13 2.93
</Table>
3. Performance figures for Class I, R1 and R2 shares, each of which was first
offered on January 2, 2004, include the historical performance of Class B
shares through December 31, 2003, adjusted for differences in certain
contractual expenses and fees. Unadjusted, the performance shown for Class I,
R1 and R2 shares might have been lower.
4. Performance figures for Class R3 shares which were first offered on April 28,
2006, include the historical performance of Class B shares through April 27,
2006, adjusted for differences in expenses and fees. Unadjusted, the
performance shown for Class R3 shares might have been lower.
5. The Morgan Stanley Capital International Europe, Australasia and Far East
Index--the MSCI EAFE(R) Index--is an unmanaged index that is considered to be
representative of the international stock market. Results assume reinvestment
of all income and capital gains. The MSCI EAFE(R) Index is considered to be
the Fund's broad-based securities-market index for comparison purposes. An
investment cannot be made directly in an index.
6. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTES ON THE TWO PRECEDING PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
THE EXAMPLE BELOW IS INTENDED TO DESCRIBE THE FEES AND EXPENSES BORNE BY
SHAREHOLDERS DURING THE SIX-MONTH PERIOD FROM MAY 1, 2008, TO OCTOBER 31, 2008,
AND THE IMPACT OF THOSE COSTS ON YOUR INVESTMENT.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $734.60 $ 7.41 $1,016.60 $ 8.62
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $736.40 $ 5.76 $1,018.50 $ 6.70
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $732.20 $10.67 $1,012.80 $12.40
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $732.20 $10.67 $1,012.80 $12.40
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $737.20 $ 4.50 $1,020.00 $ 5.23
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $736.90 $ 4.93 $1,019.50 $ 5.74
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $736.10 $ 6.02 $1,018.20 $ 7.00
- --------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $734.90 $ 7.11 $1,016.90 $ 8.26
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.70% for Investor Class, 1.32% for Class A, 2.45% for Class B and Class C,
1.03% for Class I, 1.13% for Class R1, 1.38% for Class R2 and 1.63% for Class
R3) multiplied by the average account value over the period, divided by 366
and multiplied by 184 (to reflect the one-half year period). The table above
represents actual expenses incurred during the one-half year period and does
not take into account the Fund's written expense limitation agreement.
8 MainStay International Equity Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2008
(PORTFOLIO COMPOSITION PIE CHART)
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Roche Holding A.G. Genusscheine
2. Snam Rete Gas S.p.A.
3. Tesco PLC
4. Novartis A.G.(a)
5. Reed Elsevier N.V.
6. Nestle S.A. Registered
7. BP PLC(a)
8. NTT DoCoMo, Inc.
9. Enagas
10. Aflac, Inc.
</Table>
(a) Security trades on more than one exchange.
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGER RUPAL J. BHANSALI OF MACKAY SHIELDS LLC,
THE FUND'S SUBADVISOR.
HOW DID MAINSTAY INTERNATIONAL EQUITY FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay International Equity Fund returned -32.79%
for Investor Class shares,(1) -32.67% for Class A shares, -33.36% for Class B
shares and -33.32% for Class C shares for the 12 months ended October 31, 2008.
Over the same period, the Fund's Class I shares returned -32.44%, Class R1
shares returned -32.53%, Class R2 shares returned -32.63% and Class R3 shares
returned -32.86%. All share classes outperformed the -47.01% return of the
average Lipper(2) international multi-cap core fund and the -46.62% return of
the MSCI EAFE(R) Index(3) for the 12 months ended October 31, 2008. The MSCI
EAFE(R) Index is the Fund's broad-based securities-market index. See pages 5 and
6 for Fund returns with sales charges.
WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
Throughout the reporting period, we remained focused on the analysis of
individual business models and sought to invest in quality companies. Our
bottom-up security selection process is based on what we believe to be
reasonable valuations rather than market perceptions. We attribute the Fund's
outperformance to a number of factors, including overweight positions in the
pharmaceuticals, biotechnology & life sciences and utilities industry groups,
and underweight positions in banks, capital goods and materials. On a security
selection basis, owning global pharmaceutical companies Roche Holdings and
Novartis and Italian utility Snam Rete Gas contributed to the Fund's
outperformance of the MSCI EAFE(R) Index.
DURING THE REPORTING PERIOD, WHICH INDUSTRY GROUPS WERE THE STRONGEST
CONTRIBUTORS TO THE FUND'S RELATIVE PERFORMANCE AND WHICH INDUSTRY GROUPS WERE
PARTICULARLY WEAK?
Pharmaceuticals and financials were the strongest industry group contributors to
the Fund's relative performance during the reporting period. The Fund benefited
from positive security selection and from underweight positions in banks and
diversified financials. Much of the movement in the financials sector bore a
direct relationship to the ongoing financial crisis. The utilities industry
group was also a contributor to the Fund's relative performance, as holdings
such as Snam Rete Gas and Terna outperformed the Index. In contrast, the Fund's
holdings in consumer durables and food & staples retailing detracted from
performance, mainly because of underperformance by Tesco and Puma. Tesco is a
UK-based food retailer and the Fund's largest holding. Puma is a footwear and
apparel manufacturer headquartered in Germany.
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL FUND HOLDINGS DID PARTICULARLY
WELL AND WHICH HOLDINGS WERE WEAK?
The strongest absolute and relative contributor to the Fund's performance was
NTT DoCoMo, a Japan-based provider of various telecommunication services.
Another strong contributor during the reporting period was Italian gas
transmission company Snam Rete Gas. As a regulated utility, the company is
assured of guaranteed rates of return on its asset base. A third contributor was
Roche Holdings, a Switzerland-based global pharmaceutical company. Roche
Holdings produces a diversified array of prescription drugs, including
cardiovascular, autoimmune and oncology medicines.
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. Foreign securities may be
subject to greater risks than U.S. investments, including currency fluctuations,
less-liquid trading markets, greater price volatility, political and economic
instability, less publicly available information, and changes in tax or currency
laws or monetary policy. These risks are likely to be greater in emerging
markets than in developed markets. The Fund may invest in derivatives, which may
increase the volatility of the Fund's net asset value and may result in a loss
to the Fund.
1. Performance for Investor Class shares prior to February 28, 2008, the date
the shares were first offered, includes the historical performance of Class A
shares adjusted to reflect the differences in certain contractual fees and
expenses for such shares. Unadjusted, the performance shown for Investor
Class shares might have been lower.
2. See footnote on page 7 for more information on Lipper Inc.
3. See footnote on page 7 for more information on the MSCI EAFE(R) Index.
10 MainStay International Equity Fund
The weakest performer was Tesco. The company's shares performed poorly on
indications that the United Kingdom is slipping into a recession--a situation
that could pressure the company's revenues and margins. TNT NV, a Netherlands-
based transport services company, also detracted from the Fund's performance.
The weakening global economy could have a negative impact on express mail, the
growth portion of the company's business. A third detractor was Mediaset,
Italy's television broadcasting company. Its earnings forecasts continued to
deteriorate as ad revenues weakened in tandem with the country's economy. The
Fund reduced its position in Mediaset during the reporting period.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
The Fund's exposure to the energy sector was increased during the reporting
period by adding to existing positions in Total and ENI, two global integrated
oil companies. While global demand is slowing and the price of oil has fallen
from recent record highs, we believe that major oil companies may still have
sufficient room to benefit.
We either eliminated or trimmed a number of financial holdings, as the
financials sector continued to suffer from credit issues. We sold the Fund's
position in German automaker BMW as the strong euro and deteriorating economic
conditions put pressure on the company's sales, margins and profits. In
addition, we trimmed various consumer discretionary and indebted companies
during the 12-month reporting period on the belief that weaker economic
conditions could put pressure on companies that rely on discretionary consumer
spending.
HOW WAS THE FUND POSITIONED RELATIVE TO THE MSCI EAFE(R) INDEX AT THE END OF
OCTOBER 2008?
As of October 31, 2008, the Fund was overweight relative to the MSCI EAFE(R)
Index in media, food & staples retailing and technology hardware & equipment. On
the same date, the Fund was underweight relative to the Index in materials,
banks and capital goods. The Fund held market-weight positions in energy and
telecommunication services. These weightings result from our bottom-up research
on individual companies that fall in these industry groups.
From a regional perspective, we continued to find fewer compelling investments
in Japan than we did in Europe and the rest of Asia. As a result, the Fund holds
an underweight position relative to the MSCI EAFE(R) Index in Japan.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 86.8%+
- ----------------------------------------------------------------
BELGIUM 1.3%
Mobistar S.A. (Wireless
Telecommunication Services) 106,500 $ 7,065,686
-------------
DENMARK 0.1%
Novo-Nordisk A/S Class B
(Pharmaceuticals) 6,100 326,536
-------------
FRANCE 4.1%
Neopost S.A. (Office
Electronics) 48,620 4,067,765
Sanofi-Aventis S.A., ADR
(Pharmaceuticals) (a) 50,800 1,606,296
Societe Television Francaise
1 (Media) 587,284 7,532,028
Total S.A. (Oil, Gas &
Consumable Fuels) 154,100 8,463,905
-------------
21,669,994
-------------
GERMANY 4.6%
Beiersdorf A.G. (Personal
Products) 26,700 1,411,537
Hannover Rueckversicherung
A.G. (Insurance) 444,786 11,240,680
SAP A.G., Sponsored ADR
(Software) (a) 37,300 1,317,809
Siemens A.G. (Industrial
Conglomerates) 136,400 8,160,705
Siemens A.G., Sponsored ADR
(Industrial Conglomerates)
(a) 16,600 998,490
Wincor Nixdorf A.G.
(Computers & Peripherals) 16,500 718,858
-------------
23,848,079
-------------
GREECE 2.5%
OPAP S.A. (Hotels,
Restaurants & Leisure) 595,548 13,049,130
-------------
HONG KONG 0.6%
Esprit Holdings, Ltd.
(Specialty Retail) 524,900 2,946,750
-------------
INDIA 0.1%
Infosys Technologies, Ltd.,
Sponsored ADR (IT Services)
(a) 19,500 571,740
-------------
ITALY 12.1%
Assicurazioni Generali S.p.A.
(Insurance) 57,900 1,459,499
ENI S.p.A. (Oil, Gas &
Consumable Fuels) 304,700 7,260,527
ENI S.p.A., Sponsored ADR
(Oil, Gas & Consumable
Fuels) (a) 5,000 240,250
Intesa Sanpaolo S.p.A. RNC
shares (Commercial Banks) 401,600 1,192,895
MediaSet S.p.A. (Media) 2,568,210 13,941,750
V Snam Rete Gas S.p.A. (Gas
Utilities) 4,745,286 24,055,066
Terna S.p.A. (Electric
Utilities) 4,725,600 15,270,434
-------------
63,420,421
-------------
JAPAN 12.9%
Astellas Pharma, Inc.
(Pharmaceuticals) 96,000 3,924,649
Hoya Pentax HD Corp.
(Electronic Equipment &
Instruments) 419,100 7,768,585
Keyence Corp. (Electronic
Equipment & Instruments) 44,400 8,574,200
Murata Manufacturing Co.,
Ltd. (Electronic Equipment
& Instruments) 117,900 4,085,938
Nintendo Co., Ltd. (Software) 18,310 5,774,921
Nintendo Co., Ltd., ADR
(Software) (a) 35,200 1,372,800
V NTT DoCoMo, Inc. (Wireless
Telecommunication Services) 11,504 18,251,756
OBIC Co., Ltd. (IT Services) 28,060 3,525,613
Otsuka Corp. (IT Services) 19,000 960,169
RICOH Co., Ltd. (Office
Electronics) 604,800 6,433,241
Santen Pharmaceutical Co.,
Ltd. (Pharmaceuticals) 94,800 2,410,975
Takeda Pharmaceutical Co.,
Ltd. (Pharmaceuticals) 67,300 3,391,760
Yamato Holdings Co., Ltd.
(Air Freight & Logistics) 102,400 1,126,237
-------------
67,600,844
-------------
NETHERLANDS 5.6%
V Reed Elsevier N.V. (Media) 1,499,743 20,067,787
TNT N.V. (Air Freight &
Logistics) 274,646 5,750,062
Unilever N.V., C.V.A. (Food
Products) (b) 141,700 3,416,078
-------------
29,233,927
-------------
SINGAPORE 1.6%
DBS Group Holdings, Ltd.
(Commercial Banks) 875,100 6,699,390
Venture Corp., Ltd.
(Electronic Equipment &
Instruments) 406,600 1,478,554
-------------
8,177,944
-------------
SPAIN 3.8%
V Enagas (Gas Utilities) 911,500 17,788,122
Indra Sistemas S.A. (IT
Services) 98,500 1,927,744
-------------
19,715,866
-------------
SWEDEN 0.7%
Svenska Handelsbanken Class A
(Commercial Banks) 47,100 862,447
</Table>
+ Percentages indicated are based on Fund net assets.
Among the Fund's 10 largest holdings, as of October 31, 2008, excluding short-
term investment. One of the ten largest holdings may be a security traded on
more than one exchange. May be subject to change daily.
12 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
SWEDEN (CONTINUED)
Telefonaktiebolaget LM
Ericsson, Class B
(Communications Equipment) 246,500 $ 1,738,254
Telefonaktiebolaget LM
Ericsson, Sponsored ADR
(Communications Equipment)
(a) 119,400 844,158
-------------
3,444,859
-------------
SWITZERLAND 15.7%
ABB, Ltd., Sponsored ADR
(Electrical Equipment) (a) 134,800 1,772,620
ABB, Ltd. Registered
(Electrical Equipment) (c) 246,900 3,264,586
Actelion, Ltd. Registered
(Biotechnology) (c) 39,383 2,082,263
Alcon, Inc. (Health Care
Equipment & Supplies) 56,000 4,934,720
Geberit A.G. (Building
Products) 36,932 3,840,709
V Nestle S.A. Registered
(Food Products) 495,400 19,310,424
V Novartis A.G., ADR
(Pharmaceuticals) (a) 171,200 8,729,488
V Novartis A.G. Registered
(Pharmaceuticals) 242,448 12,265,115
V Roche Holding A.G.
Genusscheine
(Pharmaceuticals) 161,825 24,769,869
Temenos Group A.G. Registered
(Software) (c) 4,833 61,074
UBS A.G. Registered (Capital
Markets) (c) 56,100 948,090
-------------
81,978,958
-------------
UNITED KINGDOM 17.9%
V BP PLC (Oil, Gas &
Consumable Fuels) 73,400 606,585
V BP PLC, Sponsored ADR
(Oil, Gas & Consumable
Fuels) (a) 367,433 18,261,420
Cobham PLC (Aerospace &
Defense) 1,728,262 5,232,659
Diageo PLC (Beverages) 305,461 4,678,827
GlaxoSmithKline PLC
(Pharmaceuticals) 90,300 1,740,624
Michael Page International
PLC (Professional Services) 144,200 466,092
Rolls-Royce Group PLC
(Aerospace & Defense) (c) 1,374,699 7,291,591
Rolls Royce Group PLC, Class
B
(Aerospace & Defense) (d) 78,632,782 126,548
Royal Dutch Shell PLC Class
A, ADR
(Oil, Gas & Consumable
Fuels) (a) 186,200 10,391,822
Scottish & Southern Energy
PLC
(Electric Utilities) 470,700 9,226,835
Shire, Ltd., ADR
(Pharmaceuticals) (a) 12,150 479,318
Shire, Ltd. (Pharmaceuticals) 318,100 4,205,042
V Tesco PLC (Food & Staples
Retailing) 3,875,835 21,186,050
Vodafone Group PLC, ADR
(Wireless Telecommunication
Services) (a) 493,624 9,512,134
-------------
93,405,547
-------------
UNITED STATES 3.2%
V Aflac, Inc. (Insurance) 360,158 15,947,797
Synthes, Inc. (Health Care
Equipment & Supplies) 4,500 581,020
-------------
16,528,817
-------------
Total Common Stocks
(Cost $556,640,523) 452,985,098
-------------
EXCHANGE TRADED FUNDS 4.4% (E)
- ----------------------------------------------------------------
UNITED STATES 4.4%
iShares MSCI EAFE Index Fund
(Capital Markets) (f) 136,800 6,104,016
iShares S&P Europe 350 Index
Fund (Capital Markets) 416,300 13,067,657
Vanguard Europe Pacific ETF
(Capital Markets) 127,500 3,562,350
-------------
Total Exchange Traded Funds
(Cost $33,342,202) 22,734,023
-------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS 1.1%
- ----------------------------------------------------------------
IRELAND 1.1%
Ryanair Holdings PLC Class A
Strike Price E 0.000001
Expire 4/3/18 (Airlines)
(c)(g) 1,749,827 5,988,197
-------------
Total Warrants
(Cost $7,037,149) 5,988,197
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 0.6%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 0.6%
UNITED STATES 0.6%
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$2,996,071 (Collateralized
by Federal Home Loan Bank
Security with a rate of
2.673% and a maturity date
of 3/4/09, with a Principal
Amount of $3,050,000 and a
Market Value of $3,057,625)
(Capital Markets) $ 2,996,046 2,996,046
-------------
Total Short-Term Investment
(Cost $2,996,046) 2,996,046
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
VALUE
Total Investments
(Cost $600,015,920) (h) 92.9% $ 484,703,364
Cash and Other Assets,
Less Liabilities 7.1 37,309,334
----- ------------
Net Assets 100.0% $ 522,012,698
===== ============
</Table>
<Table>
+++ On a daily basis NYLIM confirms that the
value of the Fund's liquid assets (liquid
portfolio securities and cash) is
sufficient to cover its potential senior
securities (e.g., futures, swaps,
options).
(a) ADR--American Depositary Receipt.
(b) CVA--Certificaten Van Aandelen.
(c) Non-income producing security.
(d) Fair valued security. The total market
value of this security at October 31,
2008 is $126,548, which represents less
than one-tenth of a percent of the Fund's
net assets.
(e) Exchange Traded Fund--represents a basket
of securities that are traded on an
exchange.
(f) Morgan Stanley Capital International
Europe, Australasia and Far East Index
(MSCI EAFE Index) is an unmanaged free
float-adjusted market-capitalization
index that is designed to measure
developed-market equity performance,
excluding the United States and Canada.
As of October 31, 2008, the MSCI EAFE
Index consisted of the following 21
developed-market country indices:
Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Hong
Kong, Ireland, Italy, Japan, the
Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden,
Switzerland and the United Kingdom.
(g) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(h) At October 31, 2008, cost is $603,862,621
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 7,943,513
Gross unrealized depreciation (127,102,770)
-------------
Net unrealized depreciation $(119,159,257)
=============
</Table>
The following abbreviation is used in the above portfolio:
E--Euro
The table below sets forth the diversification of MainStay International Equity
Fund investments by industry.
INDUSTRY DIVERSIFICATION (UNAUDITED)
<Table>
<Caption>
VALUE PERCENT(+)
Aerospace & Defense $ 12,650,798 2.4%
Air Freight & Logistics 6,876,299 1.3
Airlines 5,988,197 1.1
Beverages 4,678,827 0.9
Biotechnology 2,082,263 0.4
Building Products 3,840,709 0.7
Capital Markets 26,678,159 5.1
Commercial Banks 8,754,732 1.7
Communications Equipment 2,582,412 0.5
Computers & Peripherals 718,858 0.1
Electric Utilities 24,497,269 4.7
Electronical Equipment 5,037,206 1.0
Electronic Equipment & Instruments 21,907,277 4.2
Food & Staples Retailing 21,186,050 4.1
Food Products 22,726,502 4.3
Gas Utilities 41,843,188 8.0
Health Care Equipment & Supplies 5,515,740 1.1
Hotels, Restaurants & Leisure 13,049,130 2.5
Industrial Conglomerates 9,159,195 1.8
Insurance 28,647,976 5.5
IT Services 6,985,266 1.3
Media 41,541,565 8.0
Office Electronics 10,501,006 2.0
Oil, Gas & Consumable Fuels 45,224,509 8.7
Personal Products 1,411,537 0.3
Pharmaceuticals 63,849,672 12.2
Professional Services 466,092 0.1
Software 8,526,604 1.6
Specialty Retail 2,946,750 0.6
Wireless Telecommunication Services 34,829,576 6.7
------------ -----
484,703,364 92.9
Cash and Other Assets,
Less Liabilities 37,309,334 7.1
------------ -----
Net Assets $522,012,698 100.0%
============ =====
</Table>
<Table>
+ Percentages indicated are based on Fund
net assets.
</Table>
14 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $600,015,920) $ 484,703,364
Cash denominated in foreign
currencies (identified cost
$18,522,931) 17,932,313
Receivables:
Investment securities sold 8,564,202
Dividends and interest 1,821,772
Fund shares sold 687,896
Other assets 59,945
Unrealized appreciation on foreign
currency forward contracts 20,208,208
-------------
Total assets 533,977,700
-------------
LIABILITIES:
Payables:
Investment securities purchased 3,751,820
Fund shares redeemed 533,291
Manager (See Note 3) 360,714
Custodian 179,314
Transfer agent (See Note 3) 145,074
Shareholder communication 91,862
NYLIFE Distributors (See Note 3) 62,188
Professional fees 54,019
Trustees 1,947
Accrued expenses 17,134
Unrealized depreciation on foreign
currency forward contracts 6,767,639
-------------
Total liabilities 11,965,002
-------------
Net assets $ 522,012,698
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 476,814
Additional paid-in capital 644,140,140
-------------
644,616,954
Accumulated undistributed net
investment income 27,257,425
Accumulated net realized loss on
investments, written option
transactions and foreign currency
transactions (47,404,469)
Net unrealized depreciation on
investments (115,312,556)
Net unrealized appreciation on
translation of other assets and
liabilities in foreign currencies
and foreign currency forward
contracts 12,855,344
-------------
Net assets $ 522,012,698
=============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 35,428,601
=============
Shares of beneficial interest
outstanding 3,231,661
=============
Net asset value per share
outstanding $ 10.96
Maximum sales charge (5.50% of
offering price) 0.64
-------------
Maximum offering price per share
outstanding $ 11.60
=============
CLASS A
Net assets applicable to
outstanding shares $ 63,469,856
=============
Shares of beneficial interest
outstanding 5,783,445
=============
Net asset value per share
outstanding $ 10.97
Maximum sales charge (5.50% of
offering price) 0.64
-------------
Maximum offering price per share
outstanding $ 11.61
=============
CLASS B
Net assets applicable to
outstanding shares $ 37,098,187
=============
Shares of beneficial interest
outstanding 3,647,619
=============
Net asset value and offering price
per share outstanding $ 10.17
=============
CLASS C
Net assets applicable to
outstanding shares $ 10,976,145
=============
Shares of beneficial interest
outstanding 1,079,759
=============
Net asset value and offering price
per share outstanding $ 10.17
=============
CLASS I
Net assets applicable to
outstanding shares $ 371,974,710
=============
Shares of beneficial interest
outstanding 33,659,874
=============
Net asset value and offering price
per share outstanding $ 11.05
=============
CLASS R1
Net assets applicable to
outstanding shares $ 2,754,928
=============
Shares of beneficial interest
outstanding 250,827
=============
Net asset value and offering price
per share outstanding $ 10.98
=============
CLASS R2
Net assets applicable to
outstanding shares $ 273,566
=============
Shares of beneficial interest
outstanding 24,896
=============
Net asset value and offering price
per share outstanding $ 10.99
=============
CLASS R3
Net assets applicable to
outstanding shares $ 36,705
=============
Shares of beneficial interest
outstanding 3,352
=============
Net asset value and offering price
per share outstanding $ 10.95
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 15
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 31,921,389
Income from securities
loaned--net 1,356,417
Interest 169,798
-------------
Total income 33,447,604
-------------
EXPENSES:
Manager (See Note 3) 6,576,565
Transfer agent--Investor Class
(See Note 3) 123,268
Transfer agent--Class A (See Note
3) 259,221
Transfer agent--Classes B and C
(See Note 3) 308,753
Transfer agent--Classes I, R1, R2
and R3
(See Note 3) 247,351
Distribution--Class B (See Note
3) 430,760
Distribution--Class C (See Note
3) 139,888
Distribution--Class R3 (See Note
3) 126
Distribution/Service--Investor
Class
(See Note 3) 66,310
Distribution/Service--Class A
(See Note 3) 296,015
Service--Class B (See Note 3) 143,587
Service--Class C (See Note 3) 46,629
Distribution/Service--Class R2
(See Note 3) 867
Distribution/Service--Class R3
(See Note 3) 126
Custodian 357,819
Professional fees 139,528
Shareholder communication 125,465
Recordkeeping (b) 78,797
Registration 98,449
Trustees 26,495
Shareholder service--Class R1
(See Note 3) 3,505
Shareholder service--Class R2
(See Note 3) 347
Shareholder service--Class R3
(See Note 3) 50
Miscellaneous 52,730
-------------
Total expenses before waiver 9,522,651
Expense waiver from Manager (See
Note 3) (137,416)
-------------
Net expenses 9,385,235
-------------
Net investment income 24,062,369
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, WRITTEN OPTIONS AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gain (loss) on:
Security transactions $ (46,306,541)
Written option transactions 2,438,310
Foreign currency transactions 1,446,745
-------------
Net realized loss on investments,
written option transactions and
foreign currency transactions (42,421,486)
-------------
Net change in unrealized
appreciation (depreciation) on:
Security transactions (269,608,721)
Written option contracts 1,454,444
Translation of other assets and
liabilities in foreign
currencies and foreign
currency forward contracts 13,868,886
-------------
Net change in unrealized
appreciation on investments,
written option transactions and
foreign currency transactions (254,285,391)
-------------
Net realized and unrealized loss on
investments, written option
transactions and foreign currency
transactions (296,706,877)
-------------
Net decrease in net assets
resulting from operations $(272,644,508)
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$3,771,330.
(b) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
16 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 24,062,369 $ 13,122,781
Net realized gain (loss)
on investments, written
option transactions and
foreign currency
transactions (42,421,486) 75,893,233
Net change in unrealized
appreciation
(depreciation) on
investments, written
option transactions and
foreign currency
transactions (254,285,391) 38,713,858
-----------------------------
Net increase (decrease) in
net assets resulting from
operations (272,644,508) 127,729,872
-----------------------------
Dividends and distributions to
shareholders:
From net investment income:
Class A (598,461) (695,182)
Class I (5,317,732) (4,859,067)
Class R1 (32,078) (34,454)
Class R2 (1,893) (2,755)
Class R3 (218) (56)
-----------------------------
(5,950,382) (5,591,514)
-----------------------------
From net realized gain on investments:
Class A (16,879,290) (9,929,084)
Class B (7,486,636) (4,875,985)
Class C (2,504,890) (1,282,100)
Class I (57,826,273) (35,093,105)
Class R1 (383,627) (257,357)
Class R2 (32,779) (27,504)
Class R3 (5,318) (732)
-----------------------------
(85,118,813) (51,465,867)
-----------------------------
Total dividends and
distributions to
shareholders (91,069,195) (57,057,381)
-----------------------------
Capital share transactions:
Net proceeds from sale of
shares $ 123,377,421 $ 221,836,609
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 74,162,347 46,704,468
Cost of shares redeemed
(a) (236,089,020) (169,504,999)
-----------------------------
Increase (decrease) in
net assets derived from
capital share
transactions (38,549,252) 99,036,078
-----------------------------
Net increase (decrease)
in net assets (402,262,955) 169,708,569
NET ASSETS:
Beginning of year 924,275,653 754,567,084
-----------------------------
End of year $ 522,012,698 $ 924,275,653
=============================
Accumulated undistributed
net investment income at
end of year $ 27,257,425 $ 7,704,101
=============================
</Table>
(a) Cost of shares redeemed net of redemption fee of $24,044 and $20,373 for the
years ended October 31, 2008 and 2007, respectively.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR
CLASS CLASS A
---------- -----------------------------------------------------------------------
FEBRUARY
28,
2008**
THROUGH
OCTOBER
31, YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 14.70 $ 18.09 $ 16.69 $ 13.53 $ 11.95 $ 10.50
------- ------- -------- -------- ------- -------
Net investment income
(loss) (a) 0.36 0.41 0.22 0.24 0.15 0.07
Net realized and
unrealized gain (loss)
on investments (4.31) (6.10) 2.54 3.65 (b) 1.59 1.48
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.21 0.30 (0.17) (0.10) (0.14) 0.03
------- ------- -------- -------- ------- -------
Total from investment
operations (3.74) (5.39) 2.59 3.79 1.60 1.58
------- ------- -------- -------- ------- -------
Less dividends and
distributions:
From net investment
income -- (0.05) (0.07) (0.04) (0.02) (0.13)
From net realized gain
on investments -- (1.68) (1.12) (0.59) -- --
------- ------- -------- -------- ------- -------
Total dividends and
distributions -- (1.73) (1.19) (0.63) (0.02) (0.13)
------- ------- -------- -------- ------- -------
Redemption fee (a) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
------- ------- -------- -------- ------- -------
Net asset value at end of
period $ 10.96 $ 10.97 $ 18.09 $ 16.69 $ 13.53 $ 11.95
======= ======= ======== ======== ======= =======
Total investment return
(c)(f) (25.44%)(e) (32.67%) 16.30% 29.11%(b)(d) 13.40% 15.11%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 3.91% ++ 2.79% 1.25% 1.65% 1.15% 0.60%
Net expenses 1.70% ++ 1.47% 1.58% 1.62% 1.74% 1.90%
Expenses (before
recoupment/waiver/-
reimbursement) 1.73% ++ 1.47% 1.55% 1.67%(d) 1.76% --
Portfolio turnover rate 82% 82% 49% 50% 51% 54%
Net assets at end of
period (in 000's) $35,429 $63,470 $186,738 $145,964 $87,204 $70,252
</Table>
<Table>
<Caption>
CLASS C
------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 16.98 $ 15.77 $ 12.87 $ 11.44 $10.09
------- ------- ------- ------- ------
Net investment income
(loss) (a) 0.29 0.09 0.13 0.05 (0.02)
Net realized and
unrealized gain (loss)
on investments (5.69) 2.40 3.45 (b) 1.52 1.41
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.27 (0.16) (0.09) (0.14) 0.03
------- ------- ------- ------- ------
Total from investment
operations (5.13) 2.33 3.49 1.43 1.42
------- ------- ------- ------- ------
Less dividends and
distributions:
From net investment
income -- -- -- -- (0.07)
From net realized gain
on investments (1.68) (1.12) (0.59) -- --
------- ------- ------- ------- ------
Total dividends and
distributions (1.68) (1.12) (0.59) -- (0.07)
------- ------- ------- ------- ------
Redemption fee (a) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
------- ------- ------- ------- ------
Net asset value at end of
period $ 10.17 $ 16.98 $ 15.77 $ 12.87 $11.44
======= ======= ======= ======= ======
Total investment return
(c)(f) (33.32%) 15.49% 28.15%(b)(d) 12.50% 14.16%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 2.12% 0.53% 0.91% 0.40% (0.15%)
Net expenses 2.39% 2.33% 2.37% 2.49% 2.65%
Expenses (before
recoupment/waiver/-
reimbursement) 2.41% 2.30% 2.42%(d) 2.51% --
Portfolio turnover rate 82% 49% 50% 51% 54%
Net assets at end of
period (in 000's) $10,976 $25,677 $17,026 $11,600 $6,718
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.02 per
share on net realized gains on investments and the effect on total investment
return was less than 0.01%, respectively.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The
effect on total return was less than one-hundredth of a percent.
(e) Total return is not annualized.
(f) Total investment returns may reflect adjustments to conform to generally
accepted accounting principals.
</Table>
18 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
----------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 16.99 $ 15.78 $ 12.88 $ 11.44 $ 10.09
------- ------- ------- ------- -------
0.28 0.09 0.15 0.05 (0.02)
(5.70) 2.40 3.43 (b) 1.53 1.41
0.28 (0.16) (0.09) (0.14) (0.03)
------- ------- ------- ------- -------
(5.14) 2.33 3.49 1.44 1.42
------- ------- ------- ------- -------
-- -- -- -- (0.07)
(1.68) (1.12) (0.59) -- --
------- ------- ------- ------- -------
(1.68) (1.12) (0.59) -- (0.07)
------- ------- ------- ------- -------
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
------- ------- ------- ------- -------
$ 10.17 $ 16.99 $ 15.78 $ 12.88 $ 11.44
======= ======= ======= ======= =======
(33.36%) 15.48% 28.13%(b)(d) 12.59% 14.16%
2.10% 0.52% 1.11% 0.40% (0.15%)
2.40% 2.35% 2.37% 2.49% 2.65%
2.42% 2.30% 2.41%(d) 2.51% --
82% 49% 50% 51% 54%
$37,098 $76,081 $67,150 $88,410 $69,882
</Table>
<Table>
<Caption>
CLASS I
-------------------------------------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
OCTOBER
YEAR ENDED OCTOBER 31, 31,
-------------------------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 18.23 $ 16.79 $ 13.60 $ 12.02 $ 11.40
-------- -------- -------- -------- -------
0.50 0.31 0.33 0.23 0.12
(6.16) 2.56 3.66 (b) 1.59 0.49
0.30 (0.16) (0.10) (0.14) 0.01
-------- -------- -------- -------- -------
(5.36) 2.71 3.89 1.68 0.62
-------- -------- -------- -------- -------
(0.14) (0.15) (0.11) (0.10) --
(1.68) (1.12) (0.59) -- --
-------- -------- -------- -------- -------
(1.82) (1.27) (0.70) (0.10) --
-------- -------- -------- -------- -------
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
-------- -------- -------- -------- -------
$ 11.05 $ 18.23 $ 16.79 $ 13.60 $ 12.02
======== ======== ======== ======== =======
(32.44%) 16.96% 29.94%(b)(d) 13.98% 5.44%(e)
3.48% 1.80% 2.22% 1.72% 1.33%++
1.03% 1.03% 1.01% 1.17% 1.17%++
1.05% 1.02% 1.08%(d) 1.19% --
82% 49% 50% 51% 54%
$371,975 $631,206 $520,233 $135,643 $39,266
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
------------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
OCTOBER
YEAR ENDED OCTOBER 31, 31,
------------------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 18.13 $16.71 $13.54 $12.00 $11.40
------- ------ ------ ------ ------
Net investment income (a) 0.49 0.29 0.32 0.22 0.12
Net realized and
unrealized gain (loss)
on investments (6.13) 2.55 3.64 (b) 1.54 0.47
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.30 (0.16) (0.10) (0.14) 0.01
------- ------ ------ ------ ------
Total from investment
operations (5.34) 2.68 3.86 1.62 0.60
------- ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income (0.13) (0.14) (0.10) (0.08) --
From net realized gain
on investments (1.68) (1.12) (0.59) -- --
------- ------ ------ ------ ------
Total dividends and
distributions (1.81) (1.26) (0.69) (0.08) --
------- ------ ------ ------ ------
Redemption fee (a) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++
------- ------ ------ ------ ------
Net asset value at end of
period $ 10.98 $18.13 $16.71 $13.54 $12.00
======= ====== ====== ====== ======
Total investment return
(c)(f) (32.53%) 16.88% 29.76%(b)(d) 13.57% 5.26%(e)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 3.40% 1.68% 2.19% 1.62% 1.23%++
Net expenses 1.13% 1.13% 1.12% 1.27% 1.27%++
Expenses (before
recoupment/waiver/-
reimbursement) 1.15% 1.12% 1.17%(d) 1.29% --
Portfolio turnover rate 82% 49% 50% 51% 54%
Net assets at end of
period (in 000's) $ 2,755 $4,158 $3,893 $3,325 $ 1
</Table>
<Table>
<Caption>
CLASS R3
--------------------------------
APRIL 28,
2006**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
--------------------------------
2008 2007 2006
Net asset value at
beginning of period $ 18.10 $16.70 $15.26
------- ------ ------
Net investment income (a) 0.42 0.13 0.13
Net realized and
unrealized gain (loss)
on investments (6.13) 2.64 1.35 (b)
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.30 (0.17) (0.04)
------- ------ ------
Total from investment
operations (5.41) 2.60 1.44
------- ------ ------
Less dividends and
distributions:
From net investment
income (0.06) (0.08) --
From net realized gain
on investments (1.68) (1.12) --
------- ------ ------
Total dividends and
distributions (1.74) (1.20) --
------- ------ ------
Redemption fee (a) 0.00 ++ 0.00 ++ 0.00 ++
------- ------ ------
Net asset value at end of
period $ 10.95 $18.10 $16.70
======= ====== ======
Total investment return
(c)(f) (32.86%) 16.35% 9.44%(e)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 2.93% 0.76% 1.60%++
Net expenses 1.63% 1.63% 1.59%++
Expenses (before
recoupment/waiver/-
reimbursement) 1.65% 1.62% 1.70%(d)++
Portfolio turnover rate 82% 49% 50%
Net assets at end of
period (in 000's) $ 37 $ 57 $ 11
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.02 per
share on net realized gains on investments and the effect on total investment
return was less than 0.01%, respectively.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The
effect on total return was less than one-hundredth of a percent.
(e) Total return is not annualized.
(f) Total investment returns may reflect adjustments to conform to generally
accepted accounting principals.
</Table>
20 MainStay International Equity Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R2
----------------------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
OCTOBER
YEAR ENDED OCTOBER 31, 31,
----------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 18.14 $16.72 $13.55 $11.99 $11.40
------- ------ ------ ------ ------
0.46 0.24 0.31 0.19 0.09
(6.14) 2.57 3.62 (b) 1.57 0.49
0.30 (0.16) (0.10) (0.14) 0.01
------- ------ ------ ------ ------
(5.38) 2.65 3.83 1.62 0.59
------- ------ ------ ------ ------
(0.09) (0.11) (0.07) (0.06) --
(1.68) (1.12) (0.59) -- --
------- ------ ------ ------ ------
(1.77) (1.23) (0.66) (0.06) --
------- ------ ------ ------ ------
0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00++
------- ------ ------ ------ ------
$ 10.99 $18.14 $16.72 $13.55 $11.99
======= ====== ====== ====== ======
(32.63%) 16.49% 29.53%(b)(d) 13.52% 5.18%(e)
3.24% 1.38% 2.07% 1.37% 0.98%++
1.38% 1.38% 1.37% 1.52% 1.52%++
1.40% 1.37% 1.42%(d) 1.54% --
82% 49% 50% 51% 54%
$ 274 $ 358 $ 289 $ 416 $ 1
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay International Equity Fund (the "Fund"), a diversified fund.
The Fund currently offers eight classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on September 13, 1994. Class C shares
commenced on September 1, 1998. Class I shares, Class R1 shares and Class R2
shares commenced on January 2, 2004. Class R3 shares commenced on April 28,
2006. Investor Class shares commenced on February 28, 2008. Investor Class and
Class A shares are offered at net asset value per share plus an initial sales
charge. No sales charge applies on investments of $1 million or more (and
certain other qualified purchases) in Investor Class and Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and a 1% contingent deferred sales charge
may be imposed on redemptions made within one year of purchase of Class C
shares. Class I, Class R1, Class R2 and Class R3 shares are not subject to a
sales charge. Depending upon eligibility, Class B shares convert to either
Investor Class or Class A shares eight years after the date they were purchased.
Additionally, depending upon eligibility, Investor Class shares may convert to
Class A shares and Class A shares may convert to Investor Class shares. The
eight classes of shares have the same voting (except for issues that relate
solely to one class), dividend, liquidation and other rights and bear the same
conditions except that Class B and Class C shares are subject to higher
distribution fee rates than Investor Class, Class A, Class R2 and Class R3
shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act.
Class I and Class R1 shares are not subject to a distribution or service fee.
Class R1, Class R2 and Class R3 shares are authorized to pay to the Manager, as
defined in Note 3(A), its affiliates, or third-party service providers, as
compensation for services rendered to shareholders of Class R1, Class R2 or
Class R3 shares, a shareholder service fee.
The Fund's investment objective is to provide long-term growth of capital
commensurate with an acceptable level of risk by investing in a portfolio
consisting primarily of non-U.S. equity securities. Current income is a
secondary objective.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Options
contracts are valued at the last posted settlement price on the market where
such options are principally traded. Investments in other mutual funds are
valued at their net asset values as of the close of the New York Stock Exchange
on the date of valuation. Foreign currency forward contracts are valued at their
fair market values determined on the basis of the mean between the last current
bid and ask prices based on dealer or exchange quotations.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a
22 MainStay International Equity Fund
security the market price of which is not available from an independent pricing
source or, if so provided, does not, in the opinion of the Fund's Manager or
Subadvisor ,as defined in Note 3(A), reflect the security's market value; and
(vi) a security where the trading on that security's principal market is
temporarily closed at a time when, under normal conditions, it would be open. At
October 31, 2008, the Fund held securities with a value of $126,548 that were
valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3 (A), conclude that such events may
have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund's Board of Trustees, adjust the value of the local price to reflect the
impact on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain thresholds. In such cases, the securities are
fair valued by applying factors provided by a third party vendor in accordance
with the Fund's policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method. Income from payment-in-kind securities is recorded daily based on the
effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3(B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options that expire are
treated as realized gains. Premiums received from writing options that are
exercised or are canceled in closing purchase transactions are added to the
proceeds or netted against the amount paid on the transaction to determine the
realized gain or loss. By writing a covered call option, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of a decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in return for the premium
on the option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the obligation
as the writer continues, has retained the risk of loss should the price of the
underlying security decline. After writing a put option, the Fund may incur a
loss equal to the difference between the exercise price of the option and the
sum of the market value of the underlying security plus the premium received
from the sale of the option.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security or foreign currency it anticipates purchasing. The Fund may purchase
put options on its securities or foreign currencies to protect against a decline
in the value of the security or foreign currency or to close out covered written
put positions. The Fund may also purchase options to seek to enhance returns.
Risks may arise from an imperfect correlation between the change in market value
of the securities or foreign currencies held by the Fund and the prices of
options relating to the securities or foreign currencies purchased or sold by
the Fund and from the possible lack of a liquid secondary market for an option.
The maximum exposure to loss for any purchased option is limited to the premium
initially paid for the option. (See Note 5.)
(I) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward contract is
an agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. During the period the forward contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" such contract on a daily basis to reflect the
market value of the contract at the end of each day's trading. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into foreign currency forward
contracts primarily to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates or to try to enhance the Fund's returns.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. While the
Fund may enter into forward contracts to reduce currency exchange risks, changes
in currency exchange rates may result in poorer overall performance for the Fund
than if it had not engaged in such transactions. Exchange rate movements can be
large, depending on the currency, and can last for extended periods of time,
affecting the value of the Funds assets. Moreover, there may be an imperfect
correlation between the Fund's holdings of securities denominated in a
particular currency and the forward contracts entered into by the Fund. Such
imperfect correlation may prevent the Fund from achieving the intended hedge or
expose the Fund to the risk of currency exchange loss. The unrealized
appreciation on forward contracts reflects the Fund's exposure at period end to
credit loss in the event of a counterparty's failure to perform its obligations.
(See Note 5.)
(J) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date, and
24 MainStay International Equity Fund
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities that are denominated in foreign currency amounts are
presented at the exchange rates and market values at the close of the period.
The realized and unrealized changes in net assets arising from fluctuations in
exchange rates and market prices of securities are not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(K) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Funds' cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(L) REDEMPTION FEE. The Fund imposes a 2.00% redemption fee on redemptions
(including exchanges) of Fund shares made within 60 days of their date of
purchase for any class. The redemption fee is designed to offset brokerage
commissions and other costs associated with short-term trading and is not
assessed on shares acquired through the reinvestment of dividends or
distributions paid by the Fund. The redemption fees are included in the
Statement of Changes in Net Assets' shares redeemed amount and retained by the
Fund.
(M) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement")
between NYLIM and the Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.90% on assets up to $500 million and 0.85% on assets in
excess of $500 million.
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage, other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.70%; Class A, 1.37%; Class B,
2.45%; Class C, 2.45%; Class I, 1.03%; Class R1, 1.13%; Class R2, 1.38% and
Class R3, 1.63%. This expense limitation may be modified or terminated only with
the approval of the Board of Trustees. NYLIM may recoup the amount of certain
management fee waivers or expense reimbursements from the Fund pursuant to the
agreement if such action does not cause the Fund to exceed the existing expense
limitation and the recoupment is made within three years after the year in which
NYLIM incurred the expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $6,576,565 and waived its fees in the amount of $137,416.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2011 TOTAL
$183,002 $137,416 $320,418
- --------------------------------
</Table>
Prior to April 1, 2008, NYLIM had a written expense limitation agreement under
which it had agreed to waive a portion of the Fund's management fee or reimburse
the expenses of the appropriate class of the Fund so that the class' total
ordinary operating expenses did not exceed the following percentages of average
daily net assets for each class: Class A, 1.60%; Class B, 2.35%; Class C, 2.35%;
Class I, 1.03%; Class R1, 1.13%; Class R2, 1.38% and Class R3, 1.63%. Prior to
August 1, 2007, NYLIM had a different expense limitation agreement in place with
respect to the Fund.
Effective August 1, 2008, the fee for fund accounting and recordkeeping services
provided is included within the management fee paid by the Fund. Prior to August
1, 2008, the Fund paid the Manager a monthly fee for certain pricing and
recordkeeping services provided under an Accounting Agreement at the annual rate
of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30 of
1% of the next $80 million of average monthly net assets and 1/100 of 1% of any
amount in excess of $100 million of average monthly net assets. Fees for these
services provided to the Fund by the Manager amounted to $78,797 for the period
from November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to Investor Class, Class A, Class B, Class C, Class R2 and Class R3
shares, has adopted distribution plans (the "Plans") in accordance with the
provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor
receives a monthly distribution fee from the Fund at an annual rate of 0.25% of
the average daily net assets of the Fund's Investor Class, Class A and Class R2
shares, which is an expense of the Investor Class, Class A and Class R2 shares
of the Fund, for distribution or service activities as designated by the
Distributor. Pursuant to the Class B and Class C Plans, the Fund pays the
Distributor a monthly distribution fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Plans provide that the
Class B and Class C shares of the Fund also incur a service fee at the annual
rate of 0.25% of the average daily net asset value of the Class B and Class C
shares of the Fund. Pursuant to the Class R3 Plan, the Distributor receives a
monthly distribution fee from the Fund at the annual rate of 0.50% of the
average daily net assets of the Fund's Class R3 shares, which is an expense of
the Class R3 shares of the Fund for distribution and service activities as
designated by the Distributor. Class I and Class R1 shares are not subject to a
distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
26 MainStay International Equity Fund
In accordance with the Shareholder Services Plans for the Class R1, Class R2 and
Class R3 shares, the Manager has agreed to provide, through its affiliates or
independent third parties, various shareholder and administrative support
services to shareholders of the Class R1, Class R2 and Class R3 shares. For its
services, the Manager is entitled to a Shareholder Service Fee accrued daily and
paid monthly at an annual rate of 0.10% of the average daily net assets
attributable to the Class R1, Class R2 and Class R3 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were
$16,888 and $51,574, respectively, for the year ended October 31, 2008. The Fund
was also advised that the Distributor retained contingent deferred sales charges
on redemptions of Class A, Class B and Class C shares of $3,811, $96,864 and
$4,955, respectively, for the year ended October 31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $938,593.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 188 0.0%++
- -------------------------------------------------
Class C 121 0.0++
- -------------------------------------------------
Class I 62,400,983 16.8
- -------------------------------------------------
Class R1 1,223 0.0++
- -------------------------------------------------
Class R2 1,214 0.4
- -------------------------------------------------
Class R3 8,549 23.3
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $26,832.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$40,697,994 $(43,557,768) $-- $(119,744,482) $(122,604,256)
- ------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals, straddle loss deferrals and mark to market
on foreign currency forward contracts.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) PAID-IN
INCOME (LOSS) ON INVESTMENTS CAPITAL
$1,441,337 $(1,441,340) $3
- -----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gain
(loss) and resignation of distribution.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $43,557,768 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2016 $43,558
- -----------------------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distribution paid from:
Ordinary Income $29,895,926 $20,206,341
Long-Term Capital Gains 61,173,269 36,851,040
- -------------------------------------------------------
$91,069,195 $57,057,381
- -------------------------------------------------------
</Table>
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--WRITTEN OPTIONS, FOREIGN CURRENCY FORWARD CONTRACTS AND FOREIGN CURRENCY
TRANSACTIONS:
During the year ended October 31, 2008, the Fund had the following transactions
in written options:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options Outstanding at
October 31, 2007 16,586 $ 917,434
- ----------------------------------------------------
Options--Written -- --
- ----------------------------------------------------
Options--Expired -- --
- ----------------------------------------------------
Options--Canceled in closing
transactions (16,586) (917,434)
- ----------------------------------------------------
Options Outstanding at
October 31, 2008 -- $ --
- ----------------------------------------------------
</Table>
As of October 31, 2008, the Fund held the following foreign currency contracts:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
PURCHASED SOLD (DEPRECIATION)
Foreign Currency Buy Contracts:
- ----------------------------------------------------------------------------------------------------
Australian Dollar vs. U.S. Dollar, expiring
12/19/08 AUD 28,628,608 $ 22,771,000 $ (3,825,023)
- ----------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 1/15/09 EUR 1,123,754 1,600,000 (170,242)
- ----------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring
1/12/09 GBP 4,452,352 8,171,000 (1,031,938)
- ----------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT
SOLD PURCHASED
Foreign Currency Sale Contracts:
- -------------------------------------------------------------------------------------------------------
Australian Dollar vs. Japanese Yen expiring
3/5/09 AUD 7,900,000 JPY 441,452,000 694,854
- -------------------------------------------------------------------------------------------------------
Euro vs. Japanese Yen, expiring 11/28/08 EUR 5,723,000 JPY 828,575,242 (1,130,811)
- -------------------------------------------------------------------------------------------------------
Euro vs. Japanese Yen, expiring 2/19/09 EUR 13,400,000 JPY1,573,294,000 987,406
- -------------------------------------------------------------------------------------------------------
Japanese Yen vs. Euro, expiring 11/28/08 JPY2,798,880,000 EUR 16,800,000 7,043,935
- -------------------------------------------------------------------------------------------------------
Japanese Yen vs. Euro, expiring 2/19/09 JPY2,602,744,440 EUR 19,524,000 1,728,323
- -------------------------------------------------------------------------------------------------------
Japanese Yen vs. Swedish Krona, expiring
2/7/09 JPY 642,213,015 SEK 43,700,000 924,889
- -------------------------------------------------------------------------------------------------------
Japanese Yen vs. Swiss Franc, expiring
12/8/08 JPY4,524,804,000 CHF 43,845,000 8,167,674
- -------------------------------------------------------------------------------------------------------
Pound Sterling vs. Canadian Dollar,
expiring 1/9/09 GBP 2,321,903 CAD 4,374,000 93,566
- -------------------------------------------------------------------------------------------------------
Swiss Franc vs. Japanese Yen, expiring
12/8/08 CHF 11,460,000 JPY1,032,621,500 (609,625)
- -------------------------------------------------------------------------------------------------------
Swedish Krona vs. Japanese Yen, expiring
2/4/09 SEK 43,700,000 JPY 526,182,165 258,043
- -------------------------------------------------------------------------------------------------------
Norwegian Krone vs. Japanese Yen, expiring
2/6/09 NOK 28,200,000 JPY 376,963,500 309,518
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation on foreign
currency forward contracts $13,440,569
- -------------------------------------------------------------------------------------------------------
</Table>
28 MainStay International Equity Fund
As of October 31, 2008, the Fund held the following foreign currency:
<Table>
<Caption>
CURRENCY COST VALUE
Australian Dollar AUD 3,159,042 $ 2,781,745 $ 2,099,341
- -------------------------------------------------------------------------------------------------------
Canadian Dollar CAD 2,553,027 2,140,942 2,118,167
- -------------------------------------------------------------------------------------------------------
Euro EUR 1,674,835 2,151,335 2,134,660
- -------------------------------------------------------------------------------------------------------
Hong Kong Dollar HKD 6,338,805 817,330 817,905
- -------------------------------------------------------------------------------------------------------
Japanese Yen JPY 522,283,058 5,088,632 5,301,828
- -------------------------------------------------------------------------------------------------------
Norwegian Krone NOK 1,030,746 202,342 153,037
- -------------------------------------------------------------------------------------------------------
Pound Sterling GBP 1,896,022 3,083,308 3,051,362
- -------------------------------------------------------------------------------------------------------
Swedish Krona SEK 17,481,666 2,253,998 2,252,792
- -------------------------------------------------------------------------------------------------------
Swiss Franc CHF 3,756 3,299 3,221
- -------------------------------------------------------------------------------------------------------
$ 18,522,931 $17,932,313
- -------------------------------------------------------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $582,958 and $680,206, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31, 2008 (a):
Shares sold 912,966 $13,363,940
Shares redeemed (538,793) (7,293,093)
----------------------------
Net increase in shares
outstanding before conversion 374,173 6,070,837
Shares converted into Investor Class
(See Note 1) 3,101,147 44,596,624
Shares converted from Investor Class
(See Note 1) (243,659) (3,193,356)
----------------------------
Net increase 3,231,661 $47,474,115
============================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
mainstayinvestments.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 1,097,446 $ 15,769,585
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,019,884 16,233,458
Shares redeemed (4,266,847) (61,427,956)
----------------------------
Net decrease in shares
outstanding before
conversion (2,149,517) (29,424,913)
Shares converted into Class
A
(See Note 1) 545,536 7,557,221
Shares converted from Class
A
(See Note 1) (2,932,777) (42,271,956)
----------------------------
Net decrease (4,536,758) $(64,139,648)
============================
Year ended October 31,
2007:
Shares sold 3,278,559 $ 56,381,247
Shares issued to
shareholders in
reinvestment of dividends
and distributions 603,078 9,868,301
Shares redeemed (2,764,572) (47,810,905)
----------------------------
Net increase in shares
outstanding before
conversion 1,117,065 18,438,643
Shares converted from Class
B (See Note 1) 455,324 7,792,316
----------------------------
Net increase 1,572,389 $ 26,230,959
============================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 545,410 $ 7,446,033
Shares issued to
shareholders in
reinvestment of dividends
and distributions 470,567 6,983,163
Shares redeemed (1,338,746) (17,624,078)
----------------------------
Net decrease in shares
outstanding before
conversion (322,769) (3,194,882)
Shares converted from Class
B
(See Note 1) (506,987) (6,688,533)
----------------------------
Net decrease (829,756) $ (9,883,415)
============================
Year ended October 31,
2007:
Shares sold 1,388,110 $ 22,486,409
Shares issued to
shareholders in
reinvestment of dividends
and distributions 294,098 4,529,113
Shares redeemed (976,777) (15,856,971)
----------------------------
Net increase in shares
outstanding before
conversion 705,431 11,158,551
Shares reacquired upon
conversion into Class A
(See Note 1) (483,108) (7,792,316)
----------------------------
Net increase 222,323 $ 3,366,235
============================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 185,495 $ 2,529,522
Shares issued to
shareholders in
reinvestment of dividends
and distributions 133,359 1,977,716
Shares redeemed (751,031) (9,864,002)
----------------------------
Net decrease (432,177) $(5,356,764)
============================
Year ended October 31,
2007:
Shares sold 723,647 $11,774,483
Shares issued to
shareholders in
reinvestment of dividends
and distributions 64,527 992,409
Shares redeemed (355,999) (5,786,329)
----------------------------
Net increase 432,175 $ 6,980,563
============================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 5,903,055 $ 83,879,213
Shares issued to
shareholders in
reinvestment of dividends
and distributions 3,021,225 48,512,097
Shares redeemed (9,888,291) (139,440,210)
----------------------------
Net decrease (964,011) $ (7,048,900)
============================
Year ended October 31,
2007:
Shares sold 7,562,686 $ 130,915,468
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,880,780 30,991,788
Shares redeemed (5,797,200) (99,463,221)
----------------------------
Net increase 3,646,266 $ 62,444,035
============================
</Table>
<Table>
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 20,736 $ 268,492
Shares issued to
shareholders in
reinvestment of dividends
and distributions 26,051 415,705
Shares redeemed (25,311) (356,580)
----------------------------
Net increase 21,476 $ 327,617
============================
Year ended October 31,
2007:
Shares sold 107 $ 1,816
Shares issued to
shareholders in
reinvestment of dividends
and distributions 17,805 291,810
Shares redeemed (21,561) (372,562)
----------------------------
Net decrease (3,649) $ (78,936)
============================
</Table>
30 MainStay International Equity Fund
<Table>
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 8,027 $ 114,012
Shares issued to
shareholders in
reinvestment of dividends
and distributions 2,172 34,672
Shares redeemed (5,051) (75,353)
----------------------------
Net increase 5,148 $ 73,331
============================
Year ended October 31,
2007:
Shares sold 13,304 $ 228,306
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,845 30,259
Shares redeemed (12,704) (209,855)
----------------------------
Net increase 2,445 $ 48,710
============================
</Table>
<Table>
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 465 $ 6,624
Shares issued to
shareholders in
reinvestment of dividends
and distributions 348 5,536
Shares redeemed (607) (7,748)
----------------------------
Net increase 206 $ 4,412
============================
Year ended October 31,
2007:
Shares sold 2,731 $48,880
Shares issued to
shareholders in
reinvestment of dividends
and distributions 49 788
Shares redeemed (289) (5,156)
----------------------------
Net increase 2,491 $44,512
============================
</Table>
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
mainstayinvestments.com 31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay International Equity Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay International Equity Fund of The MainStay Funds as of October 31, 2008,
the results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended,
in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
32 MainStay International Equity Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay International Equity Fund (the "Fund"), which was
comprised solely of Independent Trustees, unanimously approved the Management
and Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New
mainstayinvestments.com 33
York Life agents and reputation as a high-quality provider of shareholder
services, which has been recognized by independent third-parties on numerous
occasions. The Board noted the role that the MainStay Family of Funds
historically has played in serving the investment needs of New York Life
Insurance Company policyholders, who often maintain smaller account balances
than other retail investors. The Board acknowledged that it had approved NYLIM's
recommendation to create a new "Investor Class" of shares designed principally
to address the higher shareholder-servicing costs typically associated with
smaller shareholder accounts. The Board considered the experience of senior
personnel at NYLIM providing management and administrative services to the Fund,
as well as NYLIM's reputation and financial condition. The Board also reviewed
NYLIM's willingness to invest in personnel designed to benefit the Fund, and
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
manager, the number of accounts managed by the portfolio manager and MacKay
Shields' method for compensating portfolio manager. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio manager and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
The Board noted that although the Fund has favorable long-term investment
performance relative to peer funds, its investment performance over the past
several years has been volatile, and generally has underperformed peer funds. In
response to discussions with the Board, NYLIM has presented to the Board a plan
reflecting its commitment to add additional resources dedicated to the portfolio
management of this Fund.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
34 MainStay International Equity Fund
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position is important in order for NYLIM to continue to provide high-
quality ongoing services to the Fund and its shareholders. The Board noted, for
example, increased costs borne by NYLIM and its affiliates due to new and
ongoing regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness
mainstayinvestments.com 35
of the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
36 MainStay International Equity Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advised shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $61,173,269.
For the fiscal year ended October 31, 2008, the Fund designates approximately
$18,354,996 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
In accordance with federal tax law, the Fund elects to provide each shareholder
with their portion of the Fund's foreign taxes paid and the income sourced from
foreign countries. Accordingly, the Fund hereby makes the following designations
regarding its fiscal year ended October 31, 2007:
- -- the total amount of taxes paid to foreign countries was $3,771,330
- -- the total amount of income sourced from foreign countries was $35,089,282
The dividends paid by the Fund during the fiscal year ended October 31, 2008
should be multiplied by 0.4% for qualified interest income and 1.0% for the
corporate dividends received deduction.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
mainstayinvestments.com 37
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
38 MainStay International Equity Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
40 MainStay International Equity Fund
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 41
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO14516 (RECYCLE LOGO) MS308-08 MSIE11-12/08
10
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP GROWTH FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP GROWTH FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 15
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 20
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 26
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 27
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 31
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 31
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 31
- ---------------------------------------------
TRUSTEES AND OFFICERS 32
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- --------------------------------------------------------
With sales charges (47.99%) (0.22%) (2.59%)
Excluding sales charges (44.96) 0.92 (1.88)
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- --------------------------------------------------------
With sales charges (47.92%) (0.19%) (2.57%)
Excluding sales charges (44.89) 0.95 (1.87)
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH
FUND CLASS RUSSELL MIDCAP
A GROWTH INDEX
------------ --------------
1/2/01 23625 25000
17695 17362
14789 14304
19443 19925
21475 21671
26933 25119
29460 28764
36981 34436
10/31/08 20381 19749
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- --------------------------------------------------------
With sales charges (48.02%) (0.20%) (2.63%)
Excluding sales charges (45.45) 0.17 (2.63)
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH
FUND CLASS RUSSELL MIDCAP
B GROWTH INDEX
------------ --------------
1/2/01 10000 10000
7440 6945
6170 5722
8050 7970
8820 8669
10980 10048
11950 11506
14879 13774
10/31/08 8117 7900
</Table>
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class
C shares are sold with no initial sales charge, are subject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 1.00%. Class I shares are sold with no initial sales charge or CDSC, have
no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Class R2 shares are sold with no initial sales
charge or CDSC and have an annual 12b-1 fee of 0.25%. R2 shares are available
only through corporate-sponsored retirement programs, which include certain
minimum program requirements. Class R3 shares are sold with no initial sales
charge or CDSC, have an annual 12b-1 fee of 0.50% and are available in
certain individual retirement accounts or in certain retirement plans.
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. These fee waivers and/or
expense limitations are contractual and may be modified or terminated only
with the approval of the Board of Trustees.
THE FOOTNOTES ON THE NEXT TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- ------------------------------------------------
With sales
charges (45.92%) 0.17% (2.63%)
Excluding sales
charges (45.41) 0.17 (2.63)
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH
FUND CLASS RUSSELL MIDCAP
C GROWTH INDEX
------------ --------------
1/2/01 10000 10000
7440 6945
6170 5722
8050 7970
8820 8669
10990 10048
11940 11506
14869 13774
10/31/08 8117 7900
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- ------------------------------------------------
(44.71%) 1.30% (1.56%)
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH
FUND CLASS RUSSELL MIDCAP
I GROWTH INDEX
------------ --------------
1/2/01 10000 10000
7506 6945
6289 5722
8288 7970
9178 8669
11552 10048
12694 11506
15993 13774
10/31/08 8843 7900
</Table>
CLASS R2 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- ------------------------------------------------
(44.99%) 0.83% (1.97%)
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP GROWTH
FUND CLASS RUSSELL MIDCAP
A GROWTH INDEX
------------ --------------
1/2/01 10000 10000
7484 6945
6249 5722
8207 7970
9055 8669
11345 10048
12398 11506
15547 13774
10/31/08 8553 7900
</Table>
The Manager may recoup the amount of certain management fee waivers or
expense reimbursements from the Fund pursuant to the contract if such action
does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which the. Manager
incurred the expense. Class A, Class B and Class C shares were introduced on
January 2, 2001.
2. Performance figures for Investor Class shares, first offered to the public on
February 28, 2008, include the historical performance of Class A shares
through February 27, 2008, adjusted for differences in certain contractual
expenses and fees. Unadjusted, the performance shown for Investor Class
shares might have been lower.
3. Performance figures for Class I shares, first offered to the public on March
29, 2005, include the historical performance of Class A shares through March
28, 2005, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
4. Performance figures for Class R2 shares, first offered to the public on
December 14, 2007, include the historical performance of Class A shares
through December 13, 2007, adjusted for differences in fees and expenses.
Unadjusted, the performance shown for Class R2 shares might have been lower.
THE FOOTNOTES ON THE PRECEDING PAGE AND THE FOLLOWING PAGE ARE AN INTEGRAL PART
OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Mid Cap Growth Fund
CLASS R3 SHARES(5)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (1/2/01)
- ----------------------------------------------
(45.01%) 0.65% (2.18%)
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE SINCE
YEAR YEARS INCEPTION
- -----------------------------------------------------------------------------
Russell Midcap(R) Growth Index(6) (42.65%) (0.18%) (2.96%)
Average Lipper mid cap growth fund(7) (42.43) (0.42) (3.38)
</Table>
5. Performance figures for Class R3 shares, first offered to the public on April
28, 2006, include the historical performance of Class A shares through April
27, 2006, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class R3 shares might have been lower.
6. The Russell Midcap(R) Growth Index is an unmanaged index that measures the
performance of those Russell Midcap(R) companies with higher price-to-book
ratios and higher forecasted growth values. The Russell Midcap(R) Index is an
unmanaged index that measures the performance of the 800 smallest companies
in the Russell 1000(R) Index, which, in turn, is an unmanaged index that
measures the performance of the 1,000 largest U.S. companies based on total
market capitalization. Results assume reinvestment of all income and capital
gains. The Russell Midcap(R) Growth Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. An investment
cannot be made directly in an index.
7. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTES ON THE PRECEDING TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MID CAP GROWTH FUND
- --------------------------------------------------------------------------------
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $617.80 $6.34 $1,017.30 $ 7.91
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $618.60 $5.25 $1,018.70 $ 6.55
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $615.10 $9.42 $1,013.50 $11.74
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $615.10 $9.38 $1,013.50 $11.69
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $619.30 $4.56 $1,019.50 $ 5.69
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $617.80 $6.02 $1,017.70 $ 7.51
- --------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $617.10 $6.87 $1,016.60 $ 8.57
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.56% for Investor Class, 1.29% for Class A, 2.32% for Class B, 2.31% for
Class C, 1.12% for Class I, 1.48% for Class R2 and 1.69% for Class R3)
multiplied by the average account value over the period, divided by 366 and
multiplied by 184 (to reflect the one-half year period). The table above
represents actual expenses incurred during the one-half year period and does
not take into account the Fund's written expense limitation agreement.
8 MainStay Mid Cap Growth Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2008
<Table>
<Caption>
Health Care Equipment & Supplies 8.0%
Aerospace & Defense 7.3
Health Care Providers & Services 5.6
Energy Equipment & Services 5.2
Life Sciences Tools & Services 5.1
Software 4.1
Electronic Equipment & Instruments 4.0
Construction & Engineering 3.7
Personal Products 3.6
Specialty Retail 3.3
Textiles, Apparel & Luxury Goods 3.3
Wireless Telecommunication Services 2.9
Biotechnology 2.7
Internet Software & Services 2.7
IT Services 2.7
Commercial Services & Supplies 2.6
Machinery 2.5
Oil, Gas & Consumable Fuels 2.5
Electrical Equipment 2.4
Containers & Packaging 2.2
Capital Markets 1.6
Communications Equipment 1.6
Distributors 1.3
Diversified Consumer Services 1.2
Household Products 1.1
Diversified Telecommunication
Services 1.0
Electric Utilities 0.9
Hotels, Restaurants & Leisure 0.9
Thrifts & Mortgage Finance 0.7
Multiline Retail 0.6
Semiconductors & Semiconductor
Equipment 0.6
Real Estate Investment Trusts 0.5
Chemicals 0.3
Computers & Peripherals 0.2
Exchange Traded Fund 1.0
Short-Term Investment 12.0
Liabilities in Excess of Cash and
Other Assets (1.9)
=====
100.0%
=====
</Table>
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Thermo Fisher Scientific, Inc.
2. Alliant Techsystems, Inc.
3. L-3 Communications Holdings, Inc.
4. Chattem, Inc.
5. Becton, Dickinson & Co.
6. Henry Schein, Inc.
7. Atwood Oceanics, Inc.
8. Cephalon, Inc.
9. St. Jude Medical, Inc.
10. Roper Industries, Inc.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS EDMUND C. SPELMAN AND ROBERT J.
CENTRELLA, CFA, OF MACKAY SHIELDS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY MID CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Mid Cap Growth Fund returned -44.96% for
Investor Class shares,(1) -44.89% for Class A shares, -45.45% for Class B shares
and -45.41% for Class C shares for the 12 months ended October 31, 2008. Over
the same period, the Fund's Class I shares returned -44.71%, Class R2 shares(2)
returned -44.99% and Class R3 shares returned -45.01%. All share classes
underperformed the -42.43% return of the average Lipper(3) mid-cap growth fund
and the -42.65% return of the Russell Midcap(R) Growth Index(4) for the 12-month
period. The Russell Midcap(R) Growth Index is the Fund's broad-based securities-
market index. See pages 5 and 6 for Fund returns with sales charges.
WHAT KEY FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
Stock selection in energy, information technology and financials detracted from
the Fund's performance relative to the Russell Midcap(R) Growth Index. Even in a
broadly declining market, however, some sectors and securities performed better
than others. Favorable stock selection in consumer staples and utilities helped
the Fund's performance in relation to its benchmark during the reporting period.
An overweight position in health care and an underweight position in utilities
also helped the Fund's relative performance.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE STRONG PERFORMERS AND WHICH
STOCKS WERE WEAK?
The strongest contributors to the Fund's absolute performance were respiratory
therapy company Respironics, discount retailer Dollar Tree and medical waste
management provider Stericycle. Chattem--a manufacturer of consumer products
under the brand names Gold Bond, Icy Hot and Bullfrog--was also a strong
contributor to the Fund's absolute performance during the reporting period. All
of these stocks provided positive total returns for the reporting period.
Major detractors from the Fund's absolute performance included silicon wafer
manufacturer MEMC Electronics and petroleum refiner Tesoro. Specialty metal
components and products manufacturer Precision Castparts and asset management
holding company Affiliated Managers Group also detracted from the Fund's
performance during the reporting period.
WERE THERE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD?
The Fund established new positions in several stocks during the reporting
period. Among these were higher education program provider Apollo Group and auto
parts retailer Autozone. We also purchased new positions in beauty products
company Avon and medical, surgical and diagnostics company C. R. Bard. Yet
another new position was household products company Church & Dwight, whose
products include baking soda, laundry detergent and toothpaste.
In January 2008, the Fund sold its position in Respironics. The company was
acquired in March 2008. Other sales included Ensco, an offshore contract
drilling company, and Skyworks Solutions, a wireless semiconductor company.
Lennox International--a manufacturer of heating, ventilation, air conditioning
and refrigeration equipment--was also sold during the reporting period.
HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
During the reporting period, we increased the Fund's positions in health care,
consumer staples and telecommunication services. These sectors have relatively
defensive characteristics. In other words, their revenue and earnings trends
tend to be less affected than those of other sectors by shifts in the overall
economy. We decreased the Fund's weightings in sectors
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. Mid-capitalization
companies are generally less established and their stocks may be more volatile
and less liquid than the securities of larger companies. The principal risk of
growth stocks is that investors expect growth companies to increase their
earnings at a certain rate that is generally higher than the rate expected for
nongrowth companies. If these expectations are not met, the market price of the
stock may decline significantly, even if earnings showed an absolute increase.
Growth company stocks also typically lack the dividend yield that can cushion
stock prices in market downturns.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. Performance for Class R2 shares prior to 12/14/07, the date the shares were
first offered, includes the historical performance of Class A shares adjusted
to reflect the differences in fees and expenses for such shares.
3. See footnote on page 7 for more information on Lipper Inc.
4. See footnote on page 7 for more information on the Russell Midcap(R) Growth
Index.
10 MainStay Mid Cap Growth Fund
that tend to show greater economic sensitivity, such as consumer discretionary,
energy and materials.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2008, the Fund was overweight relative to the Russell
Midcap(R) Growth Index in health care, industrials and telecommunication
services. On the same date, the Fund was underweight in consumer discretionary,
financials, utilities and energy.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 88.9%+
- -----------------------------------------------------------------
AEROSPACE & DEFENSE 7.3%
V Alliant Techsystems, Inc.
(a) 55,650 $ 4,593,351
V L-3 Communications
Holdings, Inc. 52,200 4,237,074
Precision Castparts Corp. 41,800 2,709,058
-------------
11,539,483
-------------
BIOTECHNOLOGY 2.7%
V Cephalon, Inc. (a) 48,100 3,449,732
United Therapeutics Corp. (a) 8,800 767,624
-------------
4,217,356
-------------
CAPITAL MARKETS 1.6%
Affiliated Managers Group,
Inc. (a) 37,800 1,753,164
Ameriprise Financial, Inc. 33,800 730,080
-------------
2,483,244
-------------
CHEMICALS 0.3%
Mosaic Co. (The) 12,000 472,920
-------------
COMMERCIAL SERVICES & SUPPLIES 2.6%
Copart, Inc. (a) 35,900 1,252,910
Iron Mountain, Inc. (a) 76,200 1,850,136
Stericycle, Inc. (a) 18,500 1,080,955
-------------
4,184,001
-------------
COMMUNICATIONS EQUIPMENT 1.6%
Harris Corp. 69,300 2,491,335
-------------
COMPUTERS & PERIPHERALS 0.2%
Logitech International S.A.
(a) 24,400 360,875
-------------
CONSTRUCTION & ENGINEERING 3.7%
Fluor Corp. 82,200 3,282,246
Quanta Services, Inc. (a) 129,300 2,554,968
-------------
5,837,214
-------------
CONTAINERS & PACKAGING 2.2%
Crown Holdings, Inc. (a) 145,000 2,926,100
Owens-Illinois, Inc. (a) 25,000 572,000
-------------
3,498,100
-------------
DISTRIBUTORS 1.3%
LKQ Corp. (a) 174,500 1,996,280
-------------
DIVERSIFIED CONSUMER SERVICES 1.2%
Apollo Group, Inc. Class A
(a) 11,000 764,610
Capella Education Co. (a) 23,400 1,109,160
-------------
1,873,770
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 1.0%
NTELOS Holdings Corp. 63,000 1,638,000
-------------
ELECTRIC UTILITIES 0.9%
DPL, Inc. 63,700 1,452,997
-------------
ELECTRICAL EQUIPMENT 2.4%
General Cable Corp. (a) 30,100 514,108
V Roper Industries, Inc. 73,100 3,315,085
-------------
3,829,193
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 4.0%
Amphenol Corp. Class A 100,400 2,876,460
Anixter International, Inc.
(a) 48,000 1,613,280
Avnet, Inc. (a) 108,900 1,822,986
-------------
6,312,726
-------------
ENERGY EQUIPMENT & SERVICES 5.2%
V Atwood Oceanics, Inc. (a) 126,800 3,484,464
FMC Technologies, Inc. (a) 18,600 650,814
National Oilwell Varco, Inc.
(a) 77,800 2,325,442
Weatherford International,
Ltd. (a) 108,200 1,826,416
-------------
8,287,136
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 8.0%
V Becton, Dickinson & Co. 56,200 3,900,280
C.R. Bard, Inc. 30,100 2,656,325
Hologic, Inc. (a) 68,304 836,041
Hospira, Inc. (a) 71,100 1,978,002
V St. Jude Medical, Inc. (a) 88,000 3,346,640
-------------
12,717,288
-------------
HEALTH CARE PROVIDERS & SERVICES 5.6%
Coventry Health Care, Inc.
(a) 29,650 391,084
DaVita, Inc. (a) 34,700 1,969,225
V Henry Schein, Inc. (a) 76,700 3,590,327
Medco Health Solutions, Inc.
(a) 77,900 2,956,305
-------------
8,906,941
-------------
HOTELS, RESTAURANTS & LEISURE 0.9%
WMS Industries, Inc. (a) 55,100 1,377,500
-------------
HOUSEHOLD PRODUCTS 1.1%
Church & Dwight Co., Inc. 17,700 1,045,893
Energizer Holdings, Inc. (a) 13,100 640,066
-------------
1,685,959
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2008, excluding short-
term investment. May be subject to change daily.
12 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
INTERNET SOFTWARE & SERVICES 2.7%
Akamai Technologies, Inc. (a) 116,200 $ 1,670,956
Equinix, Inc. (a) 42,400 2,646,608
-------------
4,317,564
-------------
IT SERVICES 2.7%
Alliance Data Systems Corp.
(a) 38,300 1,921,128
Fiserv, Inc. (a) 48,100 1,604,616
NeuStar, Inc. Class A (a) 40,500 797,850
-------------
4,323,594
-------------
LIFE SCIENCES TOOLS & SERVICES 5.1%
ICON PLC, Sponsored ADR
(a)(b) 25,700 652,009
Millipore Corp. (a) 39,500 2,049,655
Pharmaceutical Product
Development, Inc. 25,200 780,696
V Thermo Fisher Scientific,
Inc. (a) 113,500 4,608,100
-------------
8,090,460
-------------
MACHINERY 2.5%
Actuant Corp. Class A 106,000 1,900,580
Joy Global, Inc. 74,000 2,144,520
-------------
4,045,100
-------------
MULTILINE RETAIL 0.6%
Kohl's Corp. (a) 28,600 1,004,718
-------------
OIL, GAS & CONSUMABLE FUELS 2.5%
Newfield Exploration Co. (a) 98,700 2,268,126
Peabody Energy Corp. 50,500 1,742,755
-------------
4,010,881
-------------
PERSONAL PRODUCTS 3.6%
Avon Products, Inc. 73,000 1,812,590
V Chattem, Inc. (a) 51,900 3,927,273
-------------
5,739,863
-------------
REAL ESTATE INVESTMENT TRUSTS 0.5%
Digital Realty Trust, Inc. 25,400 850,392
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.6%
MEMC Electronic Materials,
Inc. (a) 49,900 917,162
-------------
SOFTWARE 4.1%
Autodesk, Inc. (a) 82,400 1,755,944
FactSet Research Systems,
Inc. 57,100 2,214,909
MICROS Systems, Inc. (a) 66,200 1,127,386
Progress Software Corp. (a) 58,700 1,346,578
-------------
6,444,817
-------------
SPECIALTY RETAIL 3.3%
AutoZone, Inc. (a) 13,600 1,731,144
Dick's Sporting Goods, Inc.
(a) 40,000 612,800
Guess?, Inc. 73,300 1,595,741
PetSmart, Inc. 68,000 1,338,920
-------------
5,278,605
-------------
TEXTILES, APPAREL & LUXURY GOODS 3.3%
Coach, Inc. (a) 125,600 2,587,360
Fossil, Inc. (a) 36,000 653,400
Phillips-Van Heusen Corp. 78,900 1,933,839
-------------
5,174,599
-------------
THRIFTS & MORTGAGE FINANCE 0.7%
New York Community Bancorp,
Inc. 71,400 1,118,124
-------------
WIRELESS TELECOMMUNICATION SERVICES 2.9%
American Tower Corp. Class A
(a) 71,600 2,313,396
SBA Communications Corp.
Class A (a) 111,100 2,331,989
-------------
4,645,385
-------------
Total Common Stocks
(Cost $190,373,745) 141,123,582
-------------
EXCHANGE TRADED FUND 1.0% (C)
- -----------------------------------------------------------------
iShares Russell Midcap Growth
Index Fund 46,000 1,549,740
-------------
Total Exchange Traded Fund
(Cost $2,632,274) 1,549,740
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 12.0%
- -----------------------------------------------------------------
REPURCHASE AGREEMENT 12.0%
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$19,002,478 (Collateralized
by a Federal Home Loan
Bank Security with a rate
of 3.35 and a maturity date
of 1/23/09, with a
Principal Amount of
$19,385,000 and a Market
Value of $19,385,000) $19,002,320 19,002,320
-------------
Total Short-Term Investment
(Cost $19,002,320) 19,002,320
-------------
Total Investments
(Cost $212,008,339) (d) 101.9% 161,675,642
Liabilities in Excess of
Cash and Other Assets (1.9) (3,031,853)
----- ------------
Net Assets 100.0% $ 158,643,789
===== ============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
(a) Non-income producing security.
(b) ADR--American Depositary Receipt.
(c) Exchange Traded Fund--represents a basket
of securities that are traded on an
exchange.
(d) At October 31, 2008, cost is $212,812,743
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 2,001,520
Gross unrealized depreciation (53,138,621)
------------
Net unrealized depreciation $(51,137,101)
============
</Table>
14 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $193,006,019) $142,673,322
Repurchase agreement, at value
identified cost $19,002,320 19,002,320
Receivables:
Fund shares sold 180,963
Dividends and interest 9,361
Other assets 56,035
------------
Total assets 161,922,001
------------
LIABILITIES:
Payables:
Investment securities purchased 2,509,468
Fund shares redeemed 388,177
Transfer agent (See Note 3) 176,476
Shareholder communication 61,294
NYLIFE Distributors (See Note 3) 57,907
Manager (See Note 3) 37,945
Professional fees 31,241
Custodian 9,855
Trustees 719
Accrued expenses 5,130
------------
Total liabilities 3,278,212
------------
Net assets $158,643,789
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited
number of shares authorized $ 205,506
Additional paid-in capital 214,660,240
------------
214,865,746
Accumulated net realized loss on
investments (5,889,260)
Net unrealized depreciation on
investments (50,332,697)
------------
Net assets $158,643,789
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 16,216,727
============
Shares of beneficial interest
outstanding 2,069,080
============
Net asset value per share
outstanding $ 7.84
Maximum sales charge (5.50% of
offering price) 0.46
------------
Maximum offering price per share
outstanding $ 8.30
============
CLASS A
Net assets applicable to
outstanding shares $ 50,496,523
============
Shares of beneficial interest
outstanding 6,435,389
============
Net asset value per share
outstanding $ 7.85
Maximum sales charge (5.50% of
offering price) 0.46
------------
Maximum offering price per share
outstanding $ 8.31
============
CLASS B
Net assets applicable to
outstanding shares $ 27,477,376
============
Shares of beneficial interest
outstanding 3,737,307
============
Net asset value and offering price
per share outstanding $ 7.35
============
CLASS C
Net assets applicable to
outstanding shares $ 20,414,363
============
Shares of beneficial interest
outstanding 2,777,037
============
Net asset value and offering price
per share outstanding $ 7.35
============
CLASS I
Net assets applicable to
outstanding shares $ 42,449,597
============
Shares of beneficial interest
outstanding 5,328,124
============
Net asset value and offering price
per share outstanding $ 7.97
============
CLASS R2
Net assets applicable to
outstanding shares $ 15,449
============
Shares of beneficial interest
outstanding 1,970
============
Net asset value and offering price
per share outstanding $ 7.84
============
CLASS R3
Net assets applicable to
outstanding shares $ 1,573,754
============
Shares of beneficial interest
outstanding 201,658
============
Net asset value and offering price
per share outstanding $ 7.80
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 15
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 881,223
Interest 363,084
Income from securities
loaned--net 265,552
-------------
Total income 1,509,859
-------------
EXPENSES:
Manager (See Note 3) 1,870,349
Transfer agent--Investor Class
(See Note 3) 59,101
Transfer agent--Class A (See Note
3) 358,994
Transfer agent--Class B and C
(See Note 3) 307,452
Transfer agent--Classes I, R2 and
R3
(See Note 3) 160,026
Distribution--Class B (See Note
3) 363,130
Distribution--Class C (See Note
3) 266,417
Distribution--Class R3 (See Note
3) 4,094
Distribution/Service--Investor
Class
(See Note 3) 36,033
Distribution/Service--Class A
(See Note 3) 254,278
Service--Class B (See Note 3) 121,044
Service--Class C (See Note 3) 88,806
Distribution/Service--Class R2
(See Note 3) 28
Distribution/Service--Class R3
(See Note 3) 4,094
Shareholder communication 91,435
Registration 87,488
Professional fees 67,420
Recordkeeping (a) 39,383
Custodian 13,090
Trustees 9,232
Shareholder service--Class R2
(See Note 3) 11
Shareholder service--Class R3
(See Note 3) 1,637
Miscellaneous 19,669
-------------
Total expenses before waiver 4,223,211
Expense waiver from Manager (See
Note 3) (177,078)
-------------
Net expenses 4,046,133
-------------
Net investment loss (2,536,274)
-------------
REALIZED AND UNREALIZED LOSS
ON INVESTMENTS:
Net realized loss on investments (5,815,695)
Net change in unrealized
appreciation on investments (126,003,444)
-------------
Net realized and unrealized loss on
investments (131,819,139)
-------------
Net decrease in net assets
resulting from operations $(134,355,413)
=============
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
16 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment loss $ (2,536,274) $ (2,217,727)
Net realized gain (loss) on
investments (5,815,695) 14,589,240
Net change in unrealized
appreciation on investments (126,003,444) 41,122,424
----------------------------
Net increase (decrease) in
net assets resulting from
operations (134,355,413) 53,493,937
----------------------------
Distributions to shareholders:
From net realized gain on investments:
Class A (7,429,800) (5,019,232)
Class B (3,346,490) (2,433,580)
Class C (2,373,368) (1,837,897)
Class I (1,272,029) (70,385)
Class R3 (32,821) (31,948)
----------------------------
Total distributions to
shareholders (14,454,508) (9,393,042)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares 127,139,225 96,169,452
Net asset value of shares
issued to shareholders in
reinvestment of
distributions 12,105,806 7,419,512
Cost of shares redeemed (118,114,858) (88,589,528)
----------------------------
Increase in net assets
derived from capital
share transactions 21,130,173 14,999,436
----------------------------
Net increase (decrease)
in net assets (127,679,748) 59,100,331
NET ASSETS:
Beginning of year 286,323,537 227,223,206
----------------------------
End of year $ 158,643,789 $286,323,537
============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------
FEBRUARY 28
2008** CLASS A
THROUGH ------------------------------------------------------------
OCTOBER 31, YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------
2008 2008 2007 2006 2005
Net asset value at
beginning of period $ 12.74 $ 15.03 $ 12.47 $ 11.40 $ 9.09
------- ------- -------- -------- -------
Net investment loss (a) (0.08) (0.09) (0.09) (0.09) (0.10)
Net realized and
unrealized gain (loss)
on investments (4.82) (6.33) 3.17 1.16 2.41
------- ------- -------- -------- -------
Total from investment
operations (4.90) (6.42) 3.08 1.07 2.31
------- ------- -------- -------- -------
Less distributions:
From net realized gain
on investments -- (0.76) (0.52) -- --
------- ------- -------- -------- -------
Net asset value at end of
period $ 7.84 $ 7.85 $ 15.03 $ 12.47 $ 11.40
======= ======= ======== ======== =======
Total investment return
(b)(f) (38.46%)(c) (44.89%) 25.53% 9.39% 25.41%
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (1.03%)++ (0.75%) (0.63%) (0.69%) (0.91%)
Net expenses 1.56% ++ 1.37% 1.50% 1.50% 1.50%
Expenses (before
recoupment/waiver/-
reimbursement) 1.56% ++ 1.48% 1.44% 1.55% 1.63%
Portfolio turnover rate 55% 55% 48% 52% 44%
Net assets at end of
period (in 000's) $16,217 $50,497 $146,359 $124,741 $48,597
<Caption>
CLASS A
--------------------
YEAR ENDED OCTOBER
31,
--------------------
2004
Net asset value at
beginning of period $ 8.23
-------
Net investment loss (a) (0.09)
Net realized and
unrealized gain (loss)
on investments 0.95
-------
Total from investment
operations 0.86
-------
Less distributions:
From net realized gain
on investments --
-------
Net asset value at end of
period $ 9.09
=======
Total investment return
(b)(f) 10.45%
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (0.99%)
Net expenses 1.50%
Expenses (before
recoupment/waiver/-
reimbursement) 1.69%
Portfolio turnover rate 52%
Net assets at end of
period (in 000's) $46,234
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 14.25 $ 11.94 $ 10.99 $ 8.82 $ 8.05
------- ------- ------- ------- ------
Net investment loss (a) (0.19) (0.18) (0.17) (0.17) (0.15)
Net realized and
unrealized gain (loss)
on investments (5.95) 3.01 1.12 2.34 0.92
------- ------- ------- ------- ------
Total from investment
operations (6.14) 2.83 0.95 2.17 0.77
------- ------- ------- ------- ------
Less distributions:
From net realized gain
on investments (0.76) (0.52) -- -- --
------- ------- ------- ------- ------
Net asset value at end of
period $ 7.35 $ 14.25 $ 11.94 $ 10.99 $ 8.82
======= ======= ======= ======= ======
Total investment return
(b)(f) (45.41%) 24.53% 8.64% 24.60% 9.57%
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (1.64%) (1.36%) (1.44%) (1.66%) (1.74%)
Net expenses 2.25% 2.25% 2.25% 2.25% 2.25%
Expenses (before
recoupment/waiver/-
reimbursement) 2.25% 2.19% 2.30% 2.38% 2.44%
Portfolio turnover rate 55% 48% 52% 44% 52%
Net assets at end of
period (in 000's) $20,414 $44,769 $42,625 $14,181 $3,580
</Table>
<Table>
** Commencement of operations.
*** Class R2 commenced operations on December 14, 2007, but investment operations
did not commence until May 1, 2008.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestments of dividends and distributions. Classes I, R2 and R3 shares are
not subject to sales charges.
(c) Total return is not annualized.
(d) The amount shown for a share outstanding does not correspond with aggregate
net realized and unrealized gain (loss) on investments due to the timing of
purchases and redemptions of Fund shares in relation to fluctuating market
values of the investments of the Fund during the period.
(e) Total return is calculated assuming a purchase of a share on the first day and
a sale on the last day of each period reported and includes reinvestment of
dividends and distributions. Total return includes the effect of expense
subsidies.
(f) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
18 MainStay Mid Cap Growth Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- ---------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2008 2007 2006 2005 2004
$ 14.26 $ 11.95 $ 10.98 $ 8.82 $ 8.05
------- ------- ------- ------- -------
(0.19) (0.18) (0.17) (0.17) (0.15)
(5.96) 3.01 1.14 2.33 0.92
------- ------- ------- ------- -------
(6.15) 2.83 0.97 2.16 0.77
------- ------- ------- ------- -------
(0.76) (0.52) -- -- --
------- ------- ------- ------- -------
$ 7.35 $ 14.26 $ 11.95 $ 10.98 $ 8.82
======= ======= ======= ======= =======
(45.45%) 24.51% 8.83% 24.49% 9.57%
(1.66%) (1.37%) (1.44%) (1.66%) (1.74%)
2.27% 2.25% 2.25% 2.25% 2.25%
2.25% 2.19% 2.30% 2.38% 2.44%
55% 48% 52% 44% 52%
$27,477 $62,665 $57,469 $62,792 $35,710
</Table>
<Table>
<Caption>
CLASS I CLASS R2 CLASS R3
- ------------------------------------------------- ----------- --------------------------------
MARCH 29, APRIL 30, APRIL 28,
2005** 2008*** 2006**
YEAR ENDED THROUGH THROUGH YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
----------------------------------------------------------------------------------------------
2008 2007 2006 2005 2008 2008 2007 2006
$ 15.20 $ 12.56 $11.43 $10.45 $ 12.69 $ 14.99 $12.46 $13.24
------- ------- ------ ------ ------- ------- ------ ------
(0.06) (0.03) (0.04) (0.03) (0.05) (0.13) (0.10) (0.08)
(6.41) 3.19 1.17 1.01 (4.80) (6.30) 3.15 (0.70)(d)
------- ------- ------ ------ ------- ------- ------ ------
(6.47) 3.16 1.13 0.98 (4.85) (6.43) 3.05 (0.78)
------- ------- ------ ------ ------- ------- ------ ------
(0.76) (0.52) -- -- -- (0.76) (0.52) --
------- ------- ------ ------ ------- ------- ------ ------
$ 7.97 $ 15.20 $12.56 $11.43 $ 7.84 $ 7.80 $14.99 $12.46
======= ======= ====== ====== ======= ======= ====== ======
(44.71%) 25.99% 9.89% 9.38%(c) (38.22%)(c) (45.01%) 25.13% (e) (5.89%)(c)
(0.49%) (0.19%) (0.28%) (0.51%)++ (0.92%)++ (1.13%) (0.76%) (1.27%)(d)++
1.07% 1.01% 1.07% 1.10% ++ 1.47% ++ 1.69% 1.64% 1.62% ++
1.22% 1.00% 1.04% 1.23% ++ 1.69% ++ 1.85% 1.60% 1.75% ++
55% 48% 52% 44% 55% 55% 48% 52%
$42,450 $31,993 $1,626 $4,205 $ 15 $ 1,574 $ 536 $ 762
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 19
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Mid Cap Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers seven classes of shares. Class A shares, Class B
shares and Class C shares commenced on January 2, 2001. Class I shares commenced
on March 29, 2005. Class R3 shares commenced on April 28, 2006. Class R2 shares
commenced on December 14, 2007. Investor Class shares commenced on February 28,
2008. Investor Class and Class A shares are offered at net asset value per share
plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Investor Class and
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and a 1% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. Class I, Class R2 and Class R3 shares are not subject to a sales
charge. Depending upon eligibility, Class B shares convert to either Investor
Class or Class A shares eight years after the date they were purchased.
Additionally, depending upon eligibility, Investor Class shares may convert to
Class A shares and Class A shares may convert to Investor Class shares. The
seven classes of shares have the same voting (except for issues that relate
solely to one class), dividend, liquidation and other rights and bear the same
conditions except that Class B and Class C shares are subject to higher
distribution fee rates than Investor Class, Class A, Class R2 and Class R3
shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act.
Class I shares are not subject to a distribution or service fee. Class R2 and
Class R3 shares are authorized to pay to the Manager, as defined in Note 3(A),
its affiliates, or third-party service providers, as compensation for services
rendered to shareholders of Class R2 or Class R3 shares, a shareholder service
fee.
The Fund's investment objective is to seek long-term growth of capital.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Investments
in other mutual funds are valued at their net asset values as of the close of
the New York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor ,as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund did not hold
securities that were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in
20 MainStay Mid Cap Growth Fund
filing tax returns (including whether an entity is taxable in a particular
jurisdiction), and requires certain expanded tax disclosures. The Interpretation
became effective for the Fund's 2008 fiscal year, and was applied to all open
tax years as of the date of effectiveness. The Manager, as defined in Note 3(A),
determined that the adoption of the Interpretation did not have an impact on the
Fund's financial statements upon adoption. The Manager continually reviews the
Fund's tax positions and such conclusions under the Interpretation based on
factors, including, but not limited to, ongoing analyses of tax laws and
regulations and interpretations thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and the Fund
pay dividends of net investment income and distributions of net realized capital
and currency gains, if any, annually. All dividends and distributions are
reinvested in shares of the Fund, at net asset value, unless the shareholder
elects otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(I) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
service providers that contain a variety of representations and warranties and
which provide general indemnifications. The Fund's maximum exposure under these
arrangements is unknown, as this would involve future claims that may be made
against the Fund that have not yet occurred. Based on experience, management is
of the view that the risk of loss in connection with these potential
indemnification obligations is remote. However, there can be no assurance that
material liabilities related to such obligations will not arise in the future,
which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement")
between NYLIM and the Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.75% on assets up to $500 million and 0.70% on assets in
excess of $500 million.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage, other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.60%; Class A, 1.29%; Class B,
2.35%; Class C, 2.35%; Class I, 1.12%; Class R2, 1.47%; and Class R3, 1.72%.
This expense limitation may be modified or terminated only with the approval of
the Board of Trustees. NYLIM may recoup the amount of certain management fee
waivers or expense reimbursements from the Fund pursuant to the agreement if
such action does not cause the Fund to exceed the existing expense limitation
and the recoupment is made within three years after the year in which NYLIM
incurred the expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $1,870,349 and waived its fees in the amount of $177,078.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2011 TOTAL
$18,665 $177,078 $195,743
- --------------------------------
</Table>
Prior to April 1, 2008, NYLIM had a written expense limitation agreement under
which it had agreed to waive a portion of the Fund's management fee or reimburse
the expenses of the appropriate class of the Fund so that the class' total
ordinary operating expenses did not exceed the following percentages of average
daily net assets for each class: Class A, 1.50%; Class B, 2.25%; Class C, 2.25%;
Class I, 1.12% and Class R3, 1.72%. Between December 14, 2007 to March 1, 2008,
NYLIM had a written expense limitation agreement that set the expense limit for
Class R2 Shares at 1.39%. Prior to August 1, 2007, NYLIM had a different expense
limitation agreement in place with respect to the Fund.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
these services provided to the Fund by the Manager amounted to $39,383 for the
period from November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in
22 MainStay Mid Cap Growth Fund
conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to Investor Class, Class A, Class B, Class C, Class R2 and Class R3
shares, has adopted distribution plans (the "Plans") in accordance with the
provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor
receives a monthly distribution fee from the Fund at an annual rate of 0.25% of
the average daily net assets of the Fund's Investor Class, Class A and Class R2
shares, which is an expense of the Investor Class, Class A and Class R2 shares
of the Fund for distribution or service activities as designated by the
Distributor. Pursuant to the Class B and Class C Plans, the Fund pays the
Distributor a monthly distribution fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Plans provide that the
Class B and Class C shares of the Fund also incur a service fee at the annual
rate of 0.25% of the average daily net asset value of the Class B and Class C
shares of the Fund. Pursuant to the Class R3 Plan, the Distributor receives a
monthly distribution fee from the Fund at the annual rate of 0.50% of the
average daily net assets of the Fund's Class R3 shares, which is an expense of
the Class R3 shares of the Fund for distribution and service activities as
designated by the Distributor. Class I shares are not subject to a distribution
or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R2 and Class R3
shares, the Manager has agreed to provide, through its affiliates or independent
third parties, various shareholder and administrative support services to
shareholders of the Class R2 and Class R3 shares. For its services, the Manager
is entitled to a Shareholder Service Fee accrued daily and paid monthly at an
annual rate of 0.10% of the average daily net assets attributable to the Class
R2 and Class R3 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were $8,519
and $30,791, respectively, for the year ended October 31, 2008. The Fund was
also advised that the Distributor retained contingent deferred sales charges on
redemptions of Class A, Class B and Class C shares of $796, $87,768 and $5,989,
respectively, for the year ended October 31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $885,573.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 169 0.0%++
- --------------------------------------------------
Class C 81 0.0++
- --------------------------------------------------
Class I 1,675 0.0++
- --------------------------------------------------
Class R2 15,449 100.0
- --------------------------------------------------
Class R3 6,476 0.4
- --------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $9,135.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(5,084,856) $-- $(51,137,101) $(56,221,957)
- -------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments, arising from permanent differences; net assets at October
31, 2008 are not affected.
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) PAID-IN
INCOME (LOSS) ON INVESTMENTS CAPITAL
$2,536,274 $10,689 $(2,546,963)
- -------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to net operating losses.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $5,084,856 were available as shown in the table below, to the extent provided
by the regulations to offset future realized gains of the Fund through the years
indicated. To the extent that these loss carryforwards are used to offset future
capital gains, it is probable that the capital gains so offset will not be
distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2016 $5,085
- ------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007 shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Long-Term Capital Gains $14,454,508 $9,393,042
- -----------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 7--PURCHASES AND SALES OF
SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $132,074 and $128,244, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31, 2008
(a):
Shares sold 650,644 $ 8,080,031
Shares redeemed (437,418) (4,985,772)
-----------------------
Net increase in shares
outstanding before
conversion 213,226 3,094,259
Shares converted into
Investor Class (See Note 1) 1,990,946 23,392,469
Shares converted from
Investor Class (See Note 1) (135,092) (1,467,071)
-----------------------
Net increase 2,069,080 $25,019,657
=======================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 2,119,917 $ 26,323,936
Shares issued to
shareholders in
reinvestment of dividends
and distributions 448,564 6,185,696
Shares redeemed (4,255,998) (51,074,655)
-------------------------
Net decrease in shares
outstanding before
conversion (1,687,517) (18,565,023)
Shares converted into Class
A (See Note 1) 307,231 3,621,491
Shares converted from Class
A (See Note 1) (1,925,040) (22,590,926)
-------------------------
Net decrease (3,305,326) $(37,534,458)
=========================
Year ended October 31, 2007:
Shares sold 3,253,463 $ 44,981,588
Shares issued to
shareholders in
reinvestment of dividends
and distributions 325,587 4,066,580
Shares redeemed (4,089,454) (54,815,941)
-------------------------
Net decrease in shares
outstanding before
conversion (510,404) (5,767,773)
Shares converted from Class
B (See Note 1) 250,885 3,433,694
-------------------------
Net decrease (259,519) $ (2,334,079)
=========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 594,315 $ 6,771,739
Shares issued to
shareholders in
reinvestment of dividends
and distributions 240,662 3,135,647
Shares redeemed (1,239,107) (13,549,287)
-------------------------
Net decrease in shares
outstanding before
conversion (404,130) (3,641,901)
Shares converted from Class
B (See Note 1) (254,524) (2,955,963)
-------------------------
Net decrease (658,654) $ (6,597,864)
=========================
</Table>
24 MainStay Mid Cap Growth Fund
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2007:
Shares sold 776,145 $ 10,219,084
Shares issued to
shareholders in
reinvestment of dividends
and distributions 190,362 2,271,021
Shares redeemed (1,118,026) (14,328,096)
-------------------------
Net decrease in shares
outstanding before
conversion (151,519) (1,837,991)
Shares reacquired upon
conversion into Class A
(See Note 1) (263,552) (3,433,694)
-------------------------
Net decrease (415,071) $ (5,271,685)
=========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 589,483 $ 6,948,196
Shares issued to
shareholders in
reinvestment of dividends
and distributions 114,038 1,483,727
Shares redeemed (1,068,004) (11,848,473)
-------------------------
Net decrease (364,483) $ (3,416,550)
=========================
Year ended October 31, 2007:
Shares sold 944,987 $ 12,291,696
Shares issued to
shareholders in
reinvestment of dividends
and distributions 82,110 979,578
Shares redeemed (1,455,609) (18,594,858)
-------------------------
Net decrease (428,512) $ (5,323,584)
=========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 5,989,672 $ 76,499,333
Shares issued to
shareholders in
reinvestment of dividends
and distributions 90,825 1,267,915
Shares redeemed (2,857,388) (36,138,977)
-------------------------
Net increase 3,223,109 $ 41,628,271
=========================
Year ended October 31, 2007:
Shares sold 2,001,332 $ 28,618,045
Shares issued to
shareholders in
reinvestment of dividends
and distributions 5,587 70,385
Shares redeemed (31,324) (448,215)
-------------------------
Net increase 1,975,595 $ 28,240,215
=========================
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2008
(b):
Shares sold 1,970 $ 25,000
-------------------------
Net increase 1,970 $ 25,000
=========================
</Table>
(b) Class R2 was seeded April 30, 2008. Investment operations did not commence
until May 1, 2008.
<Table>
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 210,199 $2,490,990
Shares issued to shareholders
in reinvestment of dividends
and distributions 2,389 32,821
Shares redeemed (46,726) (517,694)
--------------------
Net increase 165,862 $2,006,117
====================
Year ended October 31, 2007:
Shares sold 4,360 $ 59,039
Shares issued to shareholders
in reinvestment of dividends
and distributions 2,559 31,948
Shares redeemed (32,282) (402,418)
--------------------
Net decrease (25,363) $ (311,431)
====================
</Table>
NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
mainstayinvestments.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Mid Cap Growth Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2008, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year 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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Mid Cap Growth Fund of The MainStay Funds as of October 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
26 MainStay Mid Cap Growth Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Mid Cap Growth Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management and
Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider
mainstayinvestments.com 27
of shareholder services, which has been recognized by independent third-parties
on numerous occasions. The Board noted the role that the MainStay Family of
Funds historically has played in serving the investment needs of New York Life
Insurance Company policyholders, who often maintain smaller account balances
than other retail investors. The Board acknowledged that it had approved NYLIM's
recommendation to create a new "Investor Class" of shares designed principally
to address the higher shareholder-servicing costs typically associated with
smaller shareholder accounts. The Board considered the experience of senior
personnel at NYLIM providing management and administrative services to the Fund,
as well as NYLIM's reputation and financial condition. The Board also reviewed
NYLIM's willingness to invest in personnel designed to benefit the Fund, and
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and MacKay
Shields' method for compensating portfolio managers. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio managers and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position
28 MainStay Mid Cap Growth Fund
is important in order for NYLIM to continue to provide high-quality ongoing
services to the Fund and its shareholders. The Board noted, for example,
increased costs borne by NYLIM and its affiliates due to new and ongoing
regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
mainstayinvestments.com 29
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
30 MainStay Mid Cap Growth Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advised shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $14,454,508.
In January 2009, shareholders will received an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling (1-800-
SEC-0330).
mainstayinvestments.com 31
TRUSTEES AND OFFICERS
The Trustees oversee the Fund and the Manager. Each Trustee serves until his or
her successor is elected and qualified or until his or her resignation, death or
removal. The Retirement Policy provides that a Trustee shall tender his or her
resignation upon reaching age 72. A Trustee reaching the age of 72 may continue
for additional one-year periods with the approval of the Board's Nominating and
Governance Committee, except that no Trustee shall serve on the Board past his
or her 75th birthday. Officers serve a term of one year and are elected annually
by the Trustees. The business address of each Trustee and officer listed below
is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
32 MainStay Mid Cap Growth Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. Trustee since Capital Management; since 2007 (3 funds);
NOLAN, 2007 President--Shields/Alli- Director, Eclipse Funds
JR. ance, Alliance Capital Inc. since 2007 (22
11/16/46 Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 33
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
Expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios); since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
34 MainStay Mid Cap Growth Fund
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 35
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
This page intentionally left blank
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO14512 (RECYCLE LOGO) MS308-08 MSMG11-12/08
11
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MONEY MARKET FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MONEY MARKET FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 14
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 20
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 26
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 27
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 31
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 31
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 31
- ---------------------------------------------
TRUSTEES AND OFFICERS 32
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND. NOTWITHSTANDING THE PRECEDING STATEMENT,
SHAREHOLDERS OF THE FUND TEMPORARILY WILL BE GUARANTEED TO RECEIVE $1.00 NET
ASSET VALUE FOR UP TO THE NUMBER OF SHARES THAT THEY HELD AS OF SEPTEMBER 19,
2008, SUBJECT TO THE TERMS OF THE U.S. TREASURY'S TEMPORARY GUARANTEE PROGRAM
FOR MONEY MARKET FUNDS, AS DISCUSSED IN NOTE 7.
INVESTOR CLASS SHARES(2,3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------
2.56% 2.82% 3.07%
7-DAY CURRENT YIELD: 1.24%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
AVERAGE LIPPER
MONEY MARKET
INVESTOR CLASS FUND
-------------- --------------
10/31/98 10000 10000
10458 10437
11055 11012
11544 11473
11704 11610
11773 11674
11837 11733
12098 11975
12604 12461
13195 13035
10/31/08 13533 13375
</Table>
CLASS A SHARES(2)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------
2.65% 2.84% 3.08%
7-DAY CURRENT YIELD: 1.29%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
AVERAGE LIPPER
MONEY MARKET
CLASS A FUND
------- --------------
10/31/98 25000 25000
26145 26093
27638 27531
28860 28684
29260 29025
29433 29184
29593 29331
30244 29938
31510 31154
32988 32588
10/31/08 33862 33439
</Table>
CLASS B SHARES(2)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------
2.57% 2.83% 3.07%
7-DAY CURRENT YIELD: 1.23%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
AVERAGE LIPPER
MONEY MARKET
CLASS B FUND
------- --------------
10/31/98 10000 10000
10458 10437
11055 11012
11544 11473
11704 11610
11773 11674
11837 11733
12098 11975
12604 12461
13195 13035
10/31/08 13534 13375
</Table>
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect change in share price and reinvestment of dividend and
capital-gain distributions. The graphs assume an initial investment of
$25,000 for Class A shares and $10,000 for all other classes. (Effective
September 15, 2008, no minimum initial investment with no minimum subsequent
investment is required for Class A shares of the Money Market Fund if all of
your other accounts with any MainStay Fund contain Class A shares only.
Additionally, please note that if at any time you hold any class of shares
other than Class A shares of any MainStay Fund, your holdings in the Money
Market Fund will immediately become subject to the applicable investment
minimums, subsequent purchase minimums and subsequent conversion features.)
Investor Class shares and Class A, B and C shares are sold with no initial
sales charge or contingent deferred sales charge ("CDSC") and have no annual
12b-1 fees. Performance figures reflect certain fee waivers and/or expense
limitations, without which total returns may have been lower. These fee
waivers and/or expense limitations are contractual and may be modified or
terminated only with the approval of the Board of Trustees. The Manager may
recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the contract if such action does
not cause the Fund to exceed existing expense limitations and the recoupment
is made within three years after the year in which the Manager incurred the
expense.
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES(2)--NO SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------
2.57% 2.83% 3.07%
7-DAY CURRENT YIELD: 1.23%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
AVERAGE LIPPER
MONEY MARKET
CLASS C FUND
------- --------------
10/31/98 10000 10000
10458 10437
11055 11012
11544 11473
11704 11610
11773 11674
11837 11733
12098 11975
12604 12461
13195 13035
10/31/08 13534 13375
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- -------------------------------------------------------------------
Average Lipper money market fund(4) 2.54% 2.70% 2.95%
</Table>
2. As of October 31, 2008, MainStay Money Market Fund had an effective 7-day
yield of 1.25%, 1.30%, 1.24% and 1.24% for Investor Class, Class A, B and C
shares, respectively. The 7-day current yield was 1.24%, 1.29%, 1.23% and
1.23% for Investor Class, Class A, B and C shares, respectively. These yields
reflect certain expense limitations. Had these expense limitations not been
in effect, the effective 7-day current yield would have been 1.13%, 1.30%,
1.13% and 1.12% for Investor Class, Class A, B and C shares, respectively,
and the 7-day current yield would have been 1.12% for Investor Class, 1.29%
for Class A, 1.12% for Class B and 1.12% for Class C. The fee waivers and/or
expense limitations are contractual and may be modified or terminated only
with the approval of the Board of Trustees. The current yield reflects the
Fund's earnings better than does the Fund's total return.
3. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A Shares through February
27, 2008, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Investor Class shares might have been
lower.
4. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTE ON THE PREVIOUS PAGE IS AN INTEGRAL PART OF THE TABLES AND GRAPHS
AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Money Market Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MONEY MARKET FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $1,008.00 $4.09 $1,021.10 $4.12
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $1,008.70 $3.33 $1,021.80 $3.35
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $1,008.10 $4.09 $1,021.10 $4.12
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $1,008.10 $4.09 $1,021.10 $4.12
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(0.81% for Investor Class, 0.66% for Class A and 0.81% for Class B and Class
C) multiplied by the average account value over the period, divided by 366
and multiplied by 184 (to reflect the one-half year period). The table above
represents the actual expenses incurred during the one-half year period and
does not take into account the Fund's written expense limitation agreement.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2008
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Commercial Paper 57.2
U.S. Government & Federal Agencies 41.9
Corporate Bonds 1.7
Repurchase Agreement 0.0++
Liabilities in Excess of Cash and Other Assets (0.8)
</Table>
++ Less than one-tenth of a percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
8 MainStay Money Market Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS CLAUDE ATHAIDE, PH.D., CFA, AND GARY
GOODENOUGH OF MACKAY SHIELDS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY MONEY MARKET FUND PERFORM RELATIVE TO ITS PEERS DURING THE 12
MONTHS ENDED OCTOBER 31, 2008?
As of October 31, 2008, MainStay Money Market Fund had a 7-day current yield of
1.24% for Investor Class shares,(1) 1.29% for Class A shares, and 1.23% for
Class B and Class C shares. As of the same date, the Fund had a 7-day effective
yield of 1.25% for Investor Class shares, 1.30% for Class A shares, 1.24% for
Class B shares and 1.24% for Class C shares. For the 12 months ended October 31,
2008, MainStay Money Market Fund returned 2.56% for Investor Class shares, 2.65%
for Class A shares and 2.57% for Class B and Class C shares. All share classes
outperformed the 2.54% return of the average Lipper(2) money market fund for the
12 months ended October 31, 2008.
WHAT FACTORS INFLUENCED THE FUND'S PERFORMANCE AND MANAGEMENT DURING THE
REPORTING PERIOD?
The U.S. economy slowed sharply during 2008, largely because of tighter credit
conditions, rising unemployment and wealth destruction from lower home prices
and plunging equity markets. Real gross domestic product (GDP) increased, but
modestly, over the 12-months ended September 30, 2008.
The financial landscape was transformed radically over the 12-month reporting
period. During the fourth quarter of 2007, many of the largest financial
institutions around the world announced multibillion dollar losses from write-
downs on collateralized debt obligations (CDOs) and other mortgage-related
securities. As risk aversion climbed, financial firms experienced higher funding
costs that led to significant failures and bailouts.
After receiving an emergency loan from the Federal Reserve Bank of New York,
Bear Stearns was acquired by JPMorgan Chase. Mortgage giants Fannie Mae and
Freddie Mac were placed under conservatorship, Lehman Brothers filed for
bankruptcy and American International Group (AIG) received an $85 billion
secured government loan. Morgan Stanley and Goldman Sachs converted to bank
holding companies, the FDIC seized Washington Mutual Bank and sold its branches
and deposits to JPMorgan Chase and Wells Fargo purchased Wachovia.
On November 1, 2007, the federal funds target rate stood at 4.5%. Over the next
12 months, the Federal Open Market Committee (FOMC) lowered its targeted federal
funds rate seven times to close the reporting period at 1%.
The Federal Reserve also announced a number of other measures to improve
liquidity in the money market and the credit markets. Among these was the
Commercial Paper Funding Facility, which substantially mitigated the risk that a
firm would be unable to refinance maturing commercial paper. The facility was
introduced on October 27, shortly after a six-week, $366 billion contraction in
commercial paper outstanding as investors rushed to buy Treasury bills. By the
end of the month, outstanding commercial paper increased by $153 billion as a
number of issuers took advantage of the facility.
WHAT OTHER STEPS WERE TAKEN TO MAINTAIN MARKET STABILITY?
The Federal Reserve created a Term Auction Facility for banks to obtain secured
funding. After the collapse of Bear Stearns, the Federal Reserve announced a
Primary Dealer Credit Facility, granting primary dealers access to loans at the
discount window. In the days following the failure of Lehman Brothers, the
Treasury announced a temporary program to guarantee money market funds and the
Federal Reserve announced a temporary liquidity facility for asset-backed
commercial paper. Congress also passed the Troubled Assets Relief Program (TARP)
to purchase distressed assets from financial institutions.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND. NOTWITHSTANDING THE PRECEDING STATEMENT, FUND
SHAREHOLDERS TEMPORARILY WILL BE GUARANTEED TO RECEIVE $1.00 NET ASSET VALUE FOR
UP TO THE NUMBER OF SHARES THAT THEY HELD AS OF SEPTEMBER 19, 2008, SUBJECT TO
THE TERMS OF THE U.S. TREASURY'S TEMPORARY GUARANTEE PROGRAM FOR MONEY MARKET
FUNDS AS DISCUSSED IN NOTE 7.
The Fund may invest in derivatives, which may increase the volatility of the
Fund's net asset value and may result in a loss to the Fund. Foreign securities
may be subject to greater risks than U.S. investments, including currency
fluctuations, less-liquid trading markets, greater price volatility, political
and economic instability, less publicly available information, and changes in
tax or currency laws or monetary policy. These risks are likely to be greater in
emerging markets than in developed markets. The principal risk of mortgage-
related and asset-backed securities is that the underlying debt may be prepaid
ahead of schedule if interest rates fall, thereby reducing the value of the
Fund's investments. If interest rates rise, less of the debt may be prepaid and
the Fund may lose money.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 6 for more information on Lipper Inc.
mainstayinvestments.com 9
HOW DID MARKET VOLATILITY AFFECT INVESTORS?
Amid the volatility in the financial markets and concerns about the solvency of
storied financial institutions, investors sought the safety of U.S. Treasurys.
As a result, Treasurys outperformed riskier assets during the 12-month reporting
period as spreads(3) moved substantially wider. The spread between three-month
Treasury bills and three-month LIBOR(4) (known as the TED spread) rose from 98
basis points at the end of October 2007 to 463 basis points on October 10, 2008.
(A basis point is one-hundredth of a percentage point.)
HOW DID THE FUND INVEST DURING THE REPORTING PERIOD?
The Fund invested in securities issued by U.S. government-sponsored entities and
in First Tier securities issued by finance, insurance, brokerage and industrial
companies, as well as banks and bank holding companies. During the reporting
period, we increased the Fund's holdings in government debt.
As money market rates declined during the 12-month reporting period, the
proceeds from maturing investments in the Fund were necessarily reinvested in
lower-yielding securities, which lowered the Fund's return compared to the prior
reporting period.
WHAT WAS THE FUND'S DOLLAR-WEIGHTED AVERAGE MATURITY AT THE END OF THE REPORTING
PERIOD?
At the end of the reporting period, we were maintaining the average maturity of
the Fund's investments at about 30 days. This action was part of our strategy to
ensure that the Fund had sufficient liquidity.
3. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The terms may also refer to the difference in yield between two specific
securities or types of securities at a given time.
4. London interbank offered rates (LIBOR) are floating interest rates that are
widely used as reference rates in bank, corporate and government lending
agreements.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Money Market Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS 100.8%+
- ----------------------------------------------------------------
COMMERCIAL PAPER 57.2%
3M Co.
1.70%, due 1/12/09 (a) $ 7,000,000 $ 6,976,200
Allianz Finance Corp.
2.45%, due 11/7/08 (a)(b) 2,500,000 2,498,979
BNP Paribas Finance, Inc.
2.71%, due 11/7/08 (a) 6,500,000 6,497,064
BP Capital Markets PLC
1.70%, due 1/7/09 (a)(b) 7,000,000 6,977,853
1.70%, due 1/8/09 (a)(b) 6,500,000 6,479,128
Caterpillar Inc.
1.85%, due 11/6/08 (a)(b) 6,500,000 6,498,330
ChevronTexaco Funding Corp.
1.25%, due 11/17/08 (a) 3,000,000 2,998,333
1.25%, due 11/18/08 (a) 6,000,000 5,996,250
1.50%, due 11/20/08 (a) 8,000,000 7,993,667
Electricite de France
2.80%, due 11/21/08 (a)(b) 3,500,000 3,494,556
3.35%, due 11/12/08 (a)(b) 13,000,000 12,986,693
Emerson Electric Co.
1.50%, due 11/26/08 (a)(b) 7,000,000 6,992,708
2.00%, due 11/13/08 (a)(b) 4,050,000 4,047,300
2.10%, due 11/12/08 (a)(b) 3,000,000 2,998,075
European Investment Bank
2.19%, due 12/3/08 (a) 6,500,000 6,487,347
2.20%, due 12/4/08 (a) 3,000,000 2,993,950
2.40%, due 11/14/08 (a) 3,000,000 2,997,400
Export Development Canada
1.00%, due 12/19/08 (a) 15,100,000 15,079,521
General Electric Capital
Corp.
2.52%, due 11/10/08 (a) 6,500,000 6,495,905
Harvard University
1.55%, due 11/6/08 (a) 6,500,000 6,498,601
1.95%, due 11/7/08 (a) 6,000,000 5,998,050
HSBC Finance Corp.
2.72%, due 11/19/08 (a) 1,300,000 1,298,232
International Business
Machines Corp.
1.30%, due 11/24/08 (a)(b) 3,500,000 3,497,093
2.05%, due 12/18/08 (a)(b) 6,000,000 5,983,942
2.30%, due 11/4/08 (a)(b) 6,500,000 6,498,754
Johnson & Johnson
2.02%, due 11/18/08 (a)(b) 6,500,000 6,493,800
JPMorgan Chase & Co.
2.62%, due 11/17/08 (a) 9,800,000 9,788,588
KfW International Finance,
Inc.
1.00%, due 12/3/08 (a)(b) 5,000,000 4,995,417
1.20%, due 11/5/08 (a)(b) 5,000,000 4,999,333
1.20%, due 11/14/08 (a)(b) 5,125,000 5,122,779
Merck & Co., Inc.
1.05%, due 12/15/08 (a) 2,000,000 1,997,433
1.70%, due 12/1/08 (a) 4,000,000 3,994,333
1.80%, due 12/5/08 (a) 5,000,000 4,991,500
2.10%, due 11/5/08 (a) 6,000,000 5,998,600
MetLife Funding, Inc.
2.08%, due 11/3/08 (a) 5,225,000 5,224,396
2.10%, due 11/3/08 (a) 6,500,000 6,499,242
Microsoft Corp.
0.80%, due 11/19/08 (a)(b) 9,650,000 9,646,140
1.00%, due 12/2/08 (a)(b) 3,700,000 3,696,814
National Australia Funding
Delaware, Inc.
2.69%, due 11/7/08 (a)(b) 2,375,000 2,373,935
2.70%, due 11/6/08 (a)(b) 8,000,000 7,997,000
Nationwide Building Society
2.87%, due 11/3/08 (a)(b) 3,500,000 3,499,442
Pfizer, Inc.
1.50%, due 11/18/08 (a)(b) 6,000,000 5,995,750
2.10%, due 12/1/08 (a)(b) 7,000,000 6,987,750
Private Export Funding Corp.
2.25%, due 11/4/08 (a)(b) 8,000,000 7,998,500
2.38%, due 12/17/08 (a)(b) 3,550,000 3,539,204
Prudential Funding LLC
2.53%, due 11/13/08 (a) 6,925,000 6,919,160
Quebec Province
1.80%, due 11/17/08 (a)(b) 5,500,000 5,495,600
2.40%, due 12/29/08 (a)(b) 7,600,000 7,570,613
Rabobank USA Finance Corp.
2.85%, due 2/26/09 (a) 6,000,000 5,944,425
Royal Bank of Canada
2.67%, due 12/8/08 (a) 12,525,000 12,490,629
Shell International Finance
B.V.
1.05%, due 12/1/08 (a)(b) 6,000,000 5,994,574
1.10%, due 11/24/08 (a)(b) 4,000,000 3,997,189
1.65%, due 11/3/08 (a)(b) 7,000,000 6,999,358
Societe Generale North
America, Inc.
2.71%, due 12/16/08 (a) 1,000,000 996,613
2.75%, due 11/26/08 (a) 6,000,000 5,988,542
2.77%, due 12/2/08 (a) 5,800,000 5,786,165
Swedish Export Credit Corp.
2.78%, due 12/3/08 (a) 2,500,000 2,493,822
2.90%, due 11/25/08 (a) 7,500,000 7,485,500
3.38%, due 11/20/08 (a) 4,000,000 3,992,864
Total Capital S.A.
2.17%, due 11/25/08 (a)(b) 7,000,000 6,989,873
2.17%, due 11/28/08 (a)(b) 7,000,000 6,988,608
Unilever Capital Corp.
2.00%, due 11/17/08 (a)(b) 8,000,000 7,992,889
</Table>
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (CONTINUED)
COMMERCIAL PAPER (CONTINUED)
USAA Capital Corp.
2.20%, due 11/14/08 (a) $ 8,700,000 $ 8,693,088
Wal-Mart Stores, Inc.
1.50%, due 11/25/08 (a)(b) 3,500,000 3,496,500
2.05%, due 11/3/08 (a)(b) 6,500,000 6,499,260
2.10%, due 11/10/08 (a)(b) 6,000,000 5,996,850
Wells Fargo & Co.
2.66%, due 12/5/08 (a) 6,500,000 6,483,671
-------------
394,399,680
-------------
CORPORATE BONDS 1.7%
Bank of America N.A.
2.813%, due 12/18/08 (c) 6,625,000 6,624,210
Wachovia Bank N.A.
3.528%, due 2/23/09 (c) 4,750,000 4,746,179
-------------
11,370,389
-------------
REPURCHASE AGREEMENT 0.0%++
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$39,865 (Collateralized by
a Federal Home Loan Bank
Security with a rate of
3.625% and a maturity date
of 7/1/11, with a Principal
Amount of $45,731 and a
Market Value of $45,731) 39,865 39,865
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES 41.9%
Federal Home Loan Bank
2.291%, due 12/12/08 (c) 6,000,000 6,000,000
2.599%, due 2/18/09 (c) 4,400,000 4,400,875
2.70%, due 3/17/09 7,000,000 7,000,000
2.75%, due 2/20/09 7,200,000 7,200,000
2.988%, due 12/24/08 (c) 6,000,000 6,000,000
Federal Home Loan Bank
(Discount Notes)
0.883%, due 11/24/08 (a) 6,125,000 6,121,478
0.887%, due 11/7/08 (a) 15,000,000 14,997,500
0.913%, due 11/4/08 (a) 15,000,000 14,998,500
0.913%, due 11/10/08 (a) 8,000,000 7,998,000
0.927%, due 11/13/08 (a) 5,000,000 4,998,333
1.035%, due 11/12/08 (a) 12,900,000 12,895,664
1.05%, due 11/21/08 (a) 5,000,000 4,997,083
1.10%, due 11/21/08 (a) 7,000,000 6,995,722
1.15%, due 11/21/08 (a) 9,150,000 9,144,154
1.25%, due 12/4/08 (a) 10,000,000 9,988,542
1.31%, due 12/2/08 (a) 7,000,000 6,992,104
1.31%, due 12/4/08 (a) 6,675,000 6,666,984
2.10%, due 1/9/09 (a) 10,000,000 9,959,750
2.20%, due 11/12/08 (a) 3,425,000 3,422,698
2.20%, due 1/20/09 (a) 6,500,000 6,468,222
2.21%, due 12/16/08 (a) 7,000,000 6,980,662
2.27%, due 1/5/09 (a) 5,700,000 5,676,638
2.29%, due 1/2/09 (a) 6,000,000 5,976,337
2.40%, due 1/14/09 (a) 10,000,000 9,950,667
Federal Home Loan Mortgage
Corporation
2.37%, due 4/7/09 (c) 6,900,000 6,900,000
Federal Home Loan Mortgage
Corporation (Discount
Notes)
1.05%, due 11/26/08 (a) 8,000,000 7,994,167
2.46%, due 11/5/08 (a) 6,650,000 6,648,182
2.62%, due 12/9/08 (a) 5,850,000 5,833,822
Federal National Mortgage
Association (Discount
Notes)
0.844%, due 12/15/08 (a) 7,500,000 7,492,208
1.20%, due 12/22/08 (a) 6,025,000 6,014,757
1.98%, due 11/3/08 (a) 8,000,000 7,999,120
2.26%, due 1/6/09 (a) 4,950,000 4,929,491
International Bank for
Reconstruction &
Development (Discount Note)
1.40%, due 12/5/08 (a) 7,000,000 6,990,744
United States Treasury Bills
0.619%, due 11/28/08 (a) 18,875,000 18,866,230
1.609%, due 4/23/09 (a) 13,000,000 12,899,451
1.639%, due 12/11/08 (a) 6,575,000 6,563,023
1.855%, due 3/5/09 (a) 4,050,000 4,024,130
-------------
288,985,238
-------------
Total Short-Term Investments
(Amortized Cost
$694,795,172) (d) 100.8% 694,795,172
Liabilities in Excess of
Cash and Other Assets (0.8) (5,423,510)
----- ------------
Net Assets 100.0% $ 689,371,662
===== ============
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) Interest rate presented is yield to
maturity.
(b) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(c) Floating rate. Rate shown is the rate in
effect at October 31, 2008.
(d) The cost stated also represents the
aggregate cost for federal income tax
purposes.
</Table>
12 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
The table below sets forth the diversification of the Money Market Fund
investments by industry.
INDUSTRY DIVERSIFICATION (UNAUDITED)
<Table>
<Caption>
AMORTIZED
COST PERCENT(+)
Banks $ 75,101,537 10.9%
Commercial Services 12,496,651 1.8
Computers 15,979,789 2.3
Diversified Financial Services 12,440,330 1.8
Electric 16,481,249 2.4
Electrical Components &
Equipment 14,038,083 2.1
Finance--Consumer Loans 1,298,232 0.2
Finance--Investment
Banker/Broker 9,788,588 1.4
Finance--Mortgage Loan/Banker 3,499,442 0.5
Finance--Other Services 11,537,704 1.7
Health Care--Products 6,493,800 0.9
Holding Companies--Diversified 8,693,088 1.3
Insurance 9,418,139 1.4
Machinery--Construction &
Mining 6,498,330 0.9
Miscellaneous--Manufacturing 6,976,200 1.0
Multi-National 19,469,441 2.8
Oil & Gas 61,414,833 8.9
Pharmaceuticals 29,965,366 4.4
Regional (State & Province) 13,066,213 1.9
Repurchase Agreement 39,865 0.0++
Retail 15,992,610 2.3
Software 13,342,954 1.9
Sovereign 29,051,707 4.2
Special Purpose Entity 19,716,527 2.9
U.S. Government & Agencies 281,994,494 40.9
------------ -----
694,795,172 100.8
Liabilities in Excess of
Cash and Other Assets (5,423,510) (0.8)
------------ -----
Net Assets $689,371,662 100.0%
============ =====
</Table>
<Table>
+ Percentages indicated are based on Fund
net assets.
++ Less than one-tenth of a percent.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(amortized cost $694,795,172) $694,795,172
Receivables:
Fund shares sold 783,148
Interest 149,928
Prepaid insurance guarantee (See
Note 7) 41,435
Other assets 54,281
------------
Total assets 695,823,964
------------
LIABILITIES:
Payables:
Fund shares redeemed 5,763,474
Manager (See Note 3) 247,215
Transfer agent (See Note 3) 243,639
Shareholder communication 94,197
Professional fees 44,799
Custodian 22,969
Trustees 1,869
Accrued expenses 4,500
Dividend payable 29,640
------------
Total liabilities 6,452,302
------------
Net assets $689,371,662
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 6,893,703
Additional paid-in capital 682,479,592
------------
689,373,295
Accumulated distributions in excess
of net investment income (1,633)
------------
Net assets $689,371,662
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 72,720,971
============
Shares of beneficial interest
outstanding 72,723,413
============
Net asset value and offering price
per share outstanding $ 1.00
============
CLASS A
Net assets applicable to
outstanding shares $372,956,206
============
Shares of beneficial interest
outstanding 372,956,138
============
Net asset value and offering price
per share outstanding $ 1.00
============
CLASS B
Net assets applicable to
outstanding shares $187,236,572
============
Shares of beneficial interest
outstanding 187,232,776
============
Net asset value and offering price
per share outstanding $ 1.00
============
CLASS C
Net assets applicable to
outstanding shares $ 56,457,913
============
Shares of beneficial interest
outstanding 56,458,007
============
Net asset value and offering price
per share outstanding $ 1.00
============
</Table>
14 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Interest $20,901,427
-----------
EXPENSES:
Manager (See Note 3) 2,998,301
Transfer agent--Investor Class
(See Note 3) 125,626
Transfer agent--Class A (See Note
3) 594,426
Transfer agent--Classes B and C
(See Note 3) 663,226
Registration 131,118
Shareholder communication 116,507
Professional fees 103,765
Recordkeeping (a) 67,562
Custodian 26,797
Trustees 23,777
Insurance guarantee (See Note 7) 22,445
Miscellaneous 28,911
-----------
Total expenses before waiver 4,902,461
Expense waiver from Manager (See
Note 3) (315,545)
-----------
Net expenses 4,586,916
-----------
Net investment income 16,314,511
-----------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 34,557
-----------
Net increase in net assets resulting
from
operations $16,349,068
===========
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 16,314,511 $ 23,557,228
Net realized gain (loss)
on investments 34,557 (252)
-----------------------------
Net increase in net assets
resulting from operations 16,349,068 23,556,976
-----------------------------
Dividends to shareholders:
From net investment income:
Investor Class (631,850) --
Class A (9,843,192) (13,836,289)
Class B (4,649,885) (8,344,331)
Class C (1,202,040) (1,406,051)
-----------------------------
Total dividends to
shareholders (16,326,967) (23,586,671)
-----------------------------
Capital share transactions:
Net proceeds from sale of
shares 782,086,058 604,775,875
Net asset value of shares
issued to shareholders in
reinvestment of dividends 15,282,265 22,482,439
Cost of shares redeemed (668,002,065) (540,408,611)
-----------------------------
Increase in net assets
derived from capital
share transactions 129,366,258 86,849,703
-----------------------------
Net increase in net
assets 129,388,359 86,820,008
NET ASSETS:
Beginning of year 559,983,303 473,163,295
-----------------------------
End of year $ 689,371,662 $ 559,983,303
=============================
Accumulated distributions in
excess of net investment
income at end of year $ (1,633) $ (23,482)
=============================
</Table>
16 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS CLASS A
-------------- --------------------------------------------------------
FEBRUARY 28,
2008**
THROUGH
OCTOBER 31, YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- -------- -------- -------- --------
Net investment income 0.01 0.03 0.05 0.04 0.02 0.01
Net realized and
unrealized gain on
investments 0.00 +++ 0.00 +++ 0.00 +++ 0.00 +++ 0.00 +++ 0.00 +++
------- -------- -------- -------- -------- --------
Total from investment
operations 0.01 0.03 0.05 0.04 0.02 0.01
------- -------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.01) (0.03) (0.05) (0.04) (0.02) (0.01)
From net realized gain
on investments -- -- -- -- -- (0.00)+++
------- -------- -------- -------- -------- --------
Total dividends and
distributions (0.01) (0.03) (0.05) (0.04) (0.02) (0.01)
------- -------- -------- -------- -------- --------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======== ======== ======== ========
Total investment return 1.24%(a) 2.65% 4.69% 4.18% 2.20% 0.54%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.67%++ 2.65% 4.59% 4.14% 2.21% 0.54%
Net expenses 0.80%++ 0.68% 0.70% 0.70% 0.70% 0.70%
Expenses (before waiver) 0.88%++ 0.71% 0.83% 0.93% 0.99% 1.02%
Net assets at end of
period (in 000's) $72,721 $372,956 $346,960 $260,642 $205,154 $197,310
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
Net investment income 0.03 0.05 0.04 0.02 0.01
Net realized and
unrealized gain on
investments 0.00 +++ 0.00 +++ 0.00 +++ 0.00 +++ 0.00 +++
------- ------- ------- ------- -------
Total from investment
operations 0.03 0.05 0.04 0.02 0.01
------- ------- ------- ------- -------
Less dividends and
distributions:
From net investment
income (0.03) (0.05) (0.04) (0.02) (0.01)
From net realized gain
on investments -- -- -- -- (0.00)+++
------- ------- ------- ------- -------
Total dividends and
distributions (0.03) (0.05) (0.04) (0.02) (0.01)
------- ------- ------- ------- -------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total investment return 2.57% 4.69% 4.18% 2.20% 0.54%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 2.51% 4.59% 4.14% 2.21% 0.54%
Net expenses 0.76% 0.70% 0.70% 0.70% 0.70%
Expenses (before waiver) 0.83% 0.83% 0.93% 0.99% 1.02%
Net assets at end of
period (in 000's) $56,458 $36,270 $23,306 $20,426 $31,273
</Table>
<Table>
** Commencement of operations.
++ Annualized.
+++ Less than one cent per share.
(a) Total return is not annualized.
</Table>
18 MainStay Money Market Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
--------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2008 2007 2006 2005 2004
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
0.03 0.05 0.04 0.02 0.01
0.00 +++ 0.00 +++ 0.00 +++ 0.00 +++ 0.00 +++
-------- -------- -------- -------- --------
0.03 0.05 0.04 0.02 0.01
-------- -------- -------- -------- --------
(0.03) (0.05) (0.04) (0.02) (0.01)
-- -- -- -- (0.00)+++
-------- -------- -------- -------- --------
(0.03) (0.05) (0.04) (0.02) (0.01)
-------- -------- -------- -------- --------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
2.57% 4.69% 4.18% 2.20% 0.54%
2.54% 4.59% 4.14% 2.21% 0.54%
0.76% 0.70% 0.70% 0.70% 0.70%
0.84% 0.83% 0.93% 0.99% 1.02%
$187,237 $176,753 $189,216 $246,104 $295,963
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Money Market Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Investor Class shares commenced February 28,
2008. Depending upon eligibility, Class B shares convert to either Investor
Class or Class A shares eight years after the date they were purchased.
Additionally, depending upon eligibility, Investor Class shares may convert to
Class A shares and Class A shares may convert to Investor Class shares. The four
classes of shares bear the same voting (except for issues that relate solely to
one class), dividend, liquidation and other rights and conditions.
The Fund's investment objective is to seek as high a level of current income as
is considered consistent with the preservation of capital and liquidity.
The Fund's principal investments include derivatives such as variable rate
master demand notes, "floating-rate notes" and mortgage-related and asset-backed
securities. If expectations about changes in interest rates, or assessments of
an issuer's credit worthiness or market conditions are incorrect, the use of
derivatives or other investments could result in a loss.
The Fund also invests in foreign securities, which carry certain risks in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from future adverse political and economic developments
and possible imposition of currency exchange blockages or other foreign
governmental laws and restrictions. The ability of issuers of debt securities
held by the Fund to meet their obligations may be affected by economic
developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) VALUATION OF FUND SHARES. The Fund seeks to maintain a net asset value of
$1.00 per share, although there is no assurance that it will be able to do so on
a continuous basis, and it has adopted certain investment, portfolio and
dividend and distribution policies designed to enable it to do as such. An
investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. The Fund is participating
in the U.S. Treasury Department's Temporary Money Market Fund Guarantee Program
the details of which are disclosed in Note 7.
(B) SECURITIES VALUATION. Securities are valued at their amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between such cost and the value on maturity date.
(C) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund declares dividends of net
investment income daily and the Fund pays them monthly and declares and pays
distributions of net realized capital gains, if any, annually. All dividends and
distributions are reinvested in shares of the Fund, at net asset value, unless
the shareholder elects otherwise. Dividends and distributions to shareholders
are determined in accordance with federal income tax regulations and may differ
from generally accepted accounting principles in the United States of America.
(E) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method.
20 MainStay Money Market Fund
Interest income is accrued daily and discounts and premiums on securities
purchased for the Fund are accreted and amortized, respectively, on the
straight-line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(F) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(G) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(H) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(I) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement")
between NYLIM and the Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.45% on assets up to $500 million, 0.40% on assets from
$500 million to $1 billion, and 0.35% on assets in excess of $1 billion. Prior
to August 1, 2008, the Fund was contractually obligated to pay the Manager at an
annual rate of: 0.50% on assets up to $300 million, 0.45% on assets from $300
million to $700 million, 0.40% on assets from $700 million to $1 billion and
0.35% on assets in excess of $1 billion.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage and other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 0.80%; Class A,
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
0.70%; Class B, 0.80% and Class C, 0.80%. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. NYLIM
may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed the existing expense limitation and the recoupment is
made within three years after the year in which NYLIM incurred the expense.
From time to time, the Manager may limit expenses of the Fund to the extent it
deems appropriate to enhance the yield of the Fund, or a particular class of the
Fund, during periods when expenses have a significant impact on the yield of the
Fund, or a particular class of the Fund, as applicable, because of low interest
rates. This expense limitation policy is voluntary and in addition to any
contractual arrangements that may be in place with respect to the Fund and
described in the Fund's prospectus. It may be revised or terminated by the
Manager at any time without notice.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $2,998,301 and waived expenses in the amount of $315,545.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2010 2011 TOTAL
$1,058,259 $649,067 $315,545 $2,022,871
- -------------------------------------------------
</Table>
The Fund had $232,330 of waived fees for which the recoupment period expired
during the year ended October 31, 2008.
Between August 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 0.70%; Class B,
0.70% and Class C, 0.70%. Prior to August 1, 2007, NYLIM had a different expense
limitation agreement in place with respect to the Fund.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
these services provided to the Fund by the Manager amounted to $67,562 for the
period from November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) CONTINGENT DEFERRED SALES CHARGE. Although the Fund does not assess a
contingent deferred sales charge upon redemption of Class B or Class C shares of
the Fund, the applicable contingent deferred sales charge will be assessed when
shares were redeemed from the Fund if the shareholder previously exchanged his
or her investment into the Fund from another Fund in the Trust. The Fund was
advised that NYLIFE Distributors LLC (the "Distributor"), an indirect wholly
owned subsidiary of New York Life, received from shareholders the proceeds from
contingent deferred sales charges of Investor Class, Class A, Class B and Class
C of $543, $37,064, $323,786, and $51,864, respectively for the year ended
October 31, 2008.
(C) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $1,383,278.
(D) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(E) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $609 0.0%+++
- -----------------------------------------------
Class C 117 0.0+++
- -----------------------------------------------
</Table>
+++ Less than one-tenth of a percent.
22 MainStay Money Market Fund
(F) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $23,165.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$28,007 $-- $(29,640) $-- $(1,633)
- -----------------------------------------------------------------------
</Table>
The other temporary differences are primarily due to distribution payable.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN (LOSS) ON ADDITIONAL
INCOME (LOSS) INVESTMENTS PAID-IN CAPITAL
$34,305 $(34,305) $--
</Table>
The reclassifications for the Fund are primarily due to distribution
redesignations.
The Fund utilized $252 of capital loss carryforwards during the year ended
October 31, 2008.
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distribution paid from:
Ordinary Income $16,326,967 $23,586,671
- -----------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 6--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS (AT $1 PER SHARE) SHARES
Period ended October 31, 2008 (a):
Shares sold 69,342,767
Shares issued to shareholders in
reinvestment of dividends 601,846
Shares redeemed (41,587,702)
-----------
Net increase in shares outstanding
before conversion 28,356,911
Shares converted into Investor Class
(See Note 1) 57,346,493
Shares converted from Investor Class
(See Note 1) (12,979,992)
-----------
Net increase 72,723,412
===========
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A (AT $1 PER SHARE) SHARES
Year ended October 31, 2008:
Shares sold 516,333,756
Shares issued to shareholders in
reinvestment of dividends 9,148,174
Shares redeemed (456,855,791)
------------
Net increase in shares outstanding
before conversion 68,626,139
Shares converted into Class A (See
Note 1 14,555,219
Shares converted from Class A (See
Note 1) (57,205,497)
------------
Net increase 25,975,861
============
Year ended October 31, 2007:
Shares sold 460,794,717
Shares issued to shareholders in
reinvestment of dividends 13,242,219
Shares redeemed (389,745,741)
------------
Net increase in shares outstanding
before conversion 84,291,195
Shares converted from Class B (See
Note 1) 2,051,275
------------
Net increase 86,342,470
============
</Table>
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS B (AT $1 PER SHARE) SHARES
Year ended October 31, 2008:
Shares sold 104,815,056
Shares issued to shareholders in
reinvestment of dividends 4,406,951
Shares redeemed (97,026,193)
-----------
Net increase in shares outstanding
before conversion 12,195,814
Shares converted form Class B (See
Note 1) (1,716,223)
-----------
Net increase 10,479,591
===========
Year ended October 31, 2007:
Shares sold 79,952,317
Shares issued to shareholders in
reinvestment of dividends 7,913,726
Shares redeemed (98,272,327)
-----------
Net decrease in shares outstanding
before conversion (10,406,284)
Shares reacquired upon conversion
into Class A (See Note 1) (2,051,274)
-----------
Net decrease (12,457,558)
===========
</Table>
<Table>
<Caption>
CLASS C (AT $1 PER SHARE) SHARES
Year ended October 31, 2008:
Shares sold 91,594,479
Shares issued to shareholders in
reinvestment of dividends 1,125,294
Shares redeemed (72,532,379)
-----------
Net increase 20,187,394
===========
Year ended October 31, 2007:
Shares sold 64,028,841
Shares issued to shareholders in
reinvestment of dividends 1,326,494
Shares redeemed (52,390,614)
-----------
Net increase 12,964,721
===========
</Table>
NOTE 7--MONEY MARKET GUARANTEE PROGRAM:
At a meeting held on October 3, 2008, the Fund's Board of Trustees approved the
Fund's participation in the U.S. Treasury Department's Temporary Money Market
Fund Guarantee Program (the "Program"). The Program seeks to guarantee the net
asset value of certain shares of participating money market funds as of
September 19, 2008. To the extent that funds are available in the Program, any
shares held by an investor in the Fund as of the close of business September 19,
2008 are insured against loss under the Program in the event that the Fund
liquidates and the per share value at the time of liquidation is less than $1
per share. Initially, the Program ran through December 18, 2008. On November 24,
2008, the Treasury Department announced that it would extend the Program through
at least April 30, 2009. At a meeting held on December 3, 2008, the Fund's Board
of Trustees approved the Fund's continued participation in this extension of the
Program.
The Program applies only to shareholders of record of the Fund on September 19,
2008. The number of shares covered by the Program will be the lesser of (a) the
number of shares owned by the shareholder on September 19, 2008, or (b) the
number of shares owned by the shareholder on the date on which a guarantee is
triggered under the Program. Any increase in the number of shares a shareholder
holds in the Fund after the close of business on September 19, 2008 will not be
guaranteed. If a shareholder closes his/her account with the Fund or a broker-
dealer, any future investment in the Fund will not be guaranteed. It is possible
that eligible shareholders would not receive $1.00 per share in the event that a
guarantee payment is triggered under the Program if claims made by the Fund and
any other participating money market funds exceed the amount of funds available
under the Program.
If during the time the Program is in effect, a shareholder transfers his or her
Fund account from one brokerage firm (the carrying firm) to another (the
receiving firm), the shareholder could lose the benefit of the guarantee upon
closure of the account with the carrying firm or upon transfer of the shares to
the receiving firm.
Participation in the initial three months of the Program required a payment to
the U.S. Department of the Treasury in the amount of 0.01% based on the net
asset value of the Fund as of September 19, 2008. Under the extension offered by
the U.S. Treasury on November 24, 2008, the guarantee remains in effect through
April 30, 2009 for an additional payment of 0.015% based upon the net asset
value of the Fund as of September 19, 2008. This expense is borne by the Fund
without regard to any expense limitation currently in effect for the Fund.
More information about the Program is available at http://www.ustreas.gov.
NOTE 8--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal
24 MainStay Money Market Fund
year beginning November 1, 2008, will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
mainstayinvestments.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Money Market Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2008, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year 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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Money Market Fund of The MainStay Funds as of October 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
26 MainStay Money Market Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Money Market Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management and
Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider
mainstayinvestments.com 27
of shareholder services, which has been recognized by independent third-parties
on numerous occasions. The Board noted the role that the MainStay Family of
Funds historically has played in serving the investment needs of New York Life
Insurance Company policyholders, who often maintain smaller account balances
than other retail investors. The Board acknowledged that it had approved NYLIM's
recommendation to create a new "Investor Class" of shares designed principally
to address the higher shareholder-servicing costs typically associated with
smaller shareholder accounts. The Board considered the experience of senior
personnel at NYLIM providing management and administrative services to the Fund,
as well as NYLIM's reputation and financial condition. The Board also reviewed
NYLIM's willingness to invest in personnel designed to benefit the Fund, and
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and MacKay
Shields' method for compensating portfolio managers. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio managers and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position
28 MainStay Money Market Fund
is important in order for NYLIM to continue to provide high-quality ongoing
services to the Fund and its shareholders. The Board noted, for example,
increased costs borne by NYLIM and its affiliates due to new and ongoing
regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
mainstayinvestments.com 29
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
30 MainStay Money Market Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 100.0% to arrive at the amount eligible for qualified
interest income.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330.
mainstayinvestments.com 31
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
32 MainStay Money Market Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 33
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
34 MainStay Money Market Fund
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 35
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
This page intentionally left blank
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO14628 (RECYCLE LOGO) MS308-08 MSMM11-12/08
12
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TAX FREE BOND FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TAX FREE BOND FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 16
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 22
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 30
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS 31
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 37
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 37
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 37
- ---------------------------------------------
TRUSTEES AND OFFICERS 38
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (11.40%) 0.13% 1.84%
Excluding sales charges (7.23) 1.06 2.31
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (11.35%) 0.14% 1.85%
Excluding sales charges (7.17) 1.07 2.32
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (11.92%) 0.46% 2.05%
Excluding sales charges (7.46) 0.80 2.05
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 4.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 0.50%. Class
C shares are sold with no initial sales charge, are subject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 0.50%. Performance figures reflect certain fee waivers and/or expense
limitations, without which total returns may have been lower. These fee
waivers and/or expense limitations are contractual and may be modified or
terminated only with the approval of
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------------
With sales charges (8.35%) 0.80% 2.05%
Excluding sales charges (7.46) 0.80 2.05
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- -----------------------------------------------------------------------------
Barclays Capital 3-15 Year Municipal Bond Index(3) 0.53% 3.07% 4.34%
Barclays Capital Municipal Bond Index(4) (3.30) 2.73 4.14
Average Lipper general municipal debt fund(5) (7.75) 1.23 2.69
</Table>
the Board of Trustees. The Manager may recoup the amount of certain
management fee waivers or expense reimbursements from the Fund pursuant to
the contract if such action does not cause the Fund to exceed existing
expense limitations and the recoupment is made within three years after the
year in which the Manager incurred the expense.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, includes the historical performance of Class B shares through February
27, 2008, adjusted for differences in certain contractual fees and expenses.
Unadjusted, the performance shown for Investor Class shares might have been
lower.
3. Barclays Capital has recently completed its acquisition of Lehman Brothers'
North American Investment Banking and Capital Markets businesses, and as part
of the transaction has changed the name of the index from "Lehman
Brothers(R)" to "Barclays Capital." The Barclays Capital 3-15 Year Municipal
Bond Index, an unmanaged index, is a market-value-weighted index of
investment grade fixed-rate municipal bonds with maturities of 2-17 years.
The index is frequently used as a general performance measure of tax-exempt
bonds with intermediate maturities. The index reflects reinvestment of all
distributions and changes in market prices. Results assume reinvestment of
all income and capital gains. The Barclays Capital 3-15 Municipal Bond Index
is considered to be the Fund's broad-based securities-market index for
comparison purposes. An investment cannot be made directly in an index.
4. The Barclays Capital Municipal Bond Index is an unmanaged index that consists
of approximately 15,000 municipal bonds that are rated Baa or better by
Moody's and have a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded.
Results assume reinvestment of all income and capital gains. An investment
cannot be made directly in an index.
5. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND GRAPHS
AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Tax Free Bond Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY TAX FREE BOND FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $930.00 $4.80 $1,020.20 $5.03
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $931.30 $4.27 $1,020.70 $4.47
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $929.60 $6.01 $1,018.90 $6.29
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $929.50 $6.01 $1,018.90 $6.29
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(0.99% for Investor Class, 0.88% for Class A and 1.24% for Class B and Class
C) multiplied by the average account value over the period, divided by 366
and multiplied by 184 (to reflect the one-half year period). The table above
represents actual expenses incurred during the one-half year period and does
not take into account the Fund's written expense limitation agreement.
mainstayinvestments.com 7
STATE COMPOSITION AS OF OCTOBER 31, 2008
<Table>
<Caption>
Illinois 15.8%
Ohio 10.0
Florida 9.5
Texas 9.0
New York 7.8
California 6.3
North Carolina 6.1
Puerto Rico 5.0
Massachusetts 4.2
Arizona 3.8
Maryland 3.3
South Carolina 2.2
Colorado 2.1
Louisiana 2.1
New Jersey 2.1
Nevada 1.9
Tennessee 1.9
Georgia 1.7
New Mexico 1.5
Delaware 1.2
West Virginia 0.8
Michigan 0.1
Short-Term Investments 0.4
Cash and Other Assets, Less
Liabilities 1.2
-----
100.0%
=====
</Table>
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Ohio State, Series A, 5.375%, due
8/1/19-8/1/20.
2. Puerto Rico Public Buildings Authority
Revenue Guaranteed Government
Facilities, Series I, 5.00%,
due 7/1/36.
3. Illinois State Toll Highway Authority,
Series A-1, 5.00%, due 1/1/26.
4. Golden State Tobacco Securitization
Corp., 5.00%,
due 6/1/45.
5. North Carolina Municipal Power Agency
N1, Catawba Electric Revenue, Series B,
6.50%, due 1/1/20.
6. Chicago, Illinois, Housing Authority
Capital Program Revenue, 5.00%, due
7/1/23.
7. Buckeye, Ohio, Tobacco Settlement
Financing Authority, 5.75%, due 6/1/34.
8. Maryland Health & Higher Educational
Facilities Authority Revenue, 5.00%, due
7/1/14-7/1/18.
9. Scottsdale Arizona Industrial
Development Authority Hospital Revenue,
Scottsdale Healthcare, 5.00%,
due 9/1/17-9/1/18.
10. Massachusetts State Health & Educational
Facilities Authority Revenue, Caregroup,
Series E2, 5.00%,
due 7/1/17-7/1/18.
</Table>
8 MainStay Tax Free Bond Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS CHRISTINE TODD, CFA, AND MICHAEL
FALOON, CFA, FRM, OF STANDISH MELLON ASSET MANAGEMENT COMPANY LLC, THE FUND'S
SUBADVISOR.
HOW DID MAINSTAY TAX FREE BOND FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Tax Free Bond Fund returned -7.23% for
Investor Class shares,(1) -7.17% for Class A shares, -7.46% for Class B shares
and -7.46% for Class C shares for the 12 months ended October 31, 2008. Over the
same period, all share classes outperformed the -7.75% return of the average
Lipper(2) general municipal debt fund. All share classes underperformed the
- -3.30% return of the Barclays Capital Municipal Bond Index(3) and the 0.53%
return of the Barclays Capital 3-15 Year Municipal Index(4) for the 12 months
ended October 31, 2008. The Fund changed its benchmark on September 29, 2008,
and the Barclays Capital 3-15 Year Municipal Index is now the Fund's broad-based
securities-market index. See pages 5 and 6 for Fund returns with sales charges.
WERE THERE OTHER CHANGES IN THE FUND'S PORTFOLIO MANAGEMENT OR MEASUREMENT
DURING THE REPORTING PERIOD?
Yes. Effective September 29, 2008, Standish Mellon Asset Management Company LLC
became the Fund's Subadvisor. Christine Todd, CFA, and Michael Faloon, CFA, FRM,
became the Fund's portfolio managers. At that time, the Fund adopted the Lehman
Brothers(R) 3-15 Year Municipal Index as its primary benchmark because we
believed that this Index more accurately reflected the Fund's investment style.
The Index has since been renamed the Barclays Capital 3-15 Year Municipal Index.
WHAT FACTORS CONTRIBUTED TO THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
Even in a broadly declining market, some sectors and securities performed better
than others. A sizable allocation to higher-quality bonds was the primary reason
for the Fund's outperformance relative to its peers. During the reporting
period, investors flocked to higher-quality bonds in what is known as a flight
to quality. The Fund underperformed the Barclays Capital 3-15 Year Municipal
Index primarily because the Fund had greater exposure to longer-maturity
securities. Longer-term municipal bonds provided incrementally higher yields
than shorter-term municipal bonds during the reporting period. However, the
negative effect of having a longer duration in a rising interest-rate
environment overcame the yield advantage.
WHAT FACTORS INFLUENCED THE MUNICIPAL BOND MARKET AS A WHOLE DURING THE
REPORTING PERIOD?
The municipal bond market experienced a dramatic increase in volatility and a
severe lack of liquidity during the reporting period. These market dynamics were
primarily due to the subprime mortgage crisis, which disrupted the flow of
capital across the entire banking system. Liquidity from traditional sources,
such as property and casualty companies, mutual funds and leveraged buyers,
dried up. Support was hard to find from Wall Street, as several consolidations
and outright failures and bankruptcies eliminated important market participants.
Retail investors increased demand as yields rose. Their bid, however, was
overshadowed by massive sales from leveraged participants who were forced to
leave the market as borrowing costs spiked and capital constraints escalated.
During the reporting period, heightened risk aversion drove investors toward the
highest-quality and most liquid sectors, namely U.S. Treasury-backed prerefunded
bonds(5) and highly rated general obligation bonds. Lower-rated investment-grade
bonds materially underperformed.
Monoline bond insurers suffered downgrades because of their substantial exposure
to subprime mortgage debt. By the end of the reporting period, all seasoned
monoline insurers had lost their AAA
The values of debt securities fluctuate depending on various factors including
interest rates, issuer creditworthiness, market conditions and maturities.
Industrial development, pollution control and revenue bonds are generally not
secured by the taxing power of the municipality, but are secured by revenues
paid by the industrial user. This means that if the industrial user cannot repay
principal and/or interest on the bonds, the Fund may lose money. The Fund may
invest in derivatives, which may increase the volatility of the Fund's net asset
value and may result in a loss to the Fund.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 6 for more information on Lipper Inc.
3. See footnote on page 6 for more information on the Barclays Capital Municipal
Bond Index.
4. See footnote on page 6 for more information on the Barclays Capital 3-15 Year
Municipal Bond Index.
5. Prerefunding or advance refunding is a procedure in which a bond issuer
floats a second bond at a lower interest rate, and the proceeds from the sale
of the second bond are safely invested, usually in Treasury securities, which
in turn, are held in escrow collateralizing the first bond. Given that the
advance refunded bonds become, essentially, fully tax-exempt U.S. Treasury
securities and no longer represent the credit risk profile of the original
borrower, they often increase in value--sometimes significantly.
mainstayinvestments.com 9
ratings or had a negative outlook from the ratings agencies. The demise of AAA-
rated insurers caused the market share of AAA-rated insured bonds to slide from
nearly half of all tax-free securities at the beginning of the reporting period
to approximately 10% at the end of October 2008.
Triggered by the downgrades of the AAA-rated monoline insurer wraps, the auction
rate securities (ARS)(6) market virtually collapsed. Tax-exempt auctions began
to fail as the AAA-rating backstop fell into question. Dealers that had
historically supported the auction markets backed away, and yields spiked to
sustain liquidity. Municipal issuers were paying as much as a 20% premium on
certain securities and looked to refinance ARS with term bonds. The new supply
from ARS that was restructured to long-term fixed-rate debt weighed heavily on
the municipal bond market. A backlog of delayed new issues began to build as
issuers waited for more favorable market conditions.
WHAT WAS THE FUND'S DURATION STRATEGY DURING THE REPORTING PERIOD?
The Fund's duration was generally longer than that of the Barclays Capital 3-15
Municipal Index during the reporting period. Duration(7) positioning was a
significant negative contributor to the Fund's performance for the reporting
period, particularly during the turmoil in February and September.
WHAT POSITIONING DECISIONS AFFECTED THE FUND'S PERFORMANCE?
During the reporting period, long-term municipal bond yields rose significantly
more than shorter-term municipal bond yields. The resultant yield curve
steepening was driven not only by the Federal Open Market Committee's (FOMC's)
aggressive reduction in short-term interest rates, but also by a substantial
increase in long-term municipal-bond supply in the secondary market. Selling
pressure on long-term municipals stemmed largely from leveraged strategies
unwinding long-term bond positions in the face of higher financing rates and
devalued securities.
Cheaper yields prompted the Fund to purchase longer-term bonds and callable
bonds. When these market conditions persisted, however, the purchases detracted
from the Fund's returns.
When lower-quality bonds lagged considerably, the Fund added to positions in
securities in the hospital and industrial development sectors. Unfortunately,
these two sectors sold off during the reporting period, which detracted from
results. The Fund's overweight positions in hospital and industrial development
bonds--as well as in tobacco securitization credits--also detracted from
performance, as illiquid market conditions and risk aversion materially affected
these sectors. The Fund was also hurt by sales of high-quality paper that were
prompted by tighter credit spreads.
On the positive side, the Fund's sizable weighting among prerefunded bonds,
which are backed by U.S. Treasurys, was a strong contributor to performance. The
flight to quality, driven by the growing and increasingly severe credit crisis,
also benefited the Fund, since the Fund primarily held highly rated municipal
bonds. During the reporting period, we sold several California- and New
York-based and Goldman Sachs-backed bonds. These sales also contributed
positively to the Fund's returns, since these issues later sold off. Underweight
positions in California and New York also helped the Fund's relative
performance, since these states were particularly affected by economic
deterioration.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
As mentioned, the Fund sold several California- and New York-based credits.
Further, the Fund cut its exposure to Goldman Sachs in half and sold its
position in Liberty NY Development Corp., which financed the company's new
headquarters in lower Manhattan. These sales protected the Fund from credit and
price deterioration related to the obligors.
Ohio general-obligation bonds offered good yield but suffered disproportionately
from a weak regional economy, so we trimmed the Fund's position in these issues
as well.
After a market disruption of February 2008, the Fund added a position in Banner
Health. Banner Health is a hospital system that we believe to be creditworthy,
but it suffered from declining valuations in the health care sector.
WERE THERE ANY SIGNIFICANT WEIGHTING CHANGES DURING THE REPORTING PERIOD?
We added to the Fund's health care exposure during the reporting period because
these relatively stable credits were trading at increasingly cheaper valuations.
We believe that with careful research and security selection, health care
credits can offer excess
6. Auction rate securities are securities sold through a dutch auction, a system
in which the price is lowered until the entire issue can be sold. As prices
decline, yields on debt securities typically increase.
7. Duration is a measure of the price sensitivity of a fixed-income investment
to changes in interest rates. Duration is expressed as a number of years and
is considered a more accurate sensitivity gauge than average maturity.
10 MainStay Tax Free Bond Fund
yield and strong fundamentals. We also marginally increased the Fund's
allocation to the industrial development sector.
During the reporting period, we decreased the Fund's exposure to water and sewer
revenue bonds, transportation bonds and Texas school district credits.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2008, the Fund was overweight relative to the Barclays Capital
3-15 Year Municipal Index in health care, housing and industrial development
bonds. These sectors were all laggards during the flight to quality and
liquidity in the marketplace. On the same date, the Fund was underweight in
transportation, special tax and water revenue bonds. These sectors tended to
fare better in a stressed market environment.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2008
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MUNICIPAL BONDS 98.4%+
- ----------------------------------------------------------------
ARIZONA 3.8%
Arizona Health Facilities
Authority Revenue, Banner
Health
Series A
5.00%, due 1/1/19 $ 1,500,000 $ 1,414,170
V Scottsdale Arizona
Industrial Development
Authority Hospital Revenue,
Scottsdale Healthcare
5.00%, due 9/1/17 4,720,000 4,395,642
5.00%, due 9/1/18 1,440,000 1,317,744
-------------
7,127,556
-------------
CALIFORNIA 6.3%
California State Office of
the
State Treasurer
5.00%, due 8/1/25 5,000,000 4,738,700
California State Various
Purposes
5.25%, due 4/1/34 5,000 4,670
V Golden State Tobacco
Securitization Corp.
5.00%, due 6/1/45 10,000,000 7,222,500
-------------
11,965,870
-------------
COLORADO 2.1%
Denver, Colorado City &
County
Airport Revenue
Series A2
5.25%, due 11/15/32 (a)(b) 4,000,000 4,024,360
-------------
DELAWARE 1.2%
Delaware State Economic
Development Authority
Revenue Pollution Control,
Delmarva Power
Series C, Insured: AMBAC
4.90%, due 5/1/26 (a)(c) 2,250,000 2,262,825
-------------
FLORIDA 9.5%
Florida Hurricane Catastrophe
Fund, Florida Finance Corp.
Revenue
Series A
5.00%, due 7/1/14 2,000,000 2,091,120
Highlands County Florida
Health Facilities Authority
Revenue Hospital, Adventist
Health Systems
Series D
5.375%, due 11/15/35 (d) 4,500,000 4,817,925
Hillsborough County Florida
Industrial Development
Authority Hospital Revenue,
Tampa General
Hospital Project
5.25%, due 10/1/41 6,000,000 4,217,220
Miami-Dade County Florida
Solid Waste System Revenue
Insured: MBIA
5.00%, due 10/1/19 (e) 1,735,000 1,689,109
South Florida Water
Management District,
Insured: AMBAC
5.00%, due 10/1/20 (c) 5,245,000 5,209,911
-------------
18,025,285
-------------
GEORGIA 1.7%
Monroe County, Georgia
Development Authority,
Oglethorpe Power Corp.
Series B
4.625%, due 1/1/36 (a) 3,250,000 3,287,440
-------------
ILLINOIS 15.8%
Chicago, Illinois
Series A
5.25%, due 1/1/33 3,000,000 2,816,340
V Chicago, Illinois Housing
Authority Capital Program
Revenue
Insured: FSA
5.00%, due 7/1/23 (f) 7,100,000 6,842,128
Chicago, Illinois Waterworks
Revenue Insured: FGIC
6.50%, due 11/1/15 (g) 3,005,000 3,376,478
Illinois Health Facilities
Authority Revenue, Lake
Forest Hospital
Series A
5.75%, due 7/1/29 2,000,000 1,754,460
Illinois State Sales Tax
Revenue
Second Series, Insured:
FGIC
5.50%, due 6/15/17 (g) 4,000,000 4,298,720
V Illinois State Toll
Highway Authority
Series A-1, Insured: FSA
5.00%, due 1/1/26 (f) 7,000,000 7,551,390
Kane McHenry Cook & De Kalb
Counties Illinois Unit
School District No. 300
Insured: XLCA
5.00%, due 12/1/20 (h) 3,500,000 3,336,445
-------------
29,975,961
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
Among the Fund's 10 largest holdings, as of October 31, 2008, excluding short-
term investments. May be subject to change daily.
12 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MUNICIPAL BONDS (CONTINUED)
LOUISIANA 2.1%
State of Louisiana Offshore
Terminal Authority
Deepwater Port Revenue
Series C
5.25%, due 9/1/16 $ 3,970,000 $ 3,963,648
-------------
MARYLAND 3.3%
V Maryland Health & Higher
Educational Facilities
Authority Revenue
5.00%, due 7/1/14 1,845,000 1,844,428
5.00%, due 7/1/16 1,345,000 1,316,849
5.00%, due 7/1/17 1,180,000 1,142,039
5.00%, due 7/1/18 2,060,000 1,965,570
-------------
6,268,886
-------------
MASSACHUSETTS 4.2%
Massachusetts Bay
Transportation Authority
Revenue Assessment
Series A
5.75%, due 7/1/18 (d) 210,000 218,093
V Massachusetts State Health
& Educational Facilities
Authority Revenue,
Caregroup
Series E2
5.00%, due 7/1/17 3,000,000 2,646,840
Series E2
5.00%, due 7/1/18 3,500,000 3,020,535
Massachusetts State Health &
Educational Facilities
Authority Revenue,
Massachusetts Institute of
Technology
Series A
5.00%, due 7/1/19 500,000 520,295
Series A
5.00%, due 7/1/38 1,500,000 1,452,585
-------------
7,858,348
-------------
MICHIGAN 0.1%
Michigan Tobacco Settlement
Finance Authority
6.00%, due 6/1/34 250,000 170,828
-------------
NEVADA 1.9%
Clark County Nevada Passenger
Facility Charge Revenue,
Las Vegas-McCarran
International Airport
Series A-2, Insured: AMBAC
5.00%, due 7/1/26 (c) 4,000,000 3,612,000
-------------
NEW JERSEY 2.1%
New Jersey State Trust Fund
Transportation Authority
System
Series C, Insured: FSA
5.50%, due 12/15/17 (f) 3,810,000 4,060,850
-------------
NEW MEXICO 1.5%
New Mexico Finance Authority
State Transportation
Revenue
Series A, Insured: MBIA
5.00%, due 6/15/22 (e) 2,750,000 2,763,228
-------------
NEW YORK 7.8%
Metropolitan Transportation
Authority of New York
Revenue
5.00%, due 11/15/30 (a) 5,000,000 5,148,150
New York City Industrial
Development Agency Revenue
Yankee Stadium
Insured: FGIC
5.00%, due 3/1/31 (g) 1,000,000 870,010
New York State Dormitory
Authority Lease Revenue
Court Facilities
City of New York
7.375%, due 5/15/10 1,375,000 1,458,655
7.50%, due 5/15/11 1,740,000 1,839,023
New York State Dormitory
Authority Revenue
Series A, Insured: MBIA
6.00%, due 7/1/19 (e) 3,700,000 4,054,053
Series B
7.50%, due 5/15/11 (d) 1,250,000 1,363,438
New York State Environmental
Facilities Corp. Pollution
Control Revenue, State
Water Revolving Fund
Series A
7.50%, due 6/15/12 95,000 98,745
-------------
14,832,074
-------------
NORTH CAROLINA 6.1%
North Carolina Eastern
Municipal Power Agency
Systems Revenue
Series A
5.50%, due 1/1/12 2,000,000 2,047,620
Series D
6.75%, due 1/1/26 2,000,000 2,004,920
North Carolina Housing
Finance Agency Home
Ownership
Series 13-A
4.25%, due 1/1/28 (b) 440,000 405,253
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MUNICIPAL BONDS (CONTINUED)
NORTH CAROLINA (CONTINUED)
V North Carolina Municipal
Power Agency N1, Catawba
Electric Revenue
Series B
6.50%, due 1/1/20 $ 7,000,000 $ 7,110,530
-------------
11,568,323
-------------
OHIO 10.0%
V Buckeye, Ohio, Tobacco
Settlement Financing
Authority
5.75%, due 6/1/34 9,750,000 6,493,500
Lorain County Ohio Hospital
Revenue, Catholic
Healthcare
5.375%, due 10/1/30 2,300,000 2,066,504
V Ohio State
Series A
5.375%, due 8/1/19 5,000,000 5,188,100
Series A
5.375%, due 8/1/20 5,000,000 5,120,050
-------------
18,868,154
-------------
PUERTO RICO 5.0%
Puerto Rico Commonwealth
Infrastructure Financing
Special Authority
Series A
5.50%, due 10/1/17 1,500,000 1,548,510
V Puerto Rico Public
Buildings Authority Revenue
Guaranteed Government
Facilities
Series I
5.00%, due 7/1/36 10,000,000 8,009,000
-------------
9,557,510
-------------
SOUTH CAROLINA 2.2%
South Carolina Jobs-Economic
Development Authority/
Economic Development
Revenue, Bon Secours-St.
Francis Medical Center
Series A
5.625%, due 11/15/30 935,000 1,021,917
Series B
5.625%, due 11/15/30 3,565,000 3,043,120
-------------
4,065,037
-------------
TENNESSEE 1.9%
Tennessee Energy Acquisition
Corp.,
Gas Revenue
Series A
5.25%, due 9/1/24 5,000,000 3,603,800
-------------
TEXAS 9.0%
Dallas, Texas Area Rapid
Transit Sales Tax Revenue
Insured: AMBAC
5.00%, due 12/1/16 (c) 1,500,000 1,583,370
Dallas-Fort Worth, Texas
International Airport
Facilities Improvement
Revenue
Series A, Insured: FGIC
6.00%, due 11/1/28 (b)(g) 4,000,000 3,572,880
El Paso, Texas
Insured: FGIC
5.00%, due 8/15/19 (g) 3,815,000 3,877,947
Jefferson County Texas Health
Facility Development Corp.,
Texas Baptist Hospitals
Insured: AMBAC
5.20%, due 8/15/21 (c) 1,075,000 910,622
San Antonio, Texas Electric &
Gas (Escrow Shares)
Series 2000
5.00%, due 2/1/17 (i) 5,040,000 5,227,186
Texas State College Student
Loan
5.50%, due 8/1/10 (b) 1,760,000 1,808,365
-------------
16,980,370
-------------
WEST VIRGINIA 0.8%
Kanawha Mercer Nicholas
Counties West Virginia
Single Family Mortgage
Revenue
(zero coupon), due 2/1/15
(d) 2,230,000 1,599,445
-------------
Total Municipal Bonds
(Cost $202,725,995) 186,441,798
-------------
SHORT-TERM INVESTMENTS 0.4%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 0.0%++
MASSACHUSETTS
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$18,224 (Collateralized
by a Federal Home Loan Bank
Security with a rate of
3.625% and a maturity date
of 7/1/11, with a Principal
Amount of $20,000 and a
Market Value of $20,325) 18,224 18,224
-------------
Total Repurchase Agreement
(Cost $18,224) 18,224
-------------
</Table>
14 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENTS (CONTINUED)
U.S. GOVERNMENT 0.4%
UNITED STATES
United States Treasury Bill
0.854%, due 3/26/09 (j) $ 800,000 $ 797,278
-------------
Total U.S. Government
(Cost $797,278) 797,278
-------------
Total Short-Term Investments
(Cost $815,502) 815,502
-------------
Total Investments
(Cost $203,541,497) (k) 98.8% 187,257,300
Cash and Other Assets, Less
Liabilities 1.2 2,333,189
----- ------------
Net Assets 100.0% $ 189,590,489
===== ============
</Table>
<Table>
+++ On a daily basis NYLIM confirms that the
value of the Fund's liquid assets (liquid
portfolio securities and cash) is
sufficient to cover its potential senior
securities (e.g., futures, swaps,
options).
++ Less than one-tenth of a percent.
(a) Variable rate securities that may be
tendered back to the issuer at any time
prior to maturity at par. Rate shown is
the rate in effect at October 31, 2008.
(b) Interest on these securities is subject
to alternative minimum tax.
(c) AMBAC--Ambac Assurance Corp.
(d) Pre-refunding Security--issuer has or
will issue new bonds and use the proceeds
to purchase Treasury securities that
mature at or near the same date as the
original issue's call date.
(e) MBIA--MBIA Insurance Corp.
(f) FSA--Financial Security Assurance, Inc.
(g) FGIC--Financial Guaranty Insurance Co.
(h) XLCA--XL Capital Assurance, Inc.
(i) Non-income producing security.
(j) Interest rate presented is yield to
maturity.
(k) At October 31, 2008, cost is $203,541,497
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 2,277,110
Gross unrealized depreciation (18,561,307)
------------
Net unrealized depreciation $(16,284,197)
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 15
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $203,541,497) $187,257,300
Receivables:
Interest 3,378,142
Fund shares sold 33,635
Other assets 28,587
------------
Total assets 190,697,664
------------
LIABILITIES:
Payables:
Open swap agreements, at value 378,600
Fund shares redeemed 245,515
Manager (See Note 3) 68,537
NYLIFE Distributors (See Note 3) 48,296
Shareholder communication 46,153
Transfer agent (See Note 3) 35,398
Professional fees 30,461
Custodian 21,298
Trustees 609
Accrued expenses 3,934
Dividend payable 228,374
------------
Total liabilities 1,107,175
------------
Net assets $189,590,489
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 224,388
Additional paid-in capital 214,930,649
------------
215,155,037
Accumulated undistributed net
investment income 1,339,988
Accumulated net realized loss on
investments, futures transactions
and written option transactions (10,241,739)
Net unrealized depreciation on
investments and swap contracts (16,662,797)
------------
Net assets $189,590,489
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 21,449,877
============
Shares of beneficial interest
outstanding 2,529,602
============
Net asset value per share
outstanding $ 8.48
Maximum sales charge (4.50% of
offering price) 0.40
------------
Maximum offering price per share
outstanding $ 8.88
============
CLASS A
Net assets applicable to
outstanding shares $136,781,104
============
Shares of beneficial interest
outstanding 16,195,983
============
Net asset value per share
outstanding $ 8.45
Maximum sales charge (4.50% of
offering price) 0.40
------------
Maximum offering price per share
outstanding $ 8.85
============
CLASS B
Net assets applicable to
outstanding shares $ 23,934,989
============
Shares of beneficial interest
outstanding 2,834,268
============
Net asset value and offering price
per share outstanding $ 8.44
============
CLASS C
Net assets applicable to
outstanding shares $ 7,424,519
============
Shares of beneficial interest
outstanding 878,992
============
Net asset value and offering price
per share outstanding $ 8.45
============
</Table>
16 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 10,331,840
------------
EXPENSES:
Manager (See Note 3) 1,294,770
Distribution/Service--Investor
Class (See Note 3) 36,163
Distribution/Service--Class A
(See Note 3) 408,597
Service--Class B (See Note 3) 72,077
Service--Class C (See Note 3) 18,963
Transfer agent--Investor Class
(See Note 3) 32,503
Transfer agent--Class A (See Note
3) 118,485
Transfer agent--Classes B and C
(See Note 3) 62,535
Distribution--Class B (See Note
3) 71,523
Distribution--Class C (See Note
3) 18,790
Professional fees 58,246
Shareholder communication 57,668
Registration 50,444
Recordkeeping (a) 36,248
Custodian 25,478
Trustees 6,963
Miscellaneous 16,841
------------
Total expenses before waiver 2,386,294
Expense waiver from Manager (See
Note 3) (366,805)
------------
Net expenses 2,019,489
------------
Net investment income 8,312,351
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND SWAP CONTRACTS TRANSACTIONS:
Net realized gain (loss) on:
Security transactions (453,129)
Futures transactions (1,277,417)
------------
Net realized loss on investments,
futures transactions and written
option transactions (1,730,546)
------------
Net change in unrealized
appreciation (depreciation) on:
Security transactions (21,539,848)
Swap contracts (378,600)
Futures contracts 83,981
------------
Net change in unrealized
appreciation on investments, swap
contracts and futures contracts (21,834,467)
------------
Net realized and unrealized loss on
investments, swap contracts,
futures transactions and written
option transactions (23,565,013)
------------
Net decrease in net assets
resulting from operations $(15,252,662)
============
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 17
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 8,312,351 $ 9,282,521
Net realized gain (loss) on
investments, futures transactions and
written option transactions (1,730,546) 1,047,732
Net change in unrealized depreciation
on investments, swap contracts and
futures contracts (21,834,467) (7,721,404)
-------------------------------------------
Net increase (decrease) in net assets
resulting from operations (15,252,662) 2,608,849
-------------------------------------------
Dividends to shareholders:
From net investment income:
Investor Class (546,593) --
Class A (6,574,648) (7,661,668)
Class B (1,054,404) (1,423,809)
Class C (281,903) (236,790)
-------------------------------------------
Total dividends to shareholders (8,457,548) (9,322,267)
-------------------------------------------
Capital share transactions:
Net proceeds from sale of shares 15,521,438 11,195,604
Net asset value of shares issued to
shareholders in reinvestment of
dividends 5,779,899 6,365,375
Cost of shares redeemed (35,884,106) (35,035,087)
-------------------------------------------
Decrease in net assets derived from
capital share transactions (14,582,769) (17,474,108)
-------------------------------------------
Net decrease in net assets (38,292,979) (24,187,526)
NET ASSETS:
Beginning of year 227,883,468 252,070,994
-------------------------------------------
End of year $189,590,489 $227,883,468
===========================================
Accumulated undistributed (distributions
in excess of) net investment income at
end of year $ 1,339,988 $ (80,939)
===========================================
</Table>
18 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------
FEBRUARY 28,
2008** CLASS A
THROUGH ---------------------------------------------------------------------
OCTOBER 31, YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 9.07 $ 9.48 $ 9.75 $ 9.62 $ 9.84 $ 9.75
------- -------- -------- -------- ------- -------
Net investment income 0.25 0.36 0.38 0.38 (a) 0.38 0.38
Net realized and
unrealized gain
(loss) on
investments (0.60) (1.02) (0.27) 0.13 (e) (0.21) 0.07
------- -------- -------- -------- ------- -------
Total from investment
operations (0.35) (0.66) 0.11 0.51 0.17 0.45
------- -------- -------- -------- ------- -------
Less dividends:
From net investment
income (0.24) (0.37) (0.38) (0.38) (0.39) (0.36)
------- -------- -------- -------- ------- -------
Net asset value at
end of period $ 8.48 $ 8.45 $ 9.48 $ 9.75 $ 9.62 $ 9.84
======= ======== ======== ======== ======= =======
Total investment
return (b)(f) (4.03%)(c) (7.17%) 1.12% 5.43%(d)(e) 1.77% 4.71%
Ratios (to average
net
assets)/Supplemen-
tal Data:
Net investment
income 3.92% ++ 3.94% 3.88% 3.93% 3.92% 3.88%
Net expenses 0.99% ++ 0.88% 0.89% 0.89% 0.89% 1.02%
Expenses (before
waiver/reim-
bursement) 1.21% ++ 1.04% 1.06% 1.09%(d) 1.06% 1.06%
Portfolio turnover
rate 90% 90% 59% 55% 26% 18%
Net assets at end of
period (in 000's) $21,450 $136,781 $189,210 $200,593 $38,508 $37,936
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 9.48 $ 9.75 $ 9.62 $ 9.85 $ 9.75
------ ------ ------ ------ ------
Net investment income 0.34 0.35 0.36 (a) 0.36 0.36
Net realized and
unrealized gain
(loss) on
investments (1.03) (0.27) 0.13 (e) (0.22) 0.08
------ ------ ------ ------ ------
Total from investment
operations (0.69) 0.08 0.49 0.14 0.44
------ ------ ------ ------ ------
Less dividends:
From net investment
income (0.34) (0.35) (0.36) (0.37) (0.34)
------ ------ ------ ------ ------
Net asset value at
end of period $ 8.45 $ 9.48 $ 9.75 $ 9.62 $ 9.85
====== ====== ====== ====== ======
Total investment
return (b)(f) (7.46%) 0.86% 5.16%(d)(e) 1.41% 4.55%
Ratios (to average
net
assets)/Supplemen-
tal Data:
Net investment
income 3.64% 3.63% 3.68% 3.67% 3.63%
Net expenses 1.20% 1.14% 1.14% 1.14% 1.27%
Expenses (before
waiver/reim-
bursement) 1.40% 1.31% 1.34%(d) 1.31% 1.31%
Portfolio turnover
rate 90% 59% 55% 26% 18%
Net assets at end of
period (in 000's) $7,425 $6,752 $5,949 $6,231 $5,992
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charge and assumes the
reinvestments of dividends and distributions.
(c) Total return is not annualized.
(d) Includes nonrecurring reimbursements from Manager for professional fees. The
effect on total return was less than one-hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
0.01% per share on net realized gains on investments and the effect on total
investment return was less than 0.01%.
(f) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
20 MainStay Tax Free Bond Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- -----------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------
2008 2007 2006 2005 2004
$ 9.48 $ 9.75 $ 9.62 $ 9.85 $ 9.75
------- ------- ------- -------- --------
0.33 0.34 0.36 (a) 0.36 0.36
(1.03) (0.26) 0.13 (e) (0.22) 0.08
------- ------- ------- -------- --------
(0.70) 0.08 0.49 0.14 0.44
------- ------- ------- -------- --------
(0.34) (0.35) (0.36) (0.37) (0.34)
------- ------- ------- -------- --------
$ 8.44 $ 9.48 $ 9.75 $ 9.62 $ 9.85
======= ======= ======= ======== ========
(7.46%) 0.86% 5.16%(d)(e) 1.41% 4.55%
3.63% 3.63% 3.68% 3.67% 3.63%
1.20% 1.14% 1.14% 1.14% 1.27%
1.40% 1.31% 1.34%(d) 1.31% 1.31%
90% 59% 55% 26% 18%
$23,935 $31,921 $45,529 $228,206 $261,626
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Tax Free Bond Fund (the "Fund"), a diversified fund.
The Fund currently offers four classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Investor Class shares commenced on February 28,
2008. Investor Class and Class A shares are offered at net asset value per share
plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Investor Class and
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and a 1% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. Depending upon eligibility, Class B shares convert to either
Investor Class or Class A shares eight years after the date they were purchased.
Additionally, depending upon eligibility, Investor Class shares may convert to
Class A shares and Class A shares may convert to Investor Class shares. The four
classes of shares have the same voting (except for issues that relate solely to
one class), dividend, liquidation and other rights and bear the same conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Investor Class and Class A shares under a distribution plan pursuant
to Rule 12b-1 under the 1940 Act.
The Fund's investment objective is to provide a high level of current income
free from regular federal income tax, consistent with the preservation of
capital.
The ability of issuers of debt securities held by the Fund to meet their
obligations may be affected by economic developments in a specific country,
industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or broker selected by the Fund's Manager (as defined in Note 3(A))
in consultation with the Fund's Subadvisor, if any, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques, if
such prices are deemed by the Fund's Manager, in consultation with the Fund's
Subadvisor, if any, to be representative of market values, at the regular close
of trading of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("valuation date"). Futures contracts are
valued at the last posted settlement price on the market where such futures are
primarily traded.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor ,as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund did not hold
securities that were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in
22 MainStay Tax Free Bond Fund
a particular jurisdiction), and requires certain expanded tax disclosures. The
Interpretation became effective for the Fund's 2008 fiscal year, and was applied
to all open tax years as of the date of effectiveness. The Manager, as defined
in Note 3(A), determined that the adoption of the Interpretation did not have an
impact on the Fund's financial statements upon adoption. The Manager continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws
and regulations and interpretations thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income monthly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at net asset value, unless the shareholder
elects otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued as earned using the effective interest rate method. Discounts and
premiums on securities purchased, other than short-term securities, for the Fund
are accreted and amortized, respectively, on the effective interest rate method
over the life of the respective securities or, in the case of a callable
security, over the period to the first date of call. Discounts and premiums on
short-term securities are accreted and amortized, respectively, on the straight-
line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options that expire are
treated as realized gains. Premiums received from writing options that are
exercised or are canceled in closing purchase transactions are added to the
proceeds or netted against the amount paid on the transaction to determine the
realized gain or loss. By writing a covered call option, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of a decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in return for the premium
on the option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the obligation
as the writer continues, has retained the risk of loss should the price of the
underlying security decline. After writing a put option, the Fund may incur a
loss equal to the difference between the exercise price of the option and the
sum of the market value of the underlying security plus the premium received
from the sale of the option.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security or foreign currency it anticipates purchasing. The Fund may purchase
put options on its securities or foreign currencies to protect against a decline
in the value of the security or foreign currency or to close out covered written
put positions. The Fund may also purchase options to seek to enhance returns.
Risks may arise from an imperfect correlation between the change in market value
of the securities or foreign currencies held by the Fund and the prices of
options relating to the securities or foreign currencies purchased or sold by
the Fund and from the possible lack of a liquid secondary market for an option.
The maximum exposure to loss for any purchased option is limited to the premium
initially paid for the option. (See Note 5.)
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(H) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(I) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date and
price, or to make or receive a cash payment based on the value of a securities
index. During the period the futures contract is open, changes in the value of
the contract are recognized as unrealized gains or losses by "marking to market"
such contract on a daily basis to reflect the market value of the contract at
the end of each day's trading. The Fund agrees to receive from or pay to the
broker an amount of cash equal to the daily fluctuation in the value of the
contract. Such receipts or payments are known as "variation margin". When the
futures contract is closed, the Fund records a realized gain or loss equal to
the difference between the proceeds from (or cost of) the closing transaction
and the Fund's basis in the contract. The Fund invests in U.S. Treasury futures
contracts to gain full exposure to changes in bond market prices to fulfill its
investment objective. The Fund may enter into contracts for the future delivery
of debt securities in order to attempt to protect against the effect of adverse
changes in interest rates, to lengthen or shorten the average maturity or
duration of the Fund's portfolio or to try to enhance the Fund's returns. The
Fund's investment in futures contracts and other derivatives may increase the
volatility of the Fund's net asset value and may result in a loss to the Fund.
The use of futures contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the Statement of Assets and
Liabilities. The contract or notional amounts and variation margin reflect the
extent of the Fund's involvement in open futures positions. Risks arise from the
possible imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets, and the possible inability of
counterparties to meet the terms of their contracts. However, the Fund's
activities in futures contracts are conducted through regulated exchanges which
minimize counterparty credit risks.
(J) SWAP AGREEMENTS. The Fund may enter into credit default, interest rate,
index and currency exchange rate swap agreements ("swaps) for purposes of
attempting to obtain a particular desired return at a lower cost to the Fund
than if the Fund had invested directly in an instrument that yielded the desired
return or for other portfolio management purposes. In a standard swaps
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the parties
are calculated with respect to a notional amount. Credit default swaps are
contracts whereby one party makes periodic payments to a counterparty in
exchange for the right to receive a specified return in the event of a default
by a third party on its obligation. Credit default swaps may be used to provide
a measure of protection against defaults of sovereign or corporate issuers. In
connection with these agreements, cash or securities may be set aside as
collateral in accordance with the terms of the swap agreement.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an agreed-
upon level, while the seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed-upon
level. An interest rate collar combines elements of buying a cap and selling a
floor.
The Fund bears the risk of loss of the amount expected to be received under a
swap agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The Fund may be able to eliminate its exposure under a swap
agreement either by assignment or other disposition, or by entering into an
offsetting swap agreement with the same party or a similarly creditworthy party.
Swaps are marked to market daily based upon quotations from market makers and
vendors and the change in value, if any, is recorded as unrealized gain or loss.
Payments received or made on swap contracts are recorded as realized gain or
loss. Gains or losses are realized upon early termination of the swap
agreements. These financial instruments are not actively traded on financial
markets. Entering into these agreements involves elements of credit, market and
documentation risk in excess of the amounts recognized on the Statement of
Assets and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the agreements may
default on its obligation to perform or disagree as to the meaning of the
contractual terms in the agreements and that there may be unfavorable changes in
interest rates or the price of the index or security underlying these
transactions.
(K) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
24 MainStay Tax Free Bond Fund
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. Standish
Mellon Asset Management Company LLC (the "Subadvisor"), is responsible for the
day-to-day portfolio management of the Fund. Pursuant to the terms of a
subadvisory agreement ("Subadvisory Agreement") between NYLIM and the
Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.60% on assets up to $500 million, 0.575% on assets from
$500 million to $1.0 billion and 0.55% on assets in excess of $1.0 billion.
NYLIM has contractually agreed to waive its management fee to 0.45% on assets up
to $500 million and 0.425% on assets from $500 million to $1.0 billion and to
0.40% on assets in excess of $1.0 billion. This waiver may not be recouped by
NYLIM. Prior to August 1, 2008, the Fund was contractually obligated to pay the
Manager at an annual rate of: 0.60% on assets up to $1.0 billion and 0.55% on
assets in excess of $1.0 billion. NYLIM had contractually agreed to waive its
management fee to 0.45% on assets up to $1.0 billion and to 0.40% on assets in
excess of $1.0 billion. This waiver may not be recouped by NYLIM.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage and other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 0.99%; Class A, 0.89%; Class B,
1.24%; and Class C, 1.24%. This expense limitation may be modified or terminated
only with the approval of the Board of Trustees. NYLIM may recoup the amount of
certain management fee waivers or expense reimbursements from the Fund pursuant
to the agreement if such action does not cause the Fund to exceed the existing
expense limitation and the recoupment is made within three years after the year
in which NYLIM incurred the expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $1,294,770 and waived expenses in the amount of $366,805, of which
$46,063 is subject to recoupment.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2010 2011 TOTAL
$91,353 $42,343 $46,063 $179,759
</Table>
The Fund had $30,280 of waived fees for which the recoupment period expired
during the year ended October 31, 2008.
Between August 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 0.89%; Class B,
1.14%; and Class C, 1.14%. Prior to August 1, 2007, NYLIM had a different
expense limitation agreement in place with respect to the Fund.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Accounting Agreement at the annual rate of 1/20 of 1% for the first $20 million
of average monthly net assets, 1/30 of 1% of the next $80 million of average
monthly net assets and 1/100 of 1% of any amount in excess of $100 million of
average monthly net assets. Fees for these services provided to the Fund by the
Manager amounted to $36,248 for the period from November 1, 2007 to July 31,
2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, have adopted distribution plans (the "Plans") in
accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Investor Class and Class A Plans, the Distributor receives a
monthly distribution fee from the Fund at an annual rate of 0.25% of the average
daily net assets of the Fund's Investor Class and Class A shares, which is an
expense of the Investor Class and Class A shares of the Fund for distribution or
service activities as designated by the Distributor. Pursuant to the Class B and
Class C Plans, the Fund pays the Distributor a monthly distribution fee, which
is an expense of the Class B and Class C shares of the Fund, at the annual rate
of 0.25% of the average daily net assets of the Fund's Class B and Class C
shares. The Plans provide that the Class B and Class C shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B and Class C shares of the Fund.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares was $1,925
and $16,138, respectively, for the year ended October 31, 2008. The Fund was
also advised that the Distributor retained contingent deferred sales charges on
redemptions of Class A, Class B and Class C shares of $10, $22,835 and $3,615,
respectively, for the year ended October 31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $213,523.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $49,027 0.0%++
- -------------------------------------------------
Class C 99 0.0++
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $7,618.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
UNDISTRIBUTED CAPITAL OTHER UNREALIZED TOTAL
ORDINARY TAX EXEMPT AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$379,601 $1,188,761 $(10,241,739) $(228,374) $(16,662,797) $(25,564,548)
</Table>
26 MainStay Tax Free Bond Fund
The difference between book-basis and tax basis unrealized appreciation is
primarily due to dividends payable.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income, accumulated net realized loss
on investments and additional paid-in capital arising from permanent
differences; net assets at October 31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$1,566,124 $15,453,401 $(17,019,525)
-----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to capital loss
carryforwards expiring and income from partnership investments.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $10,241,739 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2011 $ 8,117
2012 478
2016 1,647
$10,242
- ------------------------------------
</Table>
The Fund had $15,453,401 of capital loss carryforwards that expired during the
year ended October 31, 2008.
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distribution paid from:
Ordinary Income $ -- $ 2,988
Exempt Interest Dividends 8,457,548 9,319,279
- -----------------------------------------------------
$8,457,548 $9,322,267
- -----------------------------------------------------
</Table>
NOTE 5--SWAP AGREEMENTS:
Swap Agreements held at October 31, 2008:
<Table>
<Caption>
NET UNREALIZED
NOTIONAL APPRECIATION
AMOUNT (DEPRECIATION)
Agreement to receive from
the counterparty a
floating rate based on
the 3-month United States
LIBOR and the fund will
pay a fixed rate equal to
4.5375%
Counterparty: Credit
Suisse Securities, LLC
Expiration Date: 1/2/29 23,000,000 $ 21,600
- -------------------------------------------------------
Agreement to pay a floating
rate to the counterparty
based on the 3-month
United States LIBOR and
the fund will receive a
fixed rate equal to 3.85%
Counterparty: Credit
Suisse Securities, LLC
Expiration Date: 1/2/14 27,000,000 (400,200)
- -------------------------------------------------------
Total Swap Agreements 50,000,000 $(378,600)
- -------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 8--PURCHASES AND SALES OF
SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $188,944 and $209,015, respectively.
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 53,586 $ 490,019
Shares issued to
shareholders in
reinvestment of dividends 50,149 454,743
Shares redeemed (258,927) (2,369,444)
--------------------------
Net decrease in shares
outstanding before
conversion (155,192) (1,424,682)
Shares converted into
Investor Class (See Note
1) 2,890,374 26,562,988
Shares converted from
Investor Class (See Note
1) (205,580) (1,854,651)
--------------------------
Net increase 2,529,602 $23,283,655
==========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 982,364 $ 9,053,080
Shares issued to
shareholders in
reinvestment of dividends 483,108 4,420,090
Shares redeemed (2,773,607) (25,549,663)
-------------------------
Net decrease in shares
outstanding before
conversion (1,308,135) (12,076,493)
Shares converted into Class
A (See Note 1) 413,208 3,759,242
Shares converted from Class
A (See Note 1) (2,864,814) (26,244,489)
-------------------------
Net decrease (3,759,741) $(34,561,740)
=========================
Year ended October 31, 2007:
Shares sold 731,402 $ 7,060,982
Shares issued to
shareholders in
reinvestment of dividends 545,543 5,252,907
Shares redeemed (2,842,176) (27,358,899)
-------------------------
Net decrease in shares
outstanding before
conversion (1,565,231) (15,045,010)
Shares converted from Class
B (See Note 1) 948,014 9,135,539
-------------------------
Net decrease (617,217) $ (5,909,471)
=========================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 200,590 $ 1,850,180
Shares issued to
shareholders in
reinvestment of dividends 81,349 743,777
Shares redeemed (573,355) (5,269,969)
--------------------------
Net decrease in shares
outstanding before
conversion (291,416) (2,676,012)
Shares converted from Class
B (See Note 1) (241,642) (2,223,090)
--------------------------
Net decrease (533,058) $ (4,899,102)
==========================
Year ended October 31, 2007:
Shares sold 146,453 $ 1,409,180
Shares issued to
shareholders in
reinvestment of dividends 99,601 959,972
Shares redeemed (601,085) (5,787,220)
--------------------------
Net decrease in shares
outstanding before
conversion (355,031) (3,418,068)
Shares reacquired upon
conversion into Class A
(See Note 1) (948,014) (9,135,539)
--------------------------
Net decrease (1,303,045) $(12,553,607)
==========================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 443,102 $ 4,128,159
Shares issued to
shareholders in
reinvestment of dividends 17,675 161,289
Shares redeemed (293,940) (2,695,030)
--------------------------
Net increase 166,837 $1,594,418
==========================
Year ended October 31, 2007:
Shares sold 282,533 $2,725,442
Shares issued to
shareholders in
reinvestment of dividends 15,843 152,496
Shares redeemed (196,353) (1,888,968)
--------------------------
Net increase 102,023 $ 988,970
==========================
</Table>
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts
28 MainStay Tax Free Bond Fund
reported in the Fund's financial statements. However, additional disclosures may
be required about the inputs used to develop the measurements and the effect of
certain measurements reported in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
NOTE 11--RECENT DEVELOPMENTS:
On May 21, 2007, the United States Supreme Court agreed to hear an appeal in
Department of Revenue of Kentucky v. Davis, a case concerning the validity of
statutes that create a state tax exemption for interest from municipal
securities. The Kentucky Court of Appeals had held that Kentucky's statute,
which provided an exemption for interest earned on municipal securities of
Kentucky issuers while taxing interest earned on municipal securities of issuers
in other states, violated the Interstate Commerce Clause of the United States
Constitution. On May 19, 2008, the Supreme Court overturned the ruling made by
the Kentucky Court of Appeals. The Supreme Court ruling upheld the longstanding
state-tax exemptions that exist for municipal bonds.
mainstayinvestments.com 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Tax Free Bond Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2008, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year 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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Tax Free Bond Fund of The MainStay Funds as of October 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
30 MainStay Tax Free Bond Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Tax Free Bond Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management and
Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality
mainstayinvestments.com 31
provider of shareholder services, which has been recognized by independent
third-parties on numerous occasions. The Board noted the role that the MainStay
Family of Funds historically has played in serving the investment needs of New
York Life Insurance Company policyholders, who often maintain smaller account
balances than other retail investors. The Board acknowledged that it had
approved NYLIM's recommendation to create a new "Investor Class" of shares
designed principally to address the higher shareholder-servicing costs typically
associated with smaller shareholder accounts. The Board considered the
experience of senior personnel at NYLIM providing management and administrative
services to the Fund, as well as NYLIM's reputation and financial condition. The
Board also reviewed NYLIM's willingness to invest in personnel designed to
benefit the Fund, and that NYLIM also is responsible for paying all of the
salaries and expenses for the Fund's officers. In addition, the Board considered
the benefits to shareholders of being part of the MainStay Family of Funds,
including the privilege of exchanging investments between the same class of
shares without the imposition of a sales charge, as described more fully in the
Fund's prospectus. Based on these considerations, the Board concluded, within
the context of its overall determinations regarding the Agreements, that the
Fund is likely to continue to benefit from the nature, extent and quality of
these services as a result of NYLIM's experience, personnel, operations and
resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and MacKay
Shields' method for compensating portfolio managers. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio managers and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position
32 MainStay Tax Free Bond Fund
is important in order for NYLIM to continue to provide high-quality ongoing
services to the Fund and its shareholders. The Board noted, for example,
increased costs borne by NYLIM and its affiliates due to new and ongoing
regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
mainstayinvestments.com 33
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
Subsequent to the Board's decision to renew the Fund's subadvisory agreement
with MacKay Shields on June 16-17, 2008, NYLIM asked the Board to consider
replacing MacKay Shields with a new subadviser, Standish Mellon Asset Management
Company LLC ("Standish"). At its September 24-25, 2008 meeting, the Board
unanimously approved the Fund's new Subadvisory Agreement (the "Standish
Agreement") with Standish for one year.
In reaching its decision to approve the Standish Agreement, the Board considered
information furnished to the Board from NYLIM and Standish. The Board also
requested and received responses from Standish to a comprehensive list of
questions encompassing a variety of topics prepared on behalf of the Board by
independent legal counsel to the Board.
In determining to approve the Standish Agreement, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by Standish; (ii) the
investment performance of the Fund and the historical investment performance of
similar portfolios managed by Standish; (iii) the costs of the services to be
provided by Standish from its relationship with the Fund; (iv) the extent to
which economies of scale may be realized as the Fund grows, and the extent to
which economies of scale may benefit Fund investors; and (v) the reasonableness
of the Fund's management and subadvisory fee levels and overall total ordinary
operating expenses.
While the members of the Board may have weighed certain factors differently, the
Board's decision to approve the Standish Agreement was based on a comprehensive
consideration of all the information provided to the Board in connection with
its review of Standish. The Board also considered that shareholders of the Fund
approved the ability of NYLIM to act as a "manager of managers," which allows
the Board to engage certain new subadvisors for the Fund without the approval of
Fund shareholders. A more detailed discussion of the factors that figured
prominently in the Board's decision to approve the Standish Agreement is
provided below.
NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY STANDISH
In considering the approval of the Standish Agreement, the Board examined the
nature, extent and quality of the services that Standish proposed to provide to
the Fund. The Board evaluated Standish's experience in serving as manager of
other similar portfolios. In this regard, the Board took note of the experience
of the Fund's portfolio managers, the number of accounts managed by the
portfolio managers and Standish's method for compensating portfolio managers.
The Board also considered the experience of senior personnel at Standish, as
well as Standish's reputation and financial condition. The Board also observed
that Standish has a long history of managing assets across all sectors of the
municipal bond market and yield curve. The Board noted that Standish manages
approximately $200 billion in total assets under management as of June 30, 2008
comprised entirely of fixed income investments. Based on these considerations,
the Board concluded, within the context of its overall determinations regarding
the Standish Agreement, that the Fund is likely to benefit from the nature,
extent and quality of these services as a result of Standish's experience,
personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating investment performance, the Board considered the Fund's historical
investment performance results in light of the Fund's investment objective,
strategies and risks, as disclosed in the Fund's prospectus. The Board also
considered information provided by NYLIM showing the investment performance of
the Fund as compared to similar mutual funds managed by other investment
advisers. The Board compared the Fund's historical investment performance to the
investment performance of similar portfolios managed by Standish, as well as the
strength of Standish's resources (including research capabilities) that may
result in stronger long-term investment performance for the Fund over time.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Standish Agreement, that the selection of
34 MainStay Tax Free Bond Fund
Standish as subadvisor to the Fund is likely to benefit the Fund's long-term
investment performance.
COSTS OF THE SERVICES PROVIDED BY STANDISH
The Board considered the estimated costs of the services to be provided by
Standish under the Standish Agreement. In evaluating these estimated costs, the
Board considered, among other things, Standish's investments in personnel,
systems, equipment and other resources necessary to manage the Fund. The Board
acknowledged that Standish must be in a position to pay and retain experienced
professional personnel to provide services to the Fund, and that Standish's
ability to maintain a strong financial position is important in order for
Standish to provide high-quality ongoing services to the Fund and its
shareholders. The Board did not consider estimated profitability information
from Standish's relationship with the Fund, since Standish had not commenced its
service as the Fund's subadvisor at the time the Board considered its approval
of the Standish Agreement. The Board will request information concerning the
profitability of the Fund to Standish the next time that the Board considers the
approval of the Standish Agreement. The Board did consider, however,
representations from NYLIM and Standish that the fees to be paid to Standish
under the Standish Agreement are the product of arm's-length negotiations
between NYLIM and Standish.
The Board also considered certain fall-out benefits that may be realized by
Standish due to its relationship with the Fund. The Board requested and received
information from Standish and NYLIM concerning other business relationships
between Standish and its affiliates, on the one hand, and NYLIM and its
affiliates, on the other. The Board requested and received assurances that these
other business relationships did not impact NYLIM's recommendation for Standish
to serve as the Fund's subadvisor, and that neither NYLIM nor its affiliates is
expected to benefit in its other business relationships due to Standish's
engagement as the Fund's subadvisor.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Standish
Agreement, that any profits realized by Standish due to its relationship with
the Fund will be the result of arm's-length negotiations between NYLIM and
Standish, and are based on subadvisory fees paid to Standish by NYLIM, not the
Fund.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board considered the
extent to which the Fund benefits from economies of scale through expense
waivers and reimbursements. The Board also observed that NYLIM historically has
subsidized the Fund's overall expenses through the operation of contractual
expense limitations that may be lifted only with prior approval of the Board.
The Board considered that it had just reviewed the Fund's contractual
arrangements, including the Fund's overall expenses, as part of its annual
review of the Fund's investment advisory contracts at its June 16-17, 2008
meeting.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Standish Agreement, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the existing
management agreement with NYLIM and the Standish Agreement between NYLIM and
Standish, and the Fund's total ordinary operating expenses. The Board considered
that the fees to be paid to Standish under the Standish Agreement are paid by
NYLIM, not the Fund, and will result in no increase in the Fund's expenses.
While acknowledging that NYLIM will retain a greater portion of its management
fee under the new Agreement with Standish as compared to the old subadvisory
agreement with MacKay Shields, the Board considered that MacKay Shields is an
affiliate of NYLIM, and that the net fees retained by NYLIM and its affiliates
under the new Agreement with Standish therefore would be lower than the net fees
retained by NYLIM and its affiliates under the old subadvisory agreement with
MacKay Shields. The Board considered information provided by Standish concerning
the fees it charges to other investment advisory clients, including
institutional separate accounts and other funds with similar investment
objectives as the Fund.
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of fee and expense
arrangements that had been negotiated by the Board with NYLIM in recent years
and observed that NYLIM has subsidized the total ordinary operating expenses of
Fund share classes through the imposition of expense limitation arrangements
that may be modified only with the prior approval of the Board. The Board also
considered that it had just reviewed the Fund's contractual arrangements,
including the Fund's overall expenses, as part of its annual review of the
Fund's investment advisory contracts at its June 16-17, 2008 meeting.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Standish Agreement, supports the
mainstayinvestments.com 35
conclusion that these fees to be paid under the Standish Agreement are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Standish Agreement.
36 MainStay Tax Free Bond Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For Federal individual income tax purposed, the Fund hereby designates 100.0% of
the ordinary income dividends paid during its fiscal year ended October 31, 2008
as attributable to interest income from Tax Exempt Municipal Bonds. Such
dividends are currently exempt from Federal income taxes under Section 103 (a)
of the Internal Revenue Code.
The dividends paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 98.3% to arrive at the amount eligible for qualified
interest income.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
mainstayinvestments.com 37
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
38 MainStay Tax Free Bond Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
40 MainStay Tax Free Bond Fund
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 41
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO14629 (RECYCLE LOGO) MS308-08 MST11-12/08
13
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TOTAL RETURN FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
TOTAL RETURN FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 27
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 32
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 41
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 42
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 45
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 45
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 45
- ---------------------------------------------
TRUSTEES AND OFFICERS 46
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (31.90%) (0.97%) (0.02%)
Excluding sales charges (27.94) 0.16 0.54
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN LEHMAN BROTHERS
RETURN - RUSSELL 1000 CORE COMPOSITE S&P 500 AGGREGATE BOND
CLASS B INDEX INDEX INDEX INDEX
-------------- ------------ -------------- ------- ---------------
10/31/98 9450 10000 10000 10000 10000
11379 12558 11515 12567 10053
12555 13696 12508 13332 10787
9902 10130 11092 10012 12358
8681 8650 10396 8500 13085
9897 10581 11996 10268 13727
10298 11568 12939 11235 14486
11166 12779 13814 12215 14651
12341 14827 15420 14211 15411
13844 17056 17143 16280 16240
10/31/08 9977 10779 13124 10403 16290
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (31.85%) (0.95%) (0.02%)
Excluding sales charges (27.88) 0.17 0.55
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN LEHMAN BROTHERS
RETURN - RUSSELL 1000 CORE COMPOSITE S&P 500 AGGREGATE BOND
CLASS A INDEX INDEX INDEX INDEX
-------------- ------------ -------------- ------- ---------------
10/31/98 23625 25000 25000 25000 25000
28447 31396 28788 31417 25133
31388 34239 31269 33331 26968
24756 25324 27730 25030 30895
21703 21626 25990 21249 32713
24742 26452 29990 25669 34318
25744 28920 32347 28088 36216
27915 31948 34535 30537 36627
30853 37068 38549 35527 38527
34610 42641 42858 40699 40601
10/31/08 24959 26949 32811 26008 40725
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (31.66%) (0.88%) (0.19%)
Excluding sales charges (28.53) (0.59) (0.19)
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN LEHMAN BROTHERS
RETURN - RUSSELL 1000 CORE COMPOSITE S&P 500 AGGREGATE BOND
CLASS B INDEX INDEX INDEX INDEX
-------------- ------------ -------------- ------- ---------------
10/31/98 10000 10000 10000 10000 10000
11955 12558 11515 12567 10053
13107 13696 12508 13332 10787
10265 10130 11092 10012 12358
8925 8650 10396 8500 13085
10102 10581 11996 10268 13727
10432 11568 12939 11235 14486
11231 12779 13814 12215 14651
12324 14827 15420 14211 15411
13725 17056 17143 16280 16240
10/31/08 9809 10779 13124 10403 16290
</Table>
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class
C shares are sold with no initial sales charge, are subject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 1.00%. Class I shares are sold with no initial sales charge or CDSC, have
no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million.
THE FOOTNOTES ON THE NEXT TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (29.10%) (0.60%) (0.20%)
Excluding sales charges (28.47) (0.60) (0.20)
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN LEHMAN BROTHERS
RETURN - RUSSELL 1000 CORE COMPOSITE S&P 500 AGGREGATE BOND
CLASS C INDEX INDEX INDEX INDEX
-------------- ------------ -------------- ------- ---------------
10/31/98 10000 10000 10000 10000 10000
11955 12558 11515 12567 10053
13107 13696 12508 13332 10787
10265 10130 11092 10012 12358
8925 8650 10396 8500 13085
10102 10581 11996 10268 13727
10432 11568 12939 11235 14486
11225 12779 13814 12215 14651
12312 14827 15420 14211 15411
13707 17056 17143 16280 16240
10/31/08 9804 10779 13124 10403 16290
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------
(27.60%) 0.69% 0.95%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY TOTAL TOTAL RETURN LEHMAN BROTHERS
RETURN - RUSSELL 1000 CORE COMPOSITE S&P 500 AGGREGATE BOND
CLASS I INDEX INDEX INDEX INDEX
-------------- ------------ -------------- ------- ---------------
10/31/98 10000 10000 10000 10000 10000
12074 12558 11515 12567 10053
13369 13696 12508 13332 10787
10576 10130 11092 10012 12358
9285 8650 10396 8500 13085
10620 10581 11996 10268 13727
11074 11568 12939 11235 14486
12128 12779 13814 12215 14651
13475 14827 15420 14211 15411
15180 17056 17143 16280 16240
10/31/08 10991 10779 13124 10403 16290
</Table>
Performance figures reflect certain fee waivers and/or expense limitations,
without which total returns may have been lower. These fee waivers and/or
expense limitations are contractual and may be modified or terminated only
with the approval of the Board of Trustees. The Manager may recoup the amount
of certain management fee waivers or expense reimbursements from the Fund
pursuant to the contract if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years
after the year in which the Manager incurred the expense.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the performance of Class A shares through February 27, 2008,
adjusted for differences in certain contractual fees and expenses.
Unadjusted, the performance shown for Investor Class shares might have been
lower.
3. Performance figures for Class I shares, first offered on January 2, 2004,
include the historical performance of Class B shares through December 31,
2003, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
THE FOOTNOTES ON THE PRECEDING PAGE AND THE FOLLOWING PAGE ARE AN INTEGRAL PART
OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Total Return Fund
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ---------------------------------------------------------------------------------------------
Russell 1000(R) Index(4) (36.80%) 0.37% 0.75%
Total Return Core Composite Index(5) (23.44) 1.81 2.76
S&P 500(R) Index(6) (36.10) 0.26 0.40
Barclays Capital Aggregate Bond Index(7) 0.30 3.48 5.00
Average Lipper mixed-asset target allocation growth fund(8) (30.82) 0.71 1.78
</Table>
4. The Russell 1000(R) Index is an unmanaged index that measures the performance
of the 1,000 largest U.S. companies based on total market capitalization.
Results assume reinvestment of all income and capital gains. An investment
cannot be made directly in an index. The Russell 1000(R) Index is considered
to be the Fund's broad-based securities market index for comparison purposes.
5. The Fund's Total Return Core Composite Index consists of the Russell 1000(R)
Index and the Barclays Capital Aggregate Bond Index weighted 60%/40%,
respectively. Results assume that all income and capital gains are reinvested
in the index or indices that produce them. An investment cannot be made
directly in an index.
6. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume reinvestment of all
income and capital gains. An investment cannot be made directly in an index.
7. Barclays Capital has recently completed its acquisition of Lehman Brothers'
North American Investment Banking and Capital Markets businesses, and as part
of the transaction has changed the name of the index from "Lehman
Brothers(R)" to "Barclays Capital." The Barclays Capital Aggregate Bond Index
is an unmanaged index that consists of the following other unmanaged Barclays
Capital Indices: the Government Index, the Corporate Index, the Mortgage-
Backed Securities Index and the Asset-Backed Securities Index. To qualify for
inclusion in the Barclays Capital Aggregate Bond Index, securities must be
U.S. dollar denominated and investment grade and have a fixed-coupon, a
remaining maturity of at least one year and a par amount outstanding of at
least $250 million. Results assume reinvestment of all income and capital
gains. An investment cannot be made directly in an index.
8. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTES ON THE PRECEDING TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY TOTAL RETURN FUND
- --------THE EXAMPLE BELOW IS INTENDED TO DESCRIBE THE FEES AND EXPENSES BORNE BY
SHAREHOLDERS DURING THE SIX-MONTH PERIOD FROM MAY 1, 2008, TO OCTOBER 31, 2008,
AND THE IMPACT OF THOSE COSTS ON YOUR INVESTMENT.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $767.20 $5.73 $1,018.70 $ 6.55
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $767.80 $5.15 $1,019.30 $ 5.89
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $764.10 $9.05 $1,014.90 $10.33
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $764.40 $9.05 $1,014.90 $10.33
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $769.40 $3.51 $1,021.20 $ 4.01
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.29% for Investor Class, 1.16% for Class A, 2.04% for Class B and Class C
and 0.79% for Class I) multiplied by the average account value over the
period, divided by 366 and multiplied by 184 (to reflect the one-half year
period). The table above represents actual expenses incurred during the one-
half year period and does not take into account the Fund's written expense
limitation agreement.
8 MainStay Total Return Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2008
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Common Stocks 50.1
U.S. Government & Federal Agencies 29.1
Short-Term Investment 8.9
Corporate Bonds 7.9
Convertible Bonds 3.6
Asset-Backed Securities 2.3
Mortgage-Backed Securities 1.6
Yankee Bonds 1.6
Convertible Preferred Stocks 1.0
Municipal Bonds 0.3
Exchange Traded Funds 0.2
Foreign Government Bonds 0.2
Loan Assignments & Participations 0.2
Warrants 0.1
Preferred Stock 0.0
Liabilities in Excess of Cash and Other
Assets (7.1)
</Table>
++ Less than one-tenth of a percent.
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS OR ISSUERS HELD AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM
INVESTMENT)
<Table>
1. Federal National Mortgage Association
(Mortgage Pass-Through Securities),
4.50%-6.50%,
due 4/1/18-12/25/38
2. Federal Home Loan Mortgage Corporation
(Mortgage Pass-Through Securities),
3.00%-6.00%,
due 8/1/10-9/1/36
3. Federal National Mortgage Association,
4.625%-6.25%, due 2/1/11-1/2/14
4. United States Treasury Notes,
3.375%-4.875%,
due 6/30/13-8/15/17
5. Government National Mortgage Association
(Mortgage Pass-Through Securities),
6.00%-6.50%,
due 4/15/29-12/25/38
6. JPMorgan Chase & Co.
7. Wal-Mart Stores, Inc.
8. Microsoft Corp.
9. Hewlett-Packard Co.
10. Intel Corp.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS EDMUND C. SPELMAN, RICHARD A. ROSEN,
CFA, GARY GOODENOUGH, JOSEPH PORTERA AND RUPAL J. BHANSALI OF MACKAY SHIELDS
LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY TOTAL RETURN FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Total Return Fund returned -27.94% for
Investor Class shares,(1) -27.88% for Class A shares, -28.53% for Class B shares
and -28.47% for Class C shares for the 12 months ended October 31, 2008. Over
the same period, the Fund's Class I shares returned -27.60%. All share classes
outperformed the -30.82% return of the average Lipper(2) mixed-asset target
allocation growth fund and the -36.80% return of the Russell 1000(R) Index(3)
for the 12 months ended October 31, 2008. The Russell 1000(R) Index is the
Fund's broad-based securities-market index. See pages 5 and 6 for Fund returns
with sales charges.
DURING THE REPORTING PERIOD, WHICH SECTORS IN THE EQUITY PORTION OF THE FUND
WERE THE STRONGEST CONTRIBUTORS AND WHICH SECTORS WERE PARTICULARLY WEAK?
Even in a broadly declining market, some sectors and securities performed better
than others. Effective stock selection in the consumer discretionary and
telecommunications services sectors made the strongest contributions to the
Fund's results relative to the Russell 1000(R) Index. The equity sectors that
detracted the most from the Fund's performance relative to the Index were
financials, energy and information technology.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE THE STRONGEST CONTRIBUTORS TO THE
FUND'S PERFORMANCE AND WHICH STOCKS DETRACTED?
During the reporting period, Wal-Mart Stores gained ground as the weakening
economy drew consumers to lower-priced goods. The Fund's position in freight
railroad company Norfolk Southern advanced on surging coal revenue and improving
efficiency. Biopharmaceutical company Genentech was also a positive contributor
to the Fund's performance relative to the Russell 1000(R) Index.
The Fund's financials holdings were hard hit during the 12-month reporting
period. Property and casualty insurer Hartford Financial became embroiled in the
liquidity worries that many insurers encountered in the fall. The company's
shares fell sharply before we sold them in late October on concerns about the
company's capital adequacy. The Fund's positions in Citigroup, Bank of America
and Goldman Sachs also lost significant value during the reporting period.
DID THE FUND MAKE ANY SIGNIFICANT EQUITY PURCHASES OR SALES DURING THE REPORTING
PERIOD?
The Fund initiated positions in several consumer-related companies during the
reporting period. Among these were tobacco companies Altria and Philip Morris
International and consumer staples companies Colgate-Palmolive, General Mills
and Proctor & Gamble.
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. The principal risk of
investing in value stocks is that they may never reach what the portfolio
manager believes is their full value or that they may even go down in value. The
values of debt securities fluctuate depending on various factors, including
interest rates, issuer creditworthiness, market conditions and maturities. High-
yield securities ("junk bonds") are generally considered speculative because
they present a greater risk of loss than higher-quality debt securities and may
be subject to greater price volatility. The Fund may invest in derivatives,
which may increase the volatility of the Fund's net asset value and may result
in a loss to the Fund. The principal risk of growth stocks is that investors
expect growth companies to increase their earnings at a certain rate that is
generally higher than the rate expected for nongrowth companies. If these
expectations are not met, the market price of the stock may decline
significantly, even if earnings showed an absolute increase. The Fund may invest
in derivatives, which may increase the volatility of the Fund's net asset value
and may result in a loss to the Fund. Foreign securities may be subject to
greater risks than U.S. investments, including currency fluctuations, less-
liquid trading markets, greater price volatility, political and economic
instability, less publicly available information, and changes in tax or currency
laws or monetary policy. These risks are likely to be greater in emerging
markets than in developed markets. The principal risk of mortgage dollar rolls
is that the security the Fund receives at the end of the transaction may be
worth less than the security the Fund sold to the same counterparty at the
beginning of the transaction. The principal risk of mortgage-related and asset-
backed securities is that the underlying debt may be prepaid ahead of schedule
if interest rates fall, thereby reducing the value of the Fund's investments. If
interest rates rise, less of the debt may be prepaid and the Fund may lose
money. The Fund may experience a portfolio turnover rate of more than 100% and
may generate taxable short-term capital gains.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 7 for more information on Lipper Inc.
3. See footnote on page 7 for more information on the Russell 1000(R) Index.
10 MainStay Total Return Fund
Life and mortgage insurer Genworth Financial saw its shares fall significantly
on concerns about the ability of the company's mortgage insurance unit to meet
capital requirements. We limited the effects on the Fund's performance by
selling the Fund's position during the fiscal year. In the materials sector, we
sold Allegheny Technologies and Southern Copper as commodity prices declined in
the second half of the reporting period.
HOW DID YOU POSITION THE BOND PORTION OF THE FUND DURING THE REPORTING PERIOD?
To position the Fund for what we expected to be a sustained housing slowdown,
the bond portion of the Fund committed additional dollars toward higher-coupon
residential mortgage-backed securities. These bonds tend to benefit from falling
mortgage prepayment rates because they earn more coupon income when their
principal balance is not declining rapidly. We maintained the bulk of the Fund's
residential mortgage exposure in agency residential pass-through securities to
avoid the financial engineering that embroiled the markets during the reporting
period. The Fund held no positions in collateralized debt obligations,
structured investment vehicles or asset-backed commercial paper. Rather, we
maintained the bulk of the Fund's residential mortgage-backed exposure in agency
residential pass-throughs.
Toward the end of the reporting period, we began to selectively allocate dollars
to sectors, such as money-center banks and brokerage firms, where we believed
that improvements in general market tone and financing conditions would likely
be felt first. Established investment-grade issuers who tapped the term-debt
market had to make concessions to complete their sales and attract secondary-
market support. We selectively participated in deals of this sort when we felt
that the concessions were attractive and might go away as investors warmed up to
the new issue. Two such deals near the end of the reporting period were
International Business Machines and PepsiCo.
During the first and second quarters of 2008, we sought to capitalize on
opportunities in the municipal auction-rate securities market, a sector where we
have not found values traditionally compelling. We took advantage of market
dislocations and gridlock in this portion of the market to purchase short-dated
highly-rated securities at what we believed to be very attractive yields.
We pared some of the Fund's exposure to Fannie Mae and Freddie Mac after the
Federal Housing Finance Agency placed both companies into conservatorship. We
also reduced some of the Fund's Treasury exposure and allocated the proceeds to
agency debentures and mortgage pass-through securities. At the time, we sought
to take advantage of moderating credit risk among agency-related products. The
agency-debenture trade had good results, but the mortgage trade had a sluggish
response. New initiatives by the Treasury to lower primary mortgage rates did
not help the performance of our sector overweight relative to the Barclays
Capital Aggregate Bond Index(4) during the reporting period.
HOW DID YOU POSITION THE BOND PORTION OF THE FUND FROM AN INTEREST RATE
PERSPECTIVE?
During the reporting period, we believed that the shape of the yield curve would
be the prominent driver of performance. We positioned the Fund for a steeper
yield curve, and the positioning helped performance. Duration(5) had only a
modest influence on the Fund's performance. We had better success with the
Fund's duration posture during the second half of the reporting period, when we
correctly anticipated that market volatility would drive Treasury yields lower
and the Fund benefited by keeping its duration longer than the median Lipper
peer fund.
4. See page 7 for more information on the Barclays Capital Aggregate Bond Index.
This Index is the fixed-income component of the Fund's Total Return Core
Composite Index.
5. Duration is a measure of the price sensitivity of a fixed-income investment
to changes in interest rates. Duration is expressed as a number of years and
is considered a more accurate sensitivity gauge than average maturity.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2008
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 46.8%+
ASSET-BACKED SECURITIES 2.3%
- ---------------------------------------------------------------
AUTOMOBILE 0.1%
Superior Wholesale Inventory
Financing Trust
Series 2007-AE1, Class A
4.66%, due 1/15/12 (a) $ 340,000 $ 309,291
-------------
CONSUMER FINANCE 0.3%
Harley-Davidson Motorcycle
Trust
Series 2007-1, Class A3
5.22%, due 3/15/12 1,225,000 1,218,982
-------------
CONSUMER LOANS 0.3%
Atlantic City Electric
Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 1,600,000 1,355,362
-------------
CREDIT CARDS 0.9%
Bank of America Credit Card
Trust
Series 2006-C4, Class C4
4.82%, due 11/15/11 (a) 745,000 706,194
Chase Issuance Trust
Series 2006-C4, Class C4
4.88%, due 1/15/14 (a) 1,315,000 990,971
Citibank Credit Card
Issuance Trust
Series 2006-C4, Class C4
4.33%, due 1/9/12 (a) 1,400,000 1,254,272
Murcie Lago International,
Ltd.
Series 2006-1X, Class A
3.49%, due 3/27/11
(a)(b)(c) 700,000 634,851
-------------
3,586,288
-------------
DIVERSIFIED FINANCIAL SERVICES 0.4%
Dominos Pizza Master Issuer
LLC
Series 2007-1, Class A2
5.261%, due 4/25/37 (d) 880,000 723,478
Dunkin Securitization
Series 2006-1, Class A2
5.779%, due 6/20/31 (d) 630,000 529,465
USXL Funding LLC
Series 2006-1A, Class A
5.379%, due 4/15/14 (c)(d) 261,286 238,057
-------------
1,491,000
-------------
HOME EQUITY 0.3%
Citicorp Residential
Mortgage Securities, Inc.
Series 2006-3, Class A3
5.61%, due 11/25/36 (e) 495,000 480,391
Series 2006-1, Class A3
5.706%, due 7/25/36 (e) 855,000 831,501
-------------
1,311,892
-------------
Total Asset-Backed
Securities
(Cost $10,446,860) 9,272,815
-------------
CONVERTIBLE BONDS 3.6%
- ---------------------------------------------------------------
AEROSPACE & DEFENSE 0.1%
L-3 Communications Corp.
3.00%, due 8/1/35 435,000 417,600
-------------
AUTO MANUFACTURERS 0.0%++
Ford Motor Co.
4.25%, due 12/15/36 391,000 110,458
-------------
BIOTECHNOLOGY 0.3%
Amgen, Inc.
0.125%, due 2/1/11 1,043,000 969,990
-------------
COAL 0.0%++
Peabody Energy Corp.
4.75%, due 12/15/66 190,000 140,838
-------------
COMPUTERS 0.3%
CACI International, Inc.
2.125%, due 5/1/14 238,000 200,515
EMC Corp.
1.75%, due 12/1/11 782,000 748,765
NetApp, Inc.
1.75%, due 6/1/13 (d) 257,000 170,584
-------------
1,119,864
-------------
DIVERSIFIED FINANCIAL SERVICES 0.2%
Nasdaq Stock Market, Inc.
(The)
2.50%, due 8/15/13 (d) 873,000 654,750
-------------
ELECTRONICS 0.2%
Fisher Scientific
International, Inc.
3.25%, due 3/1/24 480,000 550,200
Itron, Inc.
2.50%, due 8/1/26 182,000 151,060
-------------
701,260
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings or issuers held, as of October 31,
2008, excluding short-term investment. May be subject to change daily.
12 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
ENERGY--ALTERNATE SOURCES 0.2%
Covanta Holding Corp.
1.00%, due 2/1/27 $ 946,000 $ 786,362
-------------
ENVIRONMENTAL CONTROLS 0.2%
Waste Connections, Inc.
3.75%, due 4/1/26 652,000 673,190
-------------
FOOD 0.1%
Spartan Stores, Inc.
3.375%, due 5/15/27 582,000 481,605
-------------
HEALTH CARE--PRODUCTS 0.2%
Medtronic, Inc.
1.625%, due 4/15/13 1,032,000 895,260
-------------
INSURANCE 0.0%++
Conseco, Inc.
(zero coupon), beginning
9/30/10
3.50%, due 9/30/35 20,000 7,525
-------------
OIL & GAS 0.7%
Chesapeake Energy Corp.
2.50%, due 5/15/37 752,000 474,700
Nabors Industries, Inc.
0.94%, due 5/15/11 744,000 589,620
St. Mary Land & Exploration
Co.
3.50%, due 4/1/27 470,000 324,888
Transocean, Inc.
Series C
1.50%, due 12/15/37 1,225,000 938,656
Series A
1.625%, due 12/15/37 640,000 566,400
-------------
2,894,264
-------------
OIL & GAS SERVICES 0.3%
Cameron International Corp.
2.50%, due 6/15/26 672,000 643,440
Schlumberger, Ltd.
Series B
2.125%, due 6/1/23 414,000 547,515
-------------
1,190,955
-------------
PHARMACEUTICALS 0.4%
ALZA Corp.
(zero coupon), due 7/28/20 777,000 666,277
Teva Pharmaceutical Finance
Co. B.V.
Series D
1.75%, due 2/1/26 1,025,000 1,074,969
-------------
1,741,246
-------------
RETAIL 0.1%
Costco Wholesale Corp.
(zero coupon), due 8/19/17 171,000 222,300
-------------
SEMICONDUCTORS 0.0%++
ON Semiconductor Corp.
2.625%, due 12/15/26 223,000 137,145
-------------
SOFTWARE 0.1%
Sybase, Inc.
1.75%, due 2/22/25 362,000 409,060
-------------
TELECOMMUNICATIONS 0.2%
Anixter International, Inc.
1.00%, due 2/15/13 433,000 287,945
SBA Communications Corp.
1.875%, due 5/1/13 (d) 777,000 510,877
-------------
798,822
-------------
Total Convertible Bonds
(Cost $19,342,275) 14,352,494
-------------
CORPORATE BONDS 7.9%
- ---------------------------------------------------------------
ADVERTISING 0.0%++
Lamar Media Corp.
6.625%, due 8/15/15 120,000 88,200
-------------
AEROSPACE & DEFENSE 0.4%
Hawker Beechcraft
Acquisition Co. LLC/
Hawker Beechcraft Co.
8.50%, due 4/1/15 65,000 39,000
9.75%, due 4/1/17 25,000 14,000
United Technologies Corp.
5.40%, due 5/1/35 250,000 194,429
6.125%, due 7/15/38 1,430,000 1,233,412
-------------
1,480,841
-------------
AGRICULTURE 0.1%
Cargill, Inc.
4.375%, due 6/1/13 (d) 200,000 174,273
Reynolds American, Inc.
7.625%, due 6/1/16 37,000 30,354
-------------
204,627
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
AIRLINES 0.0%++
Delta Air Lines, Inc.
(Escrow Shares)
8.00%, due 6/3/23 (f) $ 40,000 $ 900
10.375%, due 12/15/22 (f) 100,000 2,125
Northwest Airlines, Inc.
(Escrow Shares)
7.625%, due 11/15/23 (f) 42,700 160
8.875%, due 12/31/08 (f) 30,000 37
10.00%, due 2/1/09 (f) 17,300 22
-------------
3,244
-------------
AUTO PARTS & EQUIPMENT 0.1%
FleetPride Corp.
11.50%, due 10/1/14 (d) 140,000 126,000
Goodyear Tire & Rubber Co.
(The)
8.625%, due 12/1/11 68,000 57,460
Lear Corp.
Series B
8.50%, due 12/1/13 53,000 20,140
8.75%, due 12/1/16 67,000 24,790
Tenneco Automotive, Inc.
8.625%, due 11/15/14 80,000 37,800
-------------
266,190
-------------
BANKS 0.6%
Bank of America Corp.
5.65%, due 5/1/18 1,010,000 868,126
Morgan Stanley
6.75%, due 4/15/11 795,000 741,831
USB Capital IX
6.189%, due 4/15/49 200,000 104,000
Wachovia Bank N.A.
7.80%, due 8/18/10 500,000 488,984
Wells Fargo & Co.
5.25%, due 10/23/12 300,000 287,070
-------------
2,490,011
-------------
BEVERAGES 0.3%
Coca-Cola Enterprises, Inc.
7.375%, due 3/3/14 705,000 715,222
Constellation Brands, Inc.
7.25%, due 5/15/17 95,000 78,850
PepsiCo, Inc.
7.90%, due 11/1/18 245,000 258,478
-------------
1,052,550
-------------
BUILDING MATERIALS 0.1%
USG Corp.
6.30%, due 11/15/16 705,000 423,000
-------------
CHEMICALS 0.1%
Equistar Chemicals, L.P.
7.55%, due 2/15/26 90,000 41,850
MacDermid, Inc.
9.50%, due 4/15/17 (d) 70,000 37,100
Millennium America, Inc.
7.625%, due 11/15/26 110,000 22,000
Mosaic Global Holdings, Inc.
7.375%, due 12/1/14 (d) 80,000 69,934
7.625%, due 12/1/16 (d) 95,000 82,961
Phibro Animal Health Corp.
10.00%, due 8/1/13 (d) 80,000 68,000
Tronox Worldwide LLC/Tronox
Finance Corp.
9.50%, due 12/1/12 (g) 100,000 22,000
-------------
343,845
-------------
COAL 0.0%++
Peabody Energy Corp.
7.375%, due 11/1/16 70,000 59,150
7.875%, due 11/1/26 120,000 93,900
-------------
153,050
-------------
COMMERCIAL SERVICES 0.0%++
Cardtronics, Inc.
9.25%, due 8/15/13 95,000 74,575
Service Corp. International
7.375%, due 10/1/14 55,000 44,962
7.625%, due 10/1/18 55,000 43,175
-------------
162,712
-------------
COMPUTERS 0.1%
International Business
Machines Corp.
7.625%, due 10/15/18 365,000 377,691
SunGard Data Systems, Inc.
3.75%, due 1/15/09 55,000 53,625
-------------
431,316
-------------
DIVERSIFIED FINANCIAL SERVICES 1.4%
American General Finance
Corp.
6.90%, due 12/15/17 240,000 86,857
AmeriCredit Corp.
8.50%, due 7/1/15 95,000 69,587
Citigroup, Inc.
5.00%, due 9/15/14 1,475,000 1,165,933
General Motors Acceptance
Corp. LLC
5.625%, due 5/15/09 766,000 649,573
8.00%, due 11/1/31 344,000 155,967
Goldman Sachs Group, Inc.
(The)
5.95%, due 1/18/18 800,000 652,413
Harley-Davidson Funding
Corp.
6.80%, due 6/15/18 (d) 815,000 647,804
</Table>
14 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
HSBC Finance Corp.
4.75%, due 4/15/10 $ 760,000 $ 736,931
LaBranche & Co., Inc.
11.00%, due 5/15/12 30,000 26,700
Morgan Stanley
5.05%, due 1/21/11 1,225,000 1,116,099
OMX Timber Finance
Investments LLC
Series 1
5.42%, due 1/29/20
(b)(c)(d) 350,000 242,452
-------------
5,550,316
-------------
ELECTRIC 0.4%
AES Eastern Energy, L.P.
Series 1999-A
9.00%, due 1/2/17 110,517 116,043
Appalachian Power Co.
5.65%, due 8/15/12 490,000 465,699
NRG Energy, Inc.
7.25%, due 2/1/14 15,000 13,125
7.375%, due 2/1/16 30,000 25,875
NSG Holdings LLC/NSG
Holdings, Inc.
7.75%, due 12/15/25 (d) 55,000 46,200
PPL Energy Supply LLC
6.50%, due 5/1/18 750,000 584,428
Reliant Energy Mid-Atlantic
Power Holdings LLC
Series C
9.681%, due 7/2/26 90,000 81,900
Reliant Energy, Inc.
7.625%, due 6/15/14 25,000 19,250
7.875%, due 6/15/17 215,000 164,475
-------------
1,516,995
-------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.0%++
Belden, Inc.
7.00%, due 3/15/17 90,000 68,850
-------------
ENTERTAINMENT 0.2%
Gaylord Entertainment Co.
6.75%, due 11/15/14 25,000 16,031
8.00%, due 11/15/13 120,000 81,900
Jacobs Entertainment, Inc.
9.75%, due 6/15/14 70,000 30,100
Mohegan Tribal Gaming
Authority
6.375%, due 7/15/09 60,000 52,800
Penn National Gaming, Inc.
6.75%, due 3/1/15 180,000 139,500
Speedway Motorsports, Inc.
6.75%, due 6/1/13 175,000 133,000
Vail Resorts, Inc.
6.75%, due 2/15/14 180,000 137,700
-------------
591,031
-------------
ENVIRONMENTAL CONTROLS 0.0%++
Geo Sub Corp.
11.00%, due 5/15/12 60,000 51,300
-------------
FINANCE--AUTO LOANS 0.0%++
Ford Motor Credit Co. LLC
7.375%, due 10/28/09 70,000 58,107
7.875%, due 6/15/10 3,000 2,016
-------------
60,123
-------------
FINANCE--OTHER SERVICES 0.1%
American Real Estate
Partners, L.P./
American Real Estate
Finance Corp.
7.125%, due 2/15/13 250,000 157,500
8.125%, due 6/1/12 305,000 207,400
-------------
364,900
-------------
FOOD 0.2%
Corn Products International,
Inc.
6.00%, due 4/15/17 800,000 715,278
Stater Brothers Holdings
7.75%, due 4/15/15 105,000 86,100
-------------
801,378
-------------
FOREST PRODUCTS & PAPER 0.1%
Bowater, Inc.
9.375%, due 12/15/21 250,000 65,000
Georgia-Pacific Corp.
7.00%, due 1/15/15 (d) 150,000 110,250
7.125%, due 1/15/17 (d) 305,000 211,975
7.75%, due 11/15/29 5,000 3,000
8.00%, due 1/15/24 20,000 12,700
8.875%, due 5/15/31 30,000 19,350
-------------
422,275
-------------
HAND & MACHINE TOOLS 0.0%++
Baldor Electric Co.
8.625%, due 2/15/17 90,000 68,850
-------------
HEALTH CARE--PRODUCTS 0.1%
Catalent Pharma Solutions,
Inc.
9.50%, due 4/15/15 145,000 84,100
Cooper Cos., Inc. (The)
7.125%, due 2/15/15 70,000 56,000
Invacare Corp.
9.75%, due 2/15/15 110,000 99,000
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
HEALTH CARE--PRODUCTS (CONTINUED)
Universal Hospital Services,
Inc.
6.303%, due 6/1/15 (a) $ 40,000 $ 27,200
8.50%, due 6/1/15 (h) 40,000 32,000
VWR Funding, Inc.
Series B
10.25%, due 7/15/15 (h) 95,000 56,525
-------------
354,825
-------------
HEALTH CARE--SERVICES 0.1%
Alliance Imaging, Inc.
7.25%, due 12/15/12 40,000 34,400
Community Health Systems,
Inc.
8.875%, due 7/15/15 215,000 180,062
HCA, Inc.
8.75%, due 9/1/10 135,000 118,800
Psychiatric Solutions, Inc.
7.75%, due 7/15/15 90,000 74,025
-------------
407,287
-------------
HOLDING COMPANY--DIVERSIFIED 0.0%++
Susser Holdings LLC
10.625%, due 12/15/13 65,000 55,250
-------------
HOUSEHOLD PRODUCTS & WARES 0.0%++
Jarden Corp.
7.50%, due 5/1/17 75,000 55,875
Libbey Glass, Inc.
9.928%, due 6/1/11 (a) 80,000 51,600
-------------
107,475
-------------
INSURANCE 0.2%
Crum & Forster Holdings
Corp.
7.75%, due 5/1/17 215,000 149,425
Fund American Cos., Inc.
5.875%, due 5/15/13 595,000 447,088
HUB International Holdings,
Inc.
9.00%, due 12/15/14 (d) 195,000 146,250
USI Holdings Corp.
6.679%, due 11/15/14
(a)(d) 35,000 22,094
9.75%, due 5/15/15 (d) 95,000 59,850
-------------
824,707
-------------
LODGING 0.1%
Boyd Gaming Corp.
7.125%, due 2/1/16 55,000 34,100
7.75%, due 12/15/12 170,000 139,400
MTR Gaming Group, Inc.
Series B
9.00%, due 6/1/12 30,000 16,650
9.75%, due 4/1/10 50,000 35,000
Seminole Hard Rock
Entertainment,
Inc./Seminole Hard
Rock International LLC
5.319%, due 3/15/14 (a)(d) 85,000 56,100
-------------
281,250
-------------
MACHINERY--CONSTRUCTION & MINING 0.2%
Caterpillar, Inc.
6.05%, due 8/15/36 825,000 655,676
-------------
MEDIA 0.2%
Houghton Mifflin Harcourt
Publishing Co.
7.20%, due 3/15/11 75,000 71,250
ION Media Networks, Inc.
8.003%, due 1/15/12 (a)(d) 30,000 16,500
11.003%, due 1/15/13
(d)(h) 36,292 12,702
Morris Publishing Group LLC
7.00%, due 8/1/13 74,000 7,400
News America Holdings, Inc.
8.00%, due 10/17/16 665,000 633,845
Rainbow National Services
LLC
8.75%, due 9/1/12 (d) 75,000 66,000
Ziff Davis Media, Inc.
(zero coupon), due 5/1/12
(b)(c)(g) 70,000 4,375
8.875%, due 7/15/11 (b)(c) 18,702 15,897
-------------
827,969
-------------
METAL FABRICATE & HARDWARE 0.0%++
Mueller Water Products, Inc.
7.375%, due 6/1/17 90,000 58,950
Neenah Foundary Co.
9.50%, due 1/1/17 130,000 77,350
-------------
136,300
-------------
MINING 0.3%
Alcoa, Inc.
5.90%, due 2/1/27 700,000 446,679
Freeport-McMoRan Copper &
Gold, Inc.
8.25%, due 4/1/15 55,000 44,000
8.375%, due 4/1/17 110,000 86,350
Vulcan Materials Co.
6.30%, due 6/15/13 430,000 405,870
-------------
982,899
-------------
MISCELLANEOUS--MANUFACTURING 0.0%++
Actuant Corp.
6.875%, due 6/15/17 85,000 72,675
RBS Global, Inc./Rexnord
Corp.
9.50%, due 8/1/14 125,000 86,250
-------------
158,925
-------------
</Table>
16 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
OFFICE & BUSINESS EQUIPMENT 0.2%
Xerox Corp.
7.625%, due 6/15/13 $ 1,055,000 $ 797,735
-------------
OIL & GAS 0.3%
Chaparral Energy, Inc.
8.50%, due 12/1/15 130,000 66,300
Chesapeake Energy Corp.
6.50%, due 8/15/17 135,000 99,394
6.875%, due 11/15/20 5,000 3,537
7.625%, due 7/15/13 405,000 344,250
Forest Oil Corp.
7.25%, due 6/15/19 125,000 85,000
Hilcorp Energy I,
L.P./Hilcorp Finance Co.
9.00%, due 6/1/16 (d) 60,000 43,800
Newfield Exploration Co.
6.625%, due 4/15/16 110,000 81,400
Pemex Project Funding Master
Trust 6.625%, due 6/15/35 315,000 234,672
Pride International, Inc.
7.375%, due 7/15/14 35,000 28,700
Regency Energy
Partners/Regency Energy
Finance Corp.
8.375%, due 12/15/13 81,000 61,560
Stone Energy Corp.
6.75%, due 12/15/14 80,000 51,200
Whiting Petroleum Corp.
7.00%, due 2/1/14 135,000 95,850
7.25%, due 5/1/13 55,000 41,250
-------------
1,236,913
-------------
OIL & GAS SERVICES 0.1%
Allis-Chalmers Energy, Inc.
8.50%, due 3/1/17 61,000 36,600
9.00%, due 1/15/14 40,000 26,000
Complete Production
Services, Inc.
8.00%, due 12/15/16 170,000 115,600
-------------
178,200
-------------
PHARMACEUTICALS 0.3%
Medco Health Solutions, Inc.
7.25%, due 8/15/13 1,180,000 1,128,604
NBTY, Inc.
7.125%, due 10/1/15 70,000 52,500
-------------
1,181,104
-------------
PIPELINES 0.3%
ANR Pipeline Co.
9.625%, due 11/1/21 55,000 57,033
Copano Energy LLC
8.125%, due 3/1/16 70,000 51,450
El Paso Natural Gas Co.
7.50%, due 11/15/26 95,000 72,408
MarkWest Energy Partners,
L.P./
MarkWest Energy Finance
Corp.
Series B
6.875%, due 11/1/14 125,000 90,313
8.50%, due 7/15/16 15,000 11,025
Nustar Logistics
7.65%, due 4/15/18 300,000 244,873
Plains All American
Pipeline, L.P./
PAA Finance Corp.
7.75%, due 10/15/12 730,000 671,820
-------------
1,198,922
-------------
REAL ESTATE INVESTMENT TRUSTS 0.1%
Health Care Property
Investors, Inc.
6.00%, due 1/30/17 450,000 319,621
Host Marriott, L.P.
6.375%, due 3/15/15 145,000 105,125
Series Q
6.75%, due 6/1/16 35,000 25,375
Omega Healthcare Investors,
Inc.
7.00%, due 4/1/14 75,000 62,250
-------------
512,371
-------------
RETAIL 0.2%
CVS Caremark Corp.
5.789%, due 1/10/26 (d) 301,343 222,952
Rite Aid Corp.
8.625%, due 3/1/15 127,000 45,085
9.375%, due 12/15/15 65,000 24,050
Star Gas Partners, L.P./Star
Gas Finance Co.
Series B
10.25%, due 2/15/13 22,000 16,060
Wal-Mart Stores, Inc.
6.50%, due 8/15/37 600,000 538,563
-------------
846,710
-------------
TELECOMMUNICATIONS 0.8%
Cisco Systems, Inc.
5.50%, due 2/22/16 1,830,000 1,696,297
GCI, Inc.
7.25%, due 2/15/14 85,000 68,000
iPCS, Inc.
4.926%, due 5/1/13 (a) 35,000 26,950
Lucent Technologies, Inc.
6.45%, due 3/15/29 530,000 259,700
PAETEC Holding Corp.
9.50%, due 7/15/15 70,000 39,725
Qwest Communications
International, Inc.
7.25%, due 2/15/11 70,000 56,525
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
17
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
Qwest Corp.
7.125%, due 11/15/43 $ 20,000 $ 12,000
7.25%, due 9/15/25 45,000 29,925
7.50%, due 10/1/14 145,000 111,650
8.875%, due 3/15/12 30,000 26,250
Verizon Communications, Inc.
8.75%, due 11/1/18 820,000 837,302
-------------
3,164,324
-------------
TEXTILES 0.0%++
INVISTA
9.25%, due 5/1/12 (d) 80,000 66,400
-------------
TRANSPORTATION 0.2%
Atlantic Express
Transportation Corp.
11.626%, due 4/15/12 (a) 35,000 17,325
Union Pacific Corp.
6.125%, due 1/15/12 850,000 812,614
-------------
829,939
-------------
TRUCKING & LEASING 0.0%++
Greenbrier Cos., Inc.
8.375%, due 5/15/15 85,000 64,812
-------------
Total Corporate Bonds
(Cost $38,798,022) 31,465,597
-------------
FOREIGN GOVERNMENT BONDS 0.2%
- ---------------------------------------------------------------
FOREIGN SOVEREIGN 0.2%
Republic of Panama
7.125%, due 1/29/26 1,000,000 825,000
Republic of Venezuela
6.00%, due 12/9/20 309,000 128,235
-------------
Total Foreign Government
Bonds
(Cost $1,308,142) 953,235
-------------
LOAN ASSIGNMENTS & PARTICIPATIONS 0.2% (I)
- ---------------------------------------------------------------
BROADCASTING 0.0%++
Nielsen Finance LLC
Dollar Term Loan
4.80%, due 8/9/13 98,001 70,610
-------------
BUILDINGS & REAL ESTATE 0.0%++
LNR Property Corp.
Initial Tranche B Term
Loan
6.04%, due 7/12/11 184,800 95,172
-------------
HEALTHCARE, EDUCATION & CHILDCARE 0.1%
Community Health Systems,
Inc.
New Term Loan B
5.16%, due 7/25/14 188,598 150,619
HCA, Inc.
Term Loan B
6.01%, due 11/18/13 245,625 202,118
Talecris Biotherapeutics,
Inc.
2nd Lien Term Loan
9.31%, due 12/6/14 115,000 100,050
-------------
452,787
-------------
LEISURE, AMUSEMENT, MOTION PICTURES, ENTERTAINMENT 0.0%++
Town Sports International,
Inc.
Term Loan
4.75%, due 2/27/14 98,500 59,100
-------------
MACHINERY 0.0%++
BHM Technologies LLC
1st Lien Term Loan
6.50%, due 7/21/13 (g) 176,936 39,811
-------------
RETAIL STORE 0.1%
Toys "R" Us (Delaware), Inc.
Term Loan
9.59%, due 1/19/13 140,000 100,625
-------------
Total Loan Assignments &
Participations
(Cost $1,244,186) 818,105
-------------
MORTGAGE-BACKED SECURITIES 1.6%
- ---------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) 1.6%
Banc of America Commercial
Mortgage, Inc.
Series 2005-5, Class A2
5.001%, due 10/10/45 1,175,000 1,104,546
Bayview Commercial Asset
Trust
Series 2006-4A, Class A1
3.49%, due 12/25/36
(a)(c)(d) 409,141 349,095
Commercial Mortgage Loan
Trust
6.22%, due 12/10/49 1,085,000 833,009
Four Times Square Trust
Series 2006-4TS, Class A
5.401%, due 12/13/28 (d) 860,000 583,039
GS Mortgage Securities Corp.
II
Series 2007-GG10, Class A4
5.99%, due 8/10/45 1,445,000 1,086,863
</Table>
18 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MORTGAGE-BACKED SECURITIES (CONTINUED)
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (CONTINUED)
LB-UBS Commercial Mortgage
Trust
Series 2004-C2, Class A2
3.246%, due 3/15/29 $ 767,899 $ 758,709
Series 2004-C7, Class A1
3.625%, due 10/15/29 425,369 417,619
Timberstar Trust
Series 2006-1, Class A
5.668%, due 10/15/36
(b)(d) 280,000 253,445
Wachovia Bank Commercial
Mortgage Trust
Series 2004-C14, Class A1
3.477%, due 8/15/41 104,352 102,870
Series 2007-C33, Class A4
6.10%, due 2/15/51 1,085,000 822,395
-------------
Total Mortgage-Backed
Securities
(Cost $7,138,172) 6,311,590
-------------
MUNICIPAL BONDS 0.3%
- ---------------------------------------------------------------
TEXAS 0.2%
Harris County Texas
Industrial Development
Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 (a) 660,000 653,182
-------------
WEST VIRGINIA 0.1%
Tobacco Settlement Finance
Authority of West Virginia
7.467%, due 6/1/47 670,000 575,229
-------------
Total Municipal Bonds
(Cost $1,330,000) 1,228,411
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES 29.1%
- ---------------------------------------------------------------
FANNIE MAE (COLLATERALIZED MORTGAGE OBLIGATION) 0.1%
Series 2006-B1, Class AB
6.00%, due 6/25/16 612,672 621,914
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) 5.3%
3.00%, due 8/1/10 441,980 436,679
4.291%, due 3/1/35 (a) 1,073,675 1,070,863
5.00%, due 8/1/33 1,339,330 1,270,467
5.028%, due 6/1/35 (a) 1,372,220 1,375,300
5.50%, due 1/1/21 5,455,941 5,441,890
5.50%, due 7/1/34 6,428,729 6,285,021
5.50%, due 1/1/36 1,271,140 1,241,136
5.50%, due 9/1/36 2,136,902 2,085,460
6.00%, due 3/1/36 1,884,125 1,882,477
-------------
21,089,293
-------------
FEDERAL HOUSING ADMINISTRATION 0.2%
Mortgage Equity Conversion
Asset Trust
Series 2007-FF2, Class A
2.64%, due 2/25/42
(a)(b)(c)(d) 814,612 777,954
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION 3.8%
4.625%, due 5/1/13 10,620,000 10,278,142
5.125%, due 1/2/14 810,000 791,427
6.25%, due 2/1/11 4,000,000 4,148,120
-------------
15,217,689
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) 13.9%
4.50%, due 4/1/18 920,693 884,788
4.50%, due 7/1/18 3,314,428 3,185,172
5.00%, due 9/1/20 309,400 303,135
5.00%, due 10/1/20 310,993 304,696
5.00%, due 12/1/20 633,287 620,464
5.00%, due 7/1/35 5,217,352 4,947,462
5.00%, due 2/1/36 909,654 862,599
5.00%, due 5/1/36 2,354,652 2,232,848
5.00%, due 6/1/36 111,461 105,643
5.50%, due 4/1/21 3,105,986 3,102,840
5.50%, due 6/1/21 2,430,862 2,426,120
5.50%, due 11/1/33 1,353,385 1,325,401
5.50%, due 12/1/33 1,170,739 1,146,531
5.50%, due 6/1/34 1,881,194 1,841,121
5.50%, due 12/25/38 TBA
(j) 9,240,000 9,026,325
6.00%, due 1/1/33 909,880 912,960
6.00%, due 3/1/33 922,581 924,840
6.00%, due 9/1/34 989,798 991,293
6.00%, due 9/1/35 3,447,159 3,452,277
6.00%, due 10/1/35 2,360,372 2,360,987
6.00%, due 12/25/38 TBA
(j) 7,960,000 7,955,025
6.50%, due 6/1/31 379,413 387,736
6.50%, due 8/1/31 346,363 353,961
6.50%, due 10/1/31 238,113 243,336
6.50%, due 11/25/38 TBA
(j) 5,625,000 5,690,036
-------------
55,587,596
-------------
FREDDIE MAC (COLLATERALIZED MORTGAGE OBLIGATION) 0.2%
Series 2632, Class NH
3.50%, due 6/15/13 728,501 717,206
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) 2.1%
6.00%, due 4/15/29 $ 1,014,348 $ 1,022,841
6.00%, due 8/15/32 1,449,528 1,456,884
6.00%, due 12/25/38 TBA
(j) 2,610,000 2,610,000
6.50%, due 12/15/38 TBA
(j) 3,120,000 3,153,150
-------------
8,242,875
-------------
UNITED STATES TREASURY BONDS 1.4%
4.375%, due 2/15/38 1,070,000 1,073,177
6.00%, due 2/15/26 335,000 381,874
6.25%, due 8/15/23 2,305,000 2,638,865
6.25%, due 5/15/30 1,125,000 1,359,844
6.875%, due 8/15/25 125,000 155,693
-------------
5,609,453
-------------
UNITED STATES TREASURY
NOTES (CONTINUED)
3.375%, due 6/30/13 185,000 190,406
4.75%, due 8/15/17 5,000,000 5,292,190
4.875%, due 8/15/16 2,870,000 3,058,568
-------------
8,541,164
-------------
Total U.S. Government &
Federal Agencies
(Cost $117,692,661) 116,405,144
-------------
YANKEE BONDS 1.6% (K)
- ---------------------------------------------------------------
BANKS 0.1%
ATF Capital B.V.
9.25%, due 2/21/14 (d) 460,000 243,800
-------------
BEVERAGES 0.1%
Coca-Cola HBC Finance B.V.
5.125%, due 9/17/13 430,000 405,462
-------------
BIOTECHNOLOGY 0.0%++
FMC Finance III S.A.
6.875%, due 7/15/17 220,000 174,900
-------------
BUILDING MATERIALS 0.1%
Asia Aluminum Holdings, Ltd.
8.00%, due 12/23/11 (d) 645,000 193,500
-------------
COMMERCIAL SERVICES 0.0%++
Quebecor World, Inc.
9.75%, due 1/15/15 (d)(g) 110,000 15,400
-------------
DIVERSIFIED FINANCIAL SERVICES 0.1%
TNK-BP Finance S.A.
7.50%, due 7/18/16 (d) 470,000 206,800
-------------
ELECTRIC 0.2%
Intergen N.V.
9.00%, due 6/30/17 (d) 215,000 172,000
SP PowerAssets, Ltd.
5.00%, due 10/22/13 (d) 625,000 578,549
-------------
750,549
-------------
ELECTRONICS 0.0%++
NXP B.V./NXP Funding LLC
7.875%, due 10/15/14 265,000 131,175
-------------
FOREST PRODUCTS & PAPER 0.1%
Bowater Canada Finance
7.95%, due 11/15/11 20,000 6,200
Catalyst Paper Corp.
7.375%, due 3/1/14 100,000 52,000
Smurfit Capital Funding PLC
7.50%, due 11/20/25 185,000 135,050
-------------
193,250
-------------
HEALTH CARE--PRODUCTS 0.1%
Covidien International
Finance S.A.
6.00%, due 10/15/17 560,000 488,308
-------------
HOLDING COMPANY--DIVERSIFIED 0.1%
Hutchison Whampoa
International, Ltd.
6.50%, due 2/13/13 (d) 650,000 566,242
-------------
INSURANCE 0.1%
Fairfax Financial Holdings,
Ltd.
7.375%, due 4/15/18 35,000 26,600
8.30%, due 4/15/26 20,000 15,000
Nippon Life Insurance Co.
4.875%, due 8/9/10 (d) 340,000 325,474
-------------
367,074
-------------
IRON & STEEL 0.0%++
Steel Capital S.A. for OAO
Severstal
9.75%, due 7/29/13 (d) 245,000 102,900
-------------
MEDIA 0.3%
BSKYB Finance UK PLC
6.50%, due 10/15/35 (d) 1,130,000 849,190
CanWest MediaWorks, Inc.
8.00%, due 9/15/12 41,000 26,240
CanWest MediaWorks, L.P.
9.25%, due 8/1/15 (d) 120,000 73,200
</Table>
20 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
MEDIA (CONTINUED)
Quebecor Media, Inc.
7.75%, due 3/15/16 $ 15,000 $ 10,388
Videotron, Ltee
6.375%, due 12/15/15 75,000 57,000
-------------
1,016,018
-------------
MISCELLANEOUS--MANUFACTURING 0.1%
Siemens
Financieringsmaatschappij
N.V.
6.125%, due 8/17/26 (d) 700,000 567,591
-------------
OIL & GAS 0.1%
Citic Resources Finance,
Ltd.
6.75%, due 5/15/14 (d) 200,000 104,000
Gazprom International S.A.
7.201%, due 2/1/20 (d) 583,631 408,542
-------------
512,542
-------------
PHARMACEUTICALS 0.0%++
Angiotech Pharmaceuticals,
Inc.
6.56%, due 12/1/13 (a) 60,000 36,600
-------------
TELECOMMUNICATIONS 0.1%
Millicom International
Cellular S.A.
10.00%, due 12/1/13 65,000 50,700
Nortel Networks, Ltd.
10.75%, due 7/15/16 70,000 36,925
Rogers Wireless, Inc.
9.625%, due 5/1/11 275,000 286,102
Satelites Mexicanos S.A. de
C.V.
12.512%, due 11/30/11 (a) 85,000 45,900
-------------
419,627
-------------
TRANSPORTATION 0.0%++
Kansas City Southern de
Mexico S.A. de C.V.
7.375%, due 6/1/14 30,000 23,475
-------------
Total Yankee Bonds
(Cost $9,093,039) 6,415,213
-------------
Total Long-Term Bonds
(Cost $206,393,357) 187,222,604
-------------
<Caption>
SHARES
COMMON STOCKS 50.1%
- ---------------------------------------------------------------
AEROSPACE & DEFENSE 1.7%
Cobham PLC 55,917 169,300
L-3 Communications Holdings,
Inc. 23,200 1,883,144
Northrop Grumman Corp. 18,200 853,398
Rolls-Royce Group PLC (f) 44,570 236,405
Rolls-Royce Group PLC C
shares (b) 2,549,404 4,103
United Technologies Corp. 66,100 3,632,856
-------------
6,779,206
-------------
AGRICULTURE 0.7%
Altria Group, Inc. 29,300 562,267
Philip Morris International,
Inc. 50,700 2,203,929
-------------
2,766,196
-------------
AIRLINES 0.0%++
Delta Air Lines, Inc. (f) 3,395 37,277
-------------
APPAREL 0.0%++
Esprit Holdings, Ltd. 16,900 94,875
-------------
BANKS 2.8%
Bank of America Corp. 119,904 2,898,080
Bank of New York Mellon
Corp. (The) 28,832 939,923
Capital One Financial Corp. 34,200 1,337,904
DBS Group Holdings, Ltd. 27,900 213,590
Intesa Sanpaolo S.p.A. RNC
shares 13,000 38,615
PNC Financial Services
Group, Inc. 19,000 1,266,730
Svenska Handelsbanken Class
A 1,500 27,466
U.S. Bancorp 102,500 3,055,525
Wells Fargo & Co. 45,200 1,539,060
-------------
11,316,893
-------------
BEVERAGES 1.2%
Coca-Cola Co. (The) 39,400 1,735,964
Diageo PLC 9,700 148,578
Hansen Natural Corp. (f) 22,100 559,572
PepsiCo, Inc. 43,900 2,502,739
-------------
4,946,853
-------------
BIOTECHNOLOGY 2.0%
Amgen, Inc. (f) 21,100 1,263,679
Celgene Corp. (f) 27,300 1,754,298
Genentech, Inc. (f) 22,300 1,849,562
Gilead Sciences, Inc. (f) 68,900 3,159,065
-------------
8,026,604
-------------
BUILDING MATERIALS 0.0%++
Geberit A.G. 1,211 125,937
-------------
CAPITAL MARKETS 0.1%
Affiliated Managers Group,
Inc. (f) 12,100 561,198
-------------
CHEMICALS 1.3%
E.I. du Pont de Nemours &
Co. 41,000 1,312,000
Monsanto Co. 13,500 1,201,230
Mosaic Co. (The) 9,300 366,513
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
21
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
CHEMICALS (CONTINUED)
Praxair, Inc. 35,700 $ 2,325,855
-------------
5,205,598
-------------
COMMERCIAL SERVICES 0.5%
Alliance Data Systems Corp.
(f) 24,800 1,243,968
Iron Mountain, Inc. (f) 33,100 803,668
Michael Page International
PLC 4,600 14,869
-------------
2,062,505
-------------
COMPUTERS 3.3%
Apple, Inc. (f) 20,900 2,248,631
EMC Corp. (f) 93,900 1,106,142
V Hewlett-Packard Co. 104,900 4,015,572
Indra Sistemas S.A. 3,150 61,649
International Business
Machines Corp. 40,600 3,774,582
Logitech International S.A.
(f) 36,000 532,440
OBIC Co., Ltd. 920 115,594
Otsuka Corp. 600 30,321
Research In Motion, Ltd. (f) 28,100 1,417,083
Wincor Nixdorf A.G. 500 21,783
-------------
13,323,797
-------------
COSMETICS & PERSONAL CARE 1.1%
Avon Products, Inc. 51,700 1,283,711
Beiersdorf A.G. 875 46,258
Colgate-Palmolive Co. 26,400 1,656,864
Procter & Gamble Co. (The) 20,000 1,290,800
-------------
4,277,633
-------------
DISTRIBUTION & WHOLESALE 0.2%
LKQ Corp. (f) 56,800 649,792
-------------
DIVERSIFIED FINANCIAL SERVICES 2.3%
Ameriprise Financial, Inc. 24,300 524,880
Citigroup, Inc. 115,100 1,571,115
Goldman Sachs Group, Inc.
(The) 18,600 1,720,500
V JPMorgan Chase & Co. 112,144 4,625,940
Merrill Lynch & Co., Inc. 46,200 858,858
UBS A.G. Registered (f) 1,800 30,420
-------------
9,331,713
-------------
ELECTRIC 0.8%
FirstEnergy Corp. 24,600 1,283,136
NRG Energy, Inc. (f) 49,300 1,146,225
Scottish & Southern Energy
PLC 14,900 292,076
Terna S.p.A. 150,000 484,714
-------------
3,206,151
-------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.2%
Energizer Holdings, Inc. (f) 9,400 459,284
General Cable Corp. (f) 25,100 428,708
-------------
887,992
-------------
ELECTRONICS 1.6%
Amphenol Corp. Class A 72,200 2,068,530
Avnet, Inc. (f) 15,500 259,470
Hoya Pentax HD Corp. 13,300 246,533
Keyence Corp. 1,400 270,358
Murata Manufacturing Co.,
Ltd. 3,800 131,693
Thermo Fisher Scientific,
Inc. (f) 80,800 3,280,480
Venture Corp., Ltd. 13,500 49,091
-------------
6,306,155
-------------
ENGINEERING & CONSTRUCTION 0.0%++
ABB, Ltd. (f) 7,900 104,456
ABB, Ltd., Sponsored ADR (l) 4,200 55,230
-------------
159,686
-------------
ENTERTAINMENT 0.1%
OPAP S.A. 21,500 471,089
-------------
FOOD 1.6%
General Mills, Inc. 37,400 2,533,476
Kroger Co. (The) 98,000 2,691,080
Nestle S.A. Registered 15,550 606,130
Tesco PLC 122,100 667,422
Unilever N.V., CVA (m) 4,600 110,896
-------------
6,609,004
-------------
GAS 0.3%
Enagas 28,900 563,990
Snam Rete Gas S.p.A. 159,577 808,936
-------------
1,372,926
-------------
HEALTH CARE--PRODUCTS 2.3%
Alcon, Inc. 1,840 162,141
Baxter International, Inc. 9,600 580,704
Becton, Dickinson & Co. 32,600 2,262,440
C.R. Bard, Inc. 16,700 1,473,775
Hologic, Inc. (f) 49,400 604,656
Johnson & Johnson 28,600 1,754,324
St. Jude Medical, Inc. (f) 61,600 2,342,648
Synthes, Inc. 150 19,367
-------------
9,200,055
-------------
HEALTH CARE--SERVICES 0.2%
Covance, Inc. (f) 18,000 900,000
-------------
HOUSEHOLD PRODUCTS & WARES 0.4%
Kimberly-Clark Corp. 25,600 1,569,024
-------------
</Table>
22 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
INSURANCE 0.4%
Aflac, Inc. 11,700 $ 518,076
Assicurazioni Generali
S.p.A. 1,900 47,894
Assurant, Inc. 6,000 152,880
Hannover Rueckversicherung
A.G. 13,875 350,650
Prudential Financial, Inc. 14,100 423,000
-------------
1,492,500
-------------
INTERNET 1.1%
Akamai Technologies, Inc.
(f) 69,900 1,005,162
Equinix, Inc. (f) 26,100 1,629,162
Google, Inc. Class A (f) 4,500 1,617,120
-------------
4,251,444
-------------
IRON & STEEL 0.1%
Nucor Corp. 13,200 534,732
-------------
MACHINERY--CONSTRUCTION & MINING 0.1%
Caterpillar, Inc. 11,800 450,406
-------------
MACHINERY--DIVERSIFIED 0.6%
Rockwell Automation, Inc. 31,800 879,906
Roper Industries, Inc. 30,900 1,401,315
-------------
2,281,221
-------------
MEDIA 1.2%
Cablevision Systems Corp.
Class A 44,300 785,439
DIRECTV Group, Inc. (The)
(f) 55,300 1,210,517
MediaSet S.p.A. 81,210 440,856
Reed Elsevier N.V. 47,317 633,140
Societe Television Francaise
1 18,875 242,076
Walt Disney Co. (The) 63,900 1,655,010
Ziff Davis Media, Inc.
(Physical Certificates)
(b)(c) 138 1
-------------
4,967,039
-------------
METAL FABRICATE & HARDWARE 0.5%
Precision Castparts Corp. 28,000 1,814,680
-------------
MINING 0.2%
Freeport-McMoRan Copper &
Gold, Inc. Class B 23,200 675,120
-------------
MISCELLANEOUS--MANUFACTURING 1.4%
3M Co. 25,200 1,620,360
Danaher Corp. 31,600 1,871,984
Honeywell International,
Inc. 41,000 1,248,450
Illinois Tool Works, Inc. 20,300 677,817
Siemens A.G. 4,355 260,556
-------------
5,679,167
-------------
OFFICE & BUSINESS EQUIPMENT 0.1%
Neopost S.A. 1,585 132,608
RICOH Co., Ltd. 19,400 206,358
-------------
338,966
-------------
OIL & GAS 2.0%
BP PLC 2,400 19,834
BP PLC, Sponsored ADR (l) 12,080 600,376
Chevron Corp. 23,600 1,760,560
ConocoPhillips 24,100 1,253,682
Diamond Offshore Drilling,
Inc. 9,900 879,120
ENI S.p.A. 9,900 235,902
ENI S.p.A., Sponsored ADR
(l) 200 9,610
Hess Corp. 17,000 1,023,570
Royal Dutch Shell PLC Class
A, ADR (l) 6,150 343,231
Suncor Energy, Inc. 16,300 389,896
Total S.A. 4,950 271,878
XTO Energy, Inc. 28,875 1,038,056
-------------
7,825,715
-------------
OIL & GAS SERVICES 1.7%
Baker Hughes, Inc. 42,300 1,478,385
Cameron International Corp.
(f) 52,000 1,261,520
Halliburton Co. 18,400 364,136
National Oilwell Varco, Inc.
(f) 44,800 1,339,072
Smith International, Inc. 12,800 441,344
Transocean, Inc. (f) 21,807 1,795,370
-------------
6,679,827
-------------
PACKAGING & CONTAINERS 0.2%
Crown Holdings, Inc. (f) 34,800 702,264
-------------
PHARMACEUTICALS 3.0%
Abbott Laboratories 35,100 1,935,765
Actelion, Ltd. Registered
(f) 1,241 65,614
Astellas Pharma, Inc. 3,100 126,734
Cardinal Health, Inc. 22,700 867,140
GlaxoSmithKline PLC 2,900 55,900
Medco Health Solutions, Inc.
(f) 59,600 2,261,820
Novartis A.G., ADR (l) 4,100 209,059
Novartis A.G. Registered 8,100 409,768
Novo-Nordisk A/S Class B 200 10,706
Pfizer, Inc. 50,000 885,500
Roche Holding A.G.
Genusscheine 5,270 806,657
Sanofi-Aventis S.A., ADR (l) 1,700 53,754
Santen Pharmaceutical Co.,
Ltd. 3,100 78,840
Shire, Ltd. 10,200 134,836
Shire, Ltd., ADR (l) 600 23,670
Takeda Pharmaceutical Co.,
Ltd. 2,200 110,875
Teva Pharmaceutical
Industries, Ltd.,
Sponsored ADR (l) 33,100 1,419,328
United Therapeutics Corp.
(f) 6,900 601,887
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
23
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
PHARMACEUTICALS (CONTINUED)
Wyeth 54,600 $ 1,757,028
-------------
11,814,881
-------------
PIPELINES 0.5%
Williams Cos., Inc. 89,100 1,868,427
-------------
RETAIL 4.7%
AutoZone, Inc. (f) 9,000 1,145,610
CVS Caremark Corp. 86,600 2,654,290
Guess?, Inc. 26,200 570,374
Home Depot, Inc. (The) 46,300 1,092,217
Kohl's Corp. (f) 72,100 2,532,873
Lowe's Cos., Inc. 69,700 1,512,490
McDonald's Corp. 22,200 1,286,046
Polo Ralph Lauren Corp. 18,000 849,060
Target Corp. 26,800 1,075,216
TJX Cos., Inc. 72,500 1,940,100
V Wal-Mart Stores, Inc. 74,900 4,180,169
-------------
18,838,445
-------------
SEMICONDUCTORS 1.1%
V Intel Corp. 238,000 3,808,000
MEMC Electronic Materials,
Inc. (f) 36,500 670,870
-------------
4,478,870
-------------
SOFTWARE 2.1%
Autodesk, Inc. (f) 51,000 1,086,810
Fiserv, Inc. (f) 21,800 727,248
Infosys Technologies, Ltd.,
Sponsored ADR (l) 600 17,592
V Microsoft Corp. 186,900 4,173,477
Oracle Corp. (f) 135,300 2,474,637
SAP A.G., Sponsored ADR (l) 1,200 42,396
Temenos Group A.G.
Registered (f) 100 1,264
-------------
8,523,424
-------------
TELECOMMUNICATIONS 3.4%
American Tower Corp. Class A
(f) 39,700 1,282,707
Anixter International, Inc.
(f) 16,800 564,648
AT&T, Inc. 60,000 1,606,200
Cisco Systems, Inc. (f) 52,600 934,702
Harris Corp. 36,700 1,319,365
Mobistar S.A. 3,490 231,542
Nokia OYJ, Sponsored ADR (l) 62,900 954,822
NTT DoCoMo, Inc., Sponsored
ADR (l) 30,000 465,000
NTT DoCoMo, Inc. 64 101,540
QUALCOMM, Inc. 52,200 1,997,172
SBA Communications Corp.
Class A (f) 32,800 688,472
Telefonaktiebolaget LM
Ericsson, Sponsored ADR
(l) 3,800 26,866
Telefonaktiebolaget LM
Ericsson Class B 7,980 56,273
Verizon Communications, Inc. 99,400 2,949,198
Vodafone Group PLC, ADR (l) 18,000 346,860
-------------
13,525,367
-------------
TOYS, GAMES & HOBBIES 0.1%
Nintendo Co., Ltd. 590 186,084
Nintendo Co., Ltd., ADR (l) 1,100 42,900
-------------
228,984
-------------
TRANSPORTATION 0.9%
ConAgra Foods, Inc. 56,900 991,198
Norfolk Southern Corp. 39,800 2,385,612
TNT N.V. 8,800 184,239
Yamato Holdings Co., Ltd. 3,300 36,295
-------------
3,597,344
-------------
Total Common Stocks
(Cost $259,416,908) 200,756,982
-------------
CONVERTIBLE PREFERRED STOCKS 1.0%
- ---------------------------------------------------------------
BANKS 0.3%
Bank of America Corp.
7.25% Series L 1,450 1,015,000
Wachovia Corp.
7.50% Series L 150 99,750
-------------
1,114,750
-------------
CHEMICALS 0.1%
Celanese Corp.
4.25% 10,700 204,304
-------------
DIVERSIFIED FINANCIAL SERVICES 0.3%
Affiliated Managers Group,
Inc.
5.10% 12,300 222,937
Citigroup, Inc.
Series T
6.50% 26,400 850,344
Series C
8.75% 5,000 106,850
-------------
1,180,131
-------------
INSURANCE 0.0%++
American International
Group, Inc.
8.50% 11,100 49,395
-------------
INVESTMENT COMPANY 0.0%++
Vale Capital, Ltd.
5.50% Series RIO 4,700 132,775
-------------
</Table>
24 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
CONVERTIBLE PREFERRED STOCKS (CONTINUED)
MINING 0.0%++
Freeport-McMoRan Copper &
Gold, Inc.
6.75% 3,800 $ 185,364
-------------
PHARMACEUTICALS 0.2%
Schering-Plough Corp.
6.00% 5,500 741,290
-------------
SOFTWARE 0.0%++
QuadraMed Corp. (c)(d)(n)
5.50% 10,700 140,063
-------------
TELECOMMUNICATIONS 0.1%
Crown Castle International
Corp.
6.25% 9,300 351,075
-------------
Total Convertible Preferred
Stocks
(Cost $6,883,193) 4,099,147
-------------
EXCHANGE TRADED FUNDS 0.2% (O)
- ---------------------------------------------------------------
iShares MSCI EAFE Index Fund
(p) 5,700 254,334
iShares S&P Europe 350 Index
Fund 13,950 437,890
Vanguard Europe Pacific ETF 4,700 131,318
-------------
Total Exchange Traded Funds
(Cost $1,117,785) 823,542
-------------
PREFERRED STOCK 0.0%++
- ---------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS 0.0%++
Sovereign Real Estate
Investment Corp. (b)(c)(d)
12.00% 100 95,250
-------------
Total Preferred Stock
(Cost $147,000) 95,250
-------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS 0.1%
- ---------------------------------------------------------------
AIRLINES 0.1%
Ryanair Holdings PLC Class A
Strike Price E0.000001
Expire 4/3/18 (d)(f) 56,813 194,423
-------------
Total Warrants
(Cost $227,533) 194,423
-------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT 8.9%
- ---------------------------------------------------------------
REPURCHASE AGREEMENT 8.9%
State Street Bank and
Trust Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$35,461,925
(Collateralized by a
Federal Home Loan Bank
Security with a rate of
2.67% and a maturity date
of 3/4/09, with a
Principal Amount of
$36,085,000 and a Market
Value of $36,175,213) $35,461,629 $ 35,461,629
-------------
Total Short-Term Investment
(Cost $35,461,629) 35,461,629
-------------
Total Investments
(Cost $509,647,405)(q) 107.1% 428,653,577
Liabilities in Excess of
Cash and Other Assets (7.1) (28,278,027)
----- ------------
Net Assets 100.0% $ 400,375,550
===== ============
</Table>
<Table>
++ Less than one--tenth of a percent.
+++ On a daily basis NYLIM confirms that the
value of the Fund's liquid assets (liquid
portfolio securities and cash) is
sufficient to cover its potential senior
securities (e.g., futures, swaps,
options).
(a) Floating rate. Rate shown is the rate in
effect at October 31, 2008.
(b) Fair valued security. The total market
value of these securities at October 31,
2008 is $2,028,328, which represents 0.5%
of the Fund's net assets.
(c) Illiquid security. The total market
value of these securities at October 31,
2008 is $2,497,995, which represents 0.6%
of the Fund's net assets.
(d) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(e) Subprime mortgage investment and other
asset-backed securities. The total market
value of the securities at October 31,
2008 is $1,311,892, which represents 0.3%
of the Fund's net assets.
(f) Non-income producing security.
(g) Issue in default.
(h) PIK ("Payment in Kind")--interest or
dividend payment is made with additional
securities.
(i) Floating Rate Loan--generally pays
interest at rates which are periodically
re-determined at a margin above the
London Inter-Bank Offered Rate ("LIBOR")
or other short-term rates. The rate shown
is the rate(s) in effect at October 31,
2008. Floating Rate Loans are generally
considered restrictive in that the Fund
is ordinarily contractually obligated to
receive consent from the Agent Bank
and/or borrower prior to disposition of a
Floating Rate Loan.
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
25
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
(j) TBA: Securities purchased on a forward
commitment basis with an approximate
principal amount and maturity date. The
actual principal amount and maturity date
will be determined upon settlement. The
market value of these securities at
October 31, 2008 is $28,434,536, which
represents 7.1% of the Fund's net assets.
All or a portion of these securities were
acquired under a mortgage dollar roll
agreement.
(k) Yankee Bond--dollar-denominated bond
issued in the United States by a foreign
bank or corporation.
(l) ADR--American Depositary Receipt.
(m) CVA--Certificaten Van Aandelen.
(n) Restricted security.
(o) Exchange Traded Fund--represents a basket
of securities that are traded on an
exchange.
(p) Morgan Stanley Capital International
Europe, Australasia and Far East Index
(MSCI EAFE Index) is an unmanaged free
float-adjusted market--capitalization
index that is designed to measure
developed-market equity performance,
excluding the United States and Canada.
As of October 31, 2008, the MSCI EAFE
Index consisted of the following 21
developed-market country indices:
Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Hong
Kong, Ireland, Italy, Japan, the
Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden,
Switzerland and the United Kingdom.
(q) At October 31, 2008, cost is $511,534,683
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 4,147,940
Gross unrealized depreciation (87,029,046)
------------
Net unrealized depreciation $(82,881,106)
============
</Table>
The following abbreviation is used in the above portfolio:
<Table>
E - Euro
</Table>
26 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $509,647,405) $428,653,577
Cash denominated in foreign
currencies
(identified cost $468,181) 439,500
Receivables:
Investment securities sold 5,694,960
Dividends and interest 2,170,024
Fund shares sold 29,788
Other assets 36,692
Unrealized appreciation on foreign
currency forward contracts 684,797
------------
Total assets 437,709,338
------------
LIABILITIES:
Payables:
Investment securities purchased 35,907,084
Transfer agent (See Note 3) 325,768
Fund shares redeemed 288,647
Manager (See Note 3) 170,414
NYLIFE Distributors (See Note 3) 138,455
Shareholder communication 109,365
Custodian 55,707
Professional fees 50,769
Trustees 1,500
Accrued expenses 5,378
Unrealized depreciation on foreign
currency forward contracts 280,701
------------
Total liabilities 37,333,788
------------
Net assets $400,375,550
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 318,227
Additional paid-in capital 506,678,307
------------
506,996,534
Accumulated undistributed net
investment income 921,580
Accumulated net realized loss on
investments, written option
transactions and foreign currency
transactions (26,921,651)
Net unrealized depreciation on
investments (80,993,828)
Net unrealized appreciation on
translation of other assets and
liabilities in foreign currencies
and foreign currency forward
contracts 372,915
------------
Net assets $400,375,550
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $136,858,097
============
Shares of beneficial interest
outstanding 10,883,022
============
Net asset value per share
outstanding $ 12.58
Maximum sales charge (5.50% of
offering price) 0.73
------------
Maximum offering price per share
outstanding $ 13.31
============
CLASS A
Net assets applicable to
outstanding shares $185,490,948
============
Shares of beneficial interest
outstanding 14,751,586
============
Net asset value per share
outstanding $ 12.57
Maximum sales charge (5.50% of
offering price) 0.73
------------
Maximum offering price per share
outstanding $ 13.30
============
CLASS B
Net assets applicable to
outstanding shares $ 76,420,132
============
Shares of beneficial interest
outstanding 6,060,554
============
Net asset value and offering price
per share outstanding $ 12.61
============
CLASS C
Net assets applicable to
outstanding shares $ 1,563,045
============
Shares of beneficial interest
outstanding 124,101
============
Net asset value and offering price
per share outstanding $ 12.59
============
CLASS I
Net assets applicable to
outstanding shares $ 43,328
============
Shares of beneficial interest
outstanding 3,425
============
Net asset value and offering price
per share outstanding $ 12.65
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
27
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 11,348,498
Dividends (a) 5,654,915
Income from securities
loaned--net 466,824
-------------
Total income 17,470,237
-------------
EXPENSES:
Manager (See Note 3) 3,586,587
Transfer agent--Investor Class
(See Note 3) 481,896
Transfer agent--Class A (See Note
3) 955,511
Transfer agent--Classes B and C
(See Note 3) 509,999
Transfer agent--Class I (See Note
3) 83
Distribution/Service--Investor
Class (See Note 3) 242,766
Distribution/Service--Class A
(See Note 3) 857,662
Service--Class B (See Note 3) 298,175
Service--Class C (See Note 3) 5,924
Distribution--Class B (See Note
3) 894,524
Distribution--Class C (See Note
3) 17,771
Shareholder communication 149,704
Custodian 114,799
Professional fees 109,822
Recordkeeping (b) 64,175
Registration 63,703
Trustees 18,940
Miscellaneous 33,123
-------------
Total expenses before waiver 8,405,164
Expense waiver from Manager (See
Note 3) (690,571)
-------------
Net expenses 7,714,593
-------------
Net investment income 9,755,644
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, WRITTEN OPTION TRANSACTIONS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions (26,441,696)
Written option transactions 93,167
Foreign currency transactions 19,897
-------------
Net realized loss on investments,
written option transactions and
foreign currency transactions (26,328,632)
-------------
Net change in unrealized
appreciation on:
Security transactions (152,633,976)
Translation of other assets and
liabilities in foreign
currencies and foreign
currency forward contracts 371,139
-------------
Net change in unrealized
appreciation on investments and
foreign currency transactions (152,262,837)
-------------
Net realized and unrealized loss on
investments, written option
transactions and foreign currency
transactions (178,591,469)
-------------
Net decrease in net assets
resulting from operations $(168,835,825)
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$136,648.
(b) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
28 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 9,755,644 $ 11,178,846
Net realized gain (loss)
on investments, written
option transactions and
foreign currency
transactions (26,328,632) 79,829,172
Net change in unrealized
appreciation on
investments and foreign
currency transactions (152,262,837) (12,857,507)
-----------------------------
Net increase (decrease) in
net assets resulting from
operations (168,835,825) 78,150,511
-----------------------------
Dividends and distributions to
shareholders:
From net investment income:
Investor Class (1,536,882) --
Class A (7,027,962) (9,255,960)
Class B (1,284,558) (1,983,268)
Class C (25,910) (33,924)
Class I (851) (180)
-----------------------------
(9,876,163) (11,273,332)
-----------------------------
From net realized gain on investments:
Class A (57,593,593) (39,886,253)
Class B (17,387,304) (16,070,543)
Class C (334,023) (254,730)
Class I (3,286) (531)
-----------------------------
(75,318,206) (56,212,057)
-----------------------------
Total dividends and
distributions to
shareholders (85,194,369) (67,485,389)
-----------------------------
Capital share transactions:
Net proceeds from sale of
shares 35,056,171 27,146,131
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 83,343,876 65,977,833
Cost of shares redeemed (141,896,100) (133,563,713)
-----------------------------
Decrease in net assets
derived from capital
share transactions (23,496,053) (40,439,749)
-----------------------------
Net decrease in net
assets (277,526,247) (29,774,627)
NET ASSETS:
Beginning of year 677,901,797 707,676,424
-----------------------------
End of year $ 400,375,550 $ 677,901,797
=============================
Accumulated undistributed
net investment income at
end of year $ 921,580 $ 822,545
=============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
29
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR
CLASS
------------
FEBRUARY 28,
2008** CLASS A
THROUGH ----------------------------------------------------------------------------
OCTOBER 31, YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 16.50 $ 20.10 $ 19.82 $ 18.92 $ 17.96 $ 17.42
-------- -------- -------- -------- ------- --------
Net investment income 0.19 (a) 0.32 (a) 0.35 (a) 0.27 (a) 0.21 (b) 0.17
Net realized and unrealized
gain (loss) on
investments (3.89) (5.27) 1.88 1.67 (e) 1.29 0.54
Net realized and unrealized
gain on foreign currency
transactions 0.01 0.01 -- -- -- --
-------- -------- -------- -------- ------- --------
Total from investment
operations (3.69) (4.94) 2.23 1.94 1.50 0.71
-------- -------- -------- -------- ------- --------
Less dividends and
distributions:
From net investment
income (0.23) (0.32) (0.35) (0.27) (0.21) (0.17)
From net realized gain on
investments -- (2.27) (1.60) (0.77) (0.33) --
-------- -------- -------- -------- ------- --------
Total dividends and
distributions (0.23) (2.59) (1.95) (1.04) (0.54) (0.17)
-------- -------- -------- -------- ------- --------
Net asset value at end of
period $ 12.58 $ 12.57 $ 20.10 $ 19.82 $ 18.92 $ 17.96
======== ======== ======== ======== ======= ========
Total investment return
(c)(h) (22.65%)(f) (27.88%) 12.18% 10.53%(d)(e) 8.43% 4.05%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.84% ++ 1.93% 1.81% 1.42% 1.10%(b) 0.94%
Net expenses 1.29% ++ 1.18% 1.19% 1.19% 1.19% 1.30%
Expenses (before
waiver/reimbursement) 1.50% ++ 1.26% 1.27% 1.34%(d) 1.31% 1.30%
Portfolio turnover rate 101% (g) 101% (g) 68% 70%(g) 77%(g) 103%
Net assets at end of period
(in 000's) $136,858 $185,491 $518,547 $502,340 $98,180 $115,877
</Table>
<Table>
<Caption>
CLASS C
----------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 20.12 $19.84 $18.94 $17.98 $17.45
------- ------ ------ ------ ------
Net investment income 0.18 (a) 0.21 (a) 0.12 (a) 0.07 (b) 0.04
Net realized and unrealized
gain (loss) on
investments (5.27) 1.88 1.67 (e) 1.28 0.53
Net realized and unrealized
gain on foreign currency
transactions 0.01 -- -- -- --
------- ------ ------ ------ ------
Total from investment
operations (5.08) 2.09 1.79 1.35 0.57
------- ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income (0.18) (0.21) (0.12) (0.06) (0.04)
From net realized gain on
investments (2.27) (1.60) (0.77) (0.33) --
------- ------ ------ ------ ------
Total dividends and
distributions (2.45) (1.81) (0.89) (0.39) (0.04)
------- ------ ------ ------ ------
Net asset value at end of
period $ 12.59 $20.12 $19.84 $18.94 $17.98
======= ====== ====== ====== ======
Total investment return
(c)(h) (28.47%) 11.33% 9.69%(d)(e) 7.60% 3.27%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.12% 1.06% 0.62% 0.35%(b) 0.19%
Net expenses 1.99% 1.94% 1.94% 1.94% 2.05%
Expenses (before
waiver/reimbursement) 2.15% 2.02% 2.09%(d) 2.06% 2.05%
Portfolio turnover rate 101% (g) 68% 70%(g) 77%(g) 103%
Net assets at end of period
(in 000's) $ 1,563 $2,980 $3,175 $3,854 $4,532
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income includes $0.01 and there was no effect to the net income
ratio, as a result of a special one time dividend from Microsoft Corp.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(d) Includes nonrecurring reimbursements from the Manager for professional fees.
The effect on total return was less than one-hundredth of a percent.
(e) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than $0.01
per share on net realized gains on investments and the effect on total return
was less than 0.02%, respectively.
(f) Total return is not annualized.
(g) The portfolio turnover rates not including mortgage dollar rolls were 86%, 55%
and 38% for the years ended October 31, 2008, 2006 and 2005, respectively.
(h) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
30 MainStay Total Return Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
-------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
2008 2007 2006 2005 2004
$ 20.15 $ 19.86 $ 18.95 $ 17.98 $ 17.45
------- -------- -------- -------- --------
0.18 (a) 0.21 (a) 0.11 (a) 0.07 (b) 0.04
(5.28) 1.89 1.69 (e) 1.29 0.53
0.01 -- -- -- --
------- -------- -------- -------- --------
(5.09) 2.10 1.80 1.36 0.57
------- -------- -------- -------- --------
(0.18) (0.21) (0.12) (0.06) (0.04)
(2.27) (1.60) (0.77) (0.33) --
------- -------- -------- -------- --------
(2.45) (1.81) (0.89) (0.39) (0.04)
------- -------- -------- -------- --------
$ 12.61 $ 20.15 $ 19.86 $ 18.95 $ 17.98
======= ======== ======== ======== ========
(28.53%) 11.37% 9.74%(d)(e) 7.66% 3.27%
1.12% 1.06% 0.55% 0.35%(b) 0.19%
1.99% 1.94% 1.94% 1.94% 2.05%
2.15% 2.02% 2.09%(d) 2.06% 2.05%
101% (g) 68% 70%(g) 77%(g) 103%
$76,420 $156,346 $202,149 $665,908 $749,689
</Table>
<Table>
<Caption>
CLASS I
- ----------------------------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
----------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 20.25 $19.90 $18.98 $17.92 $17.98
------- ------ ------ ------ ------
0.37 (a) 0.44 (a) 0.36 (a) 0.26 (b) 0.15
(5.33) 1.93 1.69 (e) 1.42 (0.03)
0.01 -- -- -- --
------- ------ ------ ------ ------
(4.95) 2.37 2.05 1.68 0.12
------- ------ ------ ------ ------
(0.38) (0.42) (0.36) (0.29) (0.18)
(2.27) (1.60) (0.77) (0.33) --
------- ------ ------ ------ ------
(2.65) (2.02) (1.13) (0.62) (0.18)
------- ------ ------ ------ ------
$ 12.65 $20.25 $19.90 $18.98 $17.92
======= ====== ====== ====== ======
(27.60%) 12.65% 11.11%(d)(e) 9.51% 0.68%(f)
2.31% 2.23% 1.86% 1.43%(b) 1.40%++
0.79% 0.81% 0.74% 0.86% 0.84%++
0.97% 0.93% 0.89%(d) 0.98% 0.84%++
101% (g) 68% 70%(g) 77%(g) 103%
$ 43 $ 29 $ 13 $ 7 $ 3
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
31
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Total Return Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on December 29, 1987. Class C shares
commenced on September 1, 1998. Class I shares commenced on January 2, 2004.
Investor Class shares commenced on February 28, 2008. Investor Class and Class A
shares are offered at net asset value per share plus an initial sales charge. No
sales charge applies on investments of $1 million or more (and certain other
qualified purchases) in Investor Class and Class A shares, but a contingent
deferred sales charge is imposed on certain redemptions of such shares within
one year of the date of purchase. Class B shares and Class C shares are offered
without an initial sales charge, although a declining contingent deferred sales
charge may be imposed on redemptions made within six years of purchase of Class
B shares and a 1% contingent deferred sales charge may be imposed on redemptions
made within one year of purchase of Class C shares. Class I shares are not
subject to a sales charge. Depending upon eligibility, Class B shares convert to
either Investor Class or Class A shares eight years after the date they were
purchased. Additionally, depending upon eligibility, Investor Class shares may
convert to Class A shares and Class A shares may convert to Investor Class
shares. The five classes of shares have the same voting (except for issues that
relate solely to one class), dividend, liquidation and other rights and bear the
same conditions except that Class B and Class C shares are subject to higher
distribution fee rates than Investor Class and Class A shares under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are
not subject to a distribution or service fee.
The Fund's investment objective is to realize current income consistent with
reasonable opportunity for future growth of capital and income.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
The Fund invests in floating rate loans. The floating rate loans in which the
Fund principally invests are usually rated less than investment grade and are
generally considered speculative because they present a greater risk of loss,
including default, than higher quality debt securities. These securities pay
investors a higher interest rate because of the increased risk of loss. Although
certain floating rate loans are collateralized, there is no guarantee that the
value of the collateral will be sufficient to repay the loan. In a recession or
serious credit event, the Fund's net asset value could go down and you could
lose money.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or broker selected by the Fund's Manager (as defined in Note 3(A))
in consultation with the Fund's Subadvisor, if any, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques, if
such prices are deemed by the Fund's Manager, in consultation with the Fund's
Subadvisor, if any, to be representative of market values, at the regular close
of trading of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("valuation date").
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange on each valuation date. Securities
that are not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Prices normally are taken from the principal market
in which each security trades. Options contracts are valued at the last posted
settlement price on the market where such options are principally traded.
Investments in other mutual funds are valued at their net asset values as of the
close of the New York Stock Exchange on the date of valuation.
Loan assignments, participations and commitments are valued at the average of
bid quotations obtained from a pricing service. The Trust has engaged an
independent pricing service to provide market value quotations from dealers in
loans. As of October 31, 2008, 100% of total investments in loans were valued
based on prices from such services.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
32 MainStay Total Return Fund
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor ,as defined in Note 3 (A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund held
securities with a value of $2,028,328 that were valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3 (A), conclude that such events may
have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund's Board of Trustees, adjust the value of the local price to reflect the
impact on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain thresholds. In such cases, the securities are
fair valued by applying factors provided by a third party vendor in accordance
with the Fund's policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income quarterly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at net asset value, unless the shareholder
elects otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method and include gains
and losses from repayments of principal on mortgage-backed securities. Dividend
income is recognized on the ex-dividend date and interest income is accrued as
earned using the effective interest rate method. Discounts and premiums on
securities purchased, other than short-term securities, for the Fund are
accreted and amortized, respectively, on the effective interest rate method over
the life of the respective securities or, in the case of a callable security,
over the period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the
mainstayinvestments.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
distribution plans further discussed in Note 3 (B)) are allocated to separate
classes of shares pro rata based upon their relative net asset value on the date
the expenses are incurred. The expenses borne by the Fund, including those of
related parties to the Fund, are shown in the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options that expire are
treated as realized gains. Premiums received from writing options that are
exercised or are canceled in closing purchase transactions are added to the
proceeds or netted against the amount paid on the transaction to determine the
realized gain or loss. By writing a covered call option, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of a decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in return for the premium
on the option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the obligation
as the writer continues, has retained the risk of loss should the price of the
underlying security decline. After writing a put option, the Fund may incur a
loss equal to the difference between the exercise price of the option and the
sum of the market value of the underlying security plus the premium received
from the sale of the option.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security or foreign currency it anticipates purchasing. The Fund may purchase
put options on its securities or foreign currencies to protect against a decline
in the value of the security or foreign currency or to close out covered written
put positions. The Fund may also purchase options to seek to enhance returns.
Risks may arise from an imperfect correlation between the change in market value
of the securities or foreign currencies held by the Fund and the prices of
options relating to the securities or foreign currencies purchased or sold by
the Fund and from the possible lack of a liquid secondary market for an option.
The maximum exposure to loss for any purchased option is limited to the premium
initially paid for the option. (See Note 5.)
(H) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(I) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
assignments and loan participations. Loan assignments and participations
("loans") are agreements to make money available (a "commitment") to a borrower
in a specified amount, at a specified rate and within a specified time. Such
loans are typically senior, secured and collateralized in nature. The Fund
records an investment when the borrower withdraws money and records interest as
earned. These loans pay interest at rates that are periodically reset by
reference to a base lending rate plus a spread. These base lending rates are
generally the prime rate offered by a designated U.S. bank or the London
InterBank Offered Rate ("LIBOR").
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. For example, the Fund may be
contractually obligated to receive approval from the agent bank and/or borrower
prior to the sale of these investments.
The Fund assumes the credit risk of the borrower, the selling participant and
any other persons interpositioned between the Fund and the borrower
("intermediate participants"). In the event that the borrower, selling
participant or intermediate participants become insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
borrower. At any point in time, up to the maturity date of the issue, the
borrower may demand the unfunded portion. These unfunded amounts are marked to
market and recorded in the Statement of Assets and Liabilities.
(J) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are
34 MainStay Total Return Fund
translated into U.S. dollars at the mean between the buying and selling rates
last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date, and
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities that are denominated in foreign currency amounts are
presented at the exchange rates and market values at the close of the period.
The realized and unrealized changes in net assets arising from fluctuations in
exchange rates and market prices of securities are not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(K) MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the Portfolio of Investments and liabilities for such purchase
commitments are included as payables for investments purchased. During the roll
period, the Fund foregoes principal and interest paid on the securities. The
Fund is compensated by the difference between the current sales price and the
forward price for the future as well as by the earnings on the cash proceeds of
the initial sale. MDRs may be renewed without physical delivery of the
securities subject to the contract. The Fund maintains liquid assets from its
portfolio having a value not less than the repurchase price, including accrued
interest. MDR transactions involve certain risks, including the risk that the
MBS returned to the Fund at the end of the roll, while substantially similar,
could be inferior to what was initially sold to the counterparty.
(L) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans, As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(M) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund may not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expenses and it may be
difficult to obtain a prompt sale at an acceptable price. (See Note 6.)
(N) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
mainstayinvestments.com 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement")
between NYLIM and the Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.64% on assets up to $500 million, 0.60% on assets from
$500 million to $1 billion and 0.575% on assets in excess of $1 billion. Prior
to August 1, 2008, the Fund was contractually obligated to pay the Manager at an
annual rate of: 0.64% on assets up to $500 million and 0.60% on assets in excess
of $500 million.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage and other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.29%; Class A, 1.16%; Class B,
2.04%; Class C, 2.04%; and Class I, 0.79%. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. NYLIM
may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed the existing expense limitation and the recoupment is
made within three years after the year in which NYLIM incurred the expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $3,586,587 and waived its fees in the amount of $690,571.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2010 2011 TOTAL
$1,037,949 $575,951 $690,571 $2,304,471
- --------------------------------------------------
</Table>
The Fund had $177,401 of waived fees for which the recoupment period expired
during the year ended October 31, 2008.
Between August 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 1.19%; Class B
1.94%; Class C, 1.94% and Class I, 0.79%. Prior to August 1, 2007, NYLIM had a
different expense limitation agreement in place with respect to the Fund.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
these services provided to the Fund by the Manager amounted to $64,175 for the
period from November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with
36 MainStay Total Return Fund
respect to each class of shares, other than Class I shares, has adopted
distribution plans (the "Plans") in accordance with the provisions of Rule 12b-1
under the 1940 Act.
Pursuant to the Investor Class and Class A Plans, the Distributor receives a
monthly distribution fee from the Fund at an annual rate of 0.25% of the average
daily net assets of the Fund's Investor Class and Class A shares, which is an
expense of the Investor Class and Class A shares of the Fund for distribution or
service activities as designated by the Distributor. Pursuant to the Class B and
Class C Plans, the Fund pays the Distributor a monthly distribution fee, which
is an expense of the Class B and Class C shares of the Fund, at the annual rate
of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Plans provide that the Class B and Class C shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B and Class C shares of the Fund. Class I shares are not
subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were
$10,734 and $20,056, respectively, for the year ended October 31, 2008. The Fund
was also advised that the Distributor retained contingent deferred sales charges
on redemptions of Class A, Class B and Class C shares of $866, $157,857 and
$772, respectively, for the year ended October 31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $1,947,489.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees on the Statement of Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $125,973 0.1%
- --------------------------------------------------
Class C 82 0.0++
- --------------------------------------------------
Class I 993 2.3
- --------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $20,099.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL AND OTHER UNREALIZED TOTAL
ORDINARY OTHER GAIN TEMPORARY APPRECIATION ACCUMULATED
INCOME (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$1,354,538 $(25,034,373) $(28,862) $(82,912,287) $(106,620,984)
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sales deferrals and mark to market on forward contracts.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income and accumulated net
realized gain on investments arising from permanent differences; net assets at
October 31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED NET
UNDISTRIBUTED NET REALIZED ADDITIONAL
INVESTMENT INCOME GAIN (LOSS) ON PAID-IN
(LOSS) INVESTMENTS CAPITAL
$219,554 $(219,744) $190
</Table>
The reclassifications for the Fund are primarily due to paydowns gain (loss),
foreign currency gain (loss) and distribution redesignations.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $25,034,373 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used
mainstayinvestments.com 37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2016 $25,034
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Ordinary Income $25,007,697 $13,516,479
Long-Term Capital Gains 60,186,672 53,968,910
- -------------------------------------------------------
$85,194,369 $67,485,389
- -------------------------------------------------------
</Table>
NOTE 5--FOREIGN CURRENCY FORWARD CONTRACTS, FOREIGN CURRENCY TRANSACTIONS AND
WRITTEN OPTIONS:
As of October 31, 2008, the Fund held the following foreign currency forward
contracts:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
PURCHASED SOLD (DEPRECIATION)
Foreign Currency Buy Contracts
- --------------------------------------------------------------------------------------------------------
Australian Dollar vs. U.S. Dollar, expiring
12/19/08 AUD 932,822 $ 817,000 $(199,672)
- --------------------------------------------------------------------------------------------------------
Euro vs. U.S. Dollar, expiring 1/15/09 EUR 35,609 50,700 (5,395)
- --------------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 1/12/09 GBP 80,645 148,000 (18,691)
- --------------------------------------------------------------------------------------------------------
Japanese Yen vs. U.S. Dollar, expiring 12/8/08 JPY 129,175,440 1,204,714 108,302
- --------------------------------------------------------------------------------------------------------
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT
SOLD PURCHASED
Foreign Currency Sale Contracts
- --------------------------------------------------------------------------------------------------------
Swiss Franc vs. U.S. Dollar, expiring 12/8/08 CHF 1,251,700 $ 1,204,714 124,871
- --------------------------------------------------------------------------------------------------------
Australian Dollar vs. Japanese Yen, expiring 3/5/09 AUD 253,000 JPY 14,137,640 22,253
- --------------------------------------------------------------------------------------------------------
Euro vs. Japanese Yen, expiring 11/28/08 EUR 181,200 JPY 26,219,018 (35,650)
- --------------------------------------------------------------------------------------------------------
Euro vs. Japanese Yen, expiring 2/18/09 EUR 428,000 JPY 50,251,480 31,537
- --------------------------------------------------------------------------------------------------------
Japanese Yen vs. Euro, expiring 11/28/08 JPY 132,447,000 EUR 795,000 333,330
- --------------------------------------------------------------------------------------------------------
Japanese Yen vs. Euro, expiring 2/18/09 JPY 81,585,720 EUR 612,000 54,176
- --------------------------------------------------------------------------------------------------------
Norwegian Krone vs. Japanese Yen, expiring 2/26/09 NOK 672,000 JPY 8,982,960 7,376
- --------------------------------------------------------------------------------------------------------
Pound Sterling vs. Canadian Dollar, expiring 1/9/09 GBP 73,256 CAD 138,000 2,952
- --------------------------------------------------------------------------------------------------------
Swiss Franc vs. Japanese Yen, expiring 12/8/08 CHF 224,000 JPY 21,106,400 (21,293)
- --------------------------------------------------------------------------------------------------------
Unrealized appreciation on foreign currency forward
contracts $ 404,096
- --------------------------------------------------------------------------------------------------------
</Table>
38 MainStay Total Return Fund
As of October 31, 2008, the Fund held the following foreign currency:
<Table>
<Caption>
CURRENCY COST VALUE
Australian Dollar AUD 71,962 $ 60,840 $ 47,823
Canadian Dollar CAD 81,177 68,041 67,350
Danish Krone DKK 21,284 4,172 3,643
Euro EUR 2,696 3,439 3,436
Hong Kong Dollar HKD 620,114 79,936 80,014
Japanese Yen JPY 1,490,610 15,523 15,132
Norwegian Krone NOK 253,061 49,687 37,572
Pound Sterling GBP 60,676 98,670 97,649
Singapore Dollar SGD 3,740 2,483 2,522
Swedish Krona SEK 332,534 42,875 42,852
Swiss Franc CHF 48,136 42,515 41,507
- -----------------------------------------------------------
$468,181 $439,500
- -----------------------------------------------------------
</Table>
During the year ended October 31, 2008, the Fund had the following transactions
in written options:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options Outstanding at
October 31, 2007 -- $ --
- ----------------------------------------------------
Options--Written 783 349,200
- ----------------------------------------------------
Options--Expired -- --
- ----------------------------------------------------
Options--Canceled in closing
transactions (783) (349,200)
- ----------------------------------------------------
Options Outstanding at
October 31, 2008 -- $ --
- ----------------------------------------------------
</Table>
NOTE 6--RESTRICTED SECURITIES:
<Table>
<Caption>
DATE OF 10/31/08 PERCENTAGE OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
QuadraMed Corp. Convertible Preferred
Stock 6/16/04 10,700 $267,500 $140,063 0.0%++
---------------------------------------------------------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
NOTE 7--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 8--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 9--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of U.S. Government
securities were $181,769 and $216,183, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $371,940 and $430,222, respectively.
NOTE 10--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 812,726 $ 13,346,743
Shares issued to
shareholders in
reinvestment of dividends
and
distributions 98,985 1,524,092
Shares redeemed (1,186,163) (18,231,948)
-------------------------
Net decrease in shares
outstanding before
conversion (274,452) (3,361,113)
Shares converted into
Investor Class (See Note
1) 11,508,599 182,668,353
Shares converted from
Investor Class (See Note
1) (351,125) (5,287,886)
-------------------------
Net increase 10,883,022 $174,019,354
=========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
mainstayinvestments.com 39
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 817,366 $ 13,368,766
Shares issued to
shareholders in
reinvestment of dividends
and
distributions 3,641,886 63,129,156
Shares redeemed (5,860,026) (94,803,883)
---------------------------
Net decrease in shares
outstanding before
conversion (1,400,774) (18,305,961)
Shares converted into Class
A (See Note 1) 1,366,368 22,037,642
Shares converted from Class
A (See Note 1) (11,009,287) (174,764,780)
---------------------------
Net decrease (11,043,693) $(171,033,099)
===========================
Year ended October 31,
2007:
Shares sold 820,263 $ 15,818,329
Shares issued to
shareholders in
reinvestment of dividends
and distributions 2,566,079 48,055,464
Shares redeemed (4,956,687) (95,704,452)
---------------------------
Net decrease in shares
outstanding before
conversion (1,570,345) (31,830,659)
Shares converted from Class
B (See Note 1) 2,021,778 38,755,220
---------------------------
Net increase 451,433 $ 6,924,561
===========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 494,833 $ 8,022,766
Shares issued to
shareholders in
reinvestment of dividends
and
distributions 1,053,710 18,349,323
Shares redeemed (1,737,249) (27,903,471)
---------------------------
Net decrease in shares
outstanding before
conversion (188,706) (1,531,382)
Shares converted from Class
B (See Note 1) (1,511,398) (24,653,329)
---------------------------
Net decrease (1,700,104) $ (26,184,711)
===========================
Year ended October 31,
2007:
Shares sold 559,086 $ 10,809,947
Shares issued to
shareholders in
reinvestment of dividends
and distributions 943,338 17,643,888
Shares redeemed (1,904,345) (36,824,730)
---------------------------
Net decrease in shares
outstanding before
conversion (401,921) (8,370,895)
Shares reacquired upon
conversion into Class A
(See Note 1) (2,016,319) (38,755,220)
---------------------------
Net decrease (2,418,240) $ (47,126,115)
===========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 17,357 $ 287,090
Shares issued to
shareholders in
reinvestment of dividends
and distributions 19,392 337,256
Shares redeemed (60,742) (954,093)
---------------------------
Net decrease (23,993) $ (329,747)
===========================
Year ended October 31,
2007:
Shares sold 25,914 $ 495,391
Shares issued to
shareholders in
reinvestment of dividends
and distributions 14,863 277,770
Shares redeemed (52,724) (1,027,026)
---------------------------
Net decrease (11,947) $ (253,865)
===========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 1,948 $ 30,806
Shares issued to
shareholders in
reinvestment of dividends
and distributions 237 4,049
Shares redeemed (174) (2,705)
---------------------------
Net increase 2,011 $ 32,150
===========================
Year ended October 31,
2007:
Shares sold 1,119 $ 22,464
Shares issued to
shareholders in
reinvestment of dividends
and distributions 37 711
Shares redeemed (371) (7,505)
---------------------------
Net increase 785 $ 15,670
===========================
</Table>
NOTE 11--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to
40 MainStay Total Return Fund
develop the measurements and the effect of certain measurements reported in the
financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
mainstayinvestments.com 41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Total Return Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2008, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year 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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Total Return Fund of The MainStay Funds as of October 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
42 MainStay Total Return Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Total Return Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management and
Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider of shareholder services, which has been recognized by
independent third-parties on numerous occasions. The Board noted the role that
the MainStay Family of Funds historically has played in serving the investment
needs of New York Life Insurance Company policyholders, who often maintain
smaller account balances than other retail investors. The Board acknowledged
that it had approved NYLIM's recommendation to create a new "Investor Class" of
shares designed principally to address the higher shareholder-servicing costs
typically associated with smaller shareholder accounts. The
mainstayinvestments.com 43
Board considered the experience of senior personnel at NYLIM providing
management and administrative services to the Fund, as well as NYLIM's
reputation and financial condition. The Board also reviewed NYLIM's willingness
to invest in personnel designed to benefit the Fund, and that NYLIM also is
responsible for paying all of the salaries and expenses for the Fund's officers.
In addition, the Board considered the benefits to shareholders of being part of
the MainStay Family of Funds, including the privilege of exchanging investments
between the same class of shares without the imposition of a sales charge, as
described more fully in the Fund's prospectus. Based on these considerations,
the Board concluded, within the context of its overall determinations regarding
the Agreements, that the Fund is likely to continue to benefit from the nature,
extent and quality of these services as a result of NYLIM's experience,
personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and MacKay
Shields' method for compensating portfolio managers. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio managers and the Board that occurred at meetings from time to
time throughout the year and in previous years. In considering the Fund's
investment performance, the Board focused principally on the Fund's long-term
performance track record.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position is important in order for NYLIM to continue to provide high-
quality ongoing services to the Fund and its shareholders. The Board noted, for
example, increased costs borne by NYLIM and its affiliates due to new and
ongoing regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other
44 MainStay Total Return Fund
profitability methodologies may also be reasonable, the Board concluded that the
profitability methodology presented by NYLIM to the Board with respect to the
Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
mainstayinvestments.com 45
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long term capital gain distributions of $60,186,672.
For the fiscal year ended October 31, 2008, the Fund designates approximately
$4,630,817 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividends paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 25.3% to arrive at the amount eligible for qualified
interest income and 29.8% for the corporate dividends received deduction.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling (1-800-
SEC-0330).
46 MainStay Total Return Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
mainstayinvestments.com 47
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
48 MainStay Total Return Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 49
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
50 MainStay Total Return Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com
The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A014607 (RECYCLE LOGO) MS308-08 MSTR11-12/08
14
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
VALUE FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
VALUE FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 14
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 22
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 29
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 30
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 34
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 34
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 34
- ---------------------------------------------
TRUSTEES AND OFFICERS 35
</Table>
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ------------------------------------------------------
With sales charges (38.53%) (0.11%) 0.77%
Excluding sales
charges (34.96) 1.03 1.34
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- --------------------------------------------------------------
With sales charges (38.58%) (0.13%) 0.76%
Excluding sales charges (35.00) 1.01 1.33
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ------------------------------------------------------
With sales charges (38.43%) (0.08%) 0.56%
Excluding sales
charges (35.55) 0.24 0.56
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class
C shares are sold with no initial sales charge, are subject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 1.00%. Class I shares are sold with no initial sales charge or CDSC, have
no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Class R1 shares are sold with no initial sales
charge or CDSC and have no annual 12b-1 fee. Class R2 shares are sold with no
initial sales charge or CDSC and have an annual 12b-1 fee of 0.25%. Class R1
and Class R2 shares are available only through corporate-sponsored retirement
programs, which include certain minimum program requirements. Performance
figures reflect certain fee waivers and/or expense limitations, without which
total returns may have been lower. These fee waivers and/or expense
limitations are contractual and may be modified or terminated only with the
approval of the Board of Trustees.
THE FOOTNOTES ON THE NEXT TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ------------------------------------------------------
With sales charges (36.10%) 0.24% 0.56%
Excluding sales
charges (35.52) 0.24 0.56
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE
ANNUAL
TOTAL ONE FIVE TEN
RETURNS YEAR YEARS(1) YEARS(1)
- ------------------------------------------
(34.73%) 1.39% 1.62%
</Table>
(PERFORMANCE GRAPH)
CLASS R1 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ------------------------------------------------------
(34.76%) 1.31% 1.54%
</Table>
(PERFORMANCE GRAPH)
The Manager may recoup the amount of certain management fee waivers or
expense reimbursements from the Fund pursuant to the contract if such action
does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which the Manager
incurred the expense. Performance figures shown reflect nonrecurring
reimbursements from affiliates for professional fees and losses attributable
to shareholder trading arrangements. If these nonrecurring reimbursements had
not been made the total return (excluding sales charges) would have been
1.00% for Class A, 0.16% for Class B, 0.22% for Class C, 1.39% for Class I,
1.30% for Class R1 and 1.02% for Class R2 for the five-year period ended
October 31, 2008, and 1.32% for Class A, 0.52% for Class B, 0.55% for Class
C, 1.62% for Class I, 1.53% for Class R1 and 1.27% for Class R2 for the ten-
year period then ended. Investor Class shares were not affected because the
reimbursement occurred prior to the launch of the share class.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A shares through February
27, 2008, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Investor Class shares might have been
lower.
3. Performance figures for Class I, R1 and R2 shares, each of which was first
offered on January 2, 2004, include the historical performance of Class B
shares through December 31, 2003, adjusted for differences in certain
contractual expenses and fees. Unadjusted, the performance shown for Class I,
R1 and R2 shares might have been lower.
THE FOOTNOTES ON THE PRECEDING PAGE AND ON THE FOLLOWING PAGE ARE AN INTEGRAL
PART OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH
THEM.
6 MainStay Value Fund
CLASS R2 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS(1) YEARS(1)
- ------------------------------------------------
(34.96%) 1.03% 1.28%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ------------------------------------------------------------------------
Russell 1000(R) Value Index(4) (36.80%) 1.90% 2.79%
Average Lipper large-cap value fund(5) (37.28) 0.52 1.70
</Table>
4. The Russell 1000(R) Value Index is an unmanaged index that measures the
performance of those Russell 1000(R) companies with lower price-to-book
ratios and lower forecasted growth values. The Russell 1000(R) Index is an
unmanaged index that measures the performance of the 1,000 largest U.S.
companies based on total market capitalization. Results assume reinvestment
of all income and capital gains. The Russell 1000(R) Value Index is
considered to be the Fund's broad-based securities-market index for
comparison purposes. An investment cannot be made directly in an index.
5. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTES ON THE PRECEDING TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY VALUE FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $719.30 $5.49 $1,018.80 $ 6.44
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $720.00 $4.97 $1,019.40 $ 5.84
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $716.70 $8.72 $1,015.00 $10.23
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $716.70 $8.72 $1,015.00 $10.23
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $721.40 $3.07 $1,021.60 $ 3.61
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $721.20 $3.46 $1,021.10 $ 4.06
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $720.10 $4.54 $1,019.90 $ 5.33
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.27% for Investor Class, 1.15% for Class A, 2.02% for Class B and Class C,
0.71% for Class I, 0.80% for Class R1 and 1.05% for Class R2) multiplied by
the average account value over the period, divided by 366 and multiplied by
184 (to reflect the one-half year period). The table above represents actual
expenses incurred during the one-half year period and does not take into
account the Fund's written expense limitation agreement.
8 MainStay Value Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2008
<Table>
<Caption>
Diversified Financial Services 10.2%
Pharmaceuticals 9.8
Oil, Gas & Consumable Fuels 8.7
Diversified Telecommunication
Services 7.5
Food & Staples Retailing 5.6
Commercial Banks 5.2
Aerospace & Defense 3.9
Specialty Retail 3.9
Computers & Peripherals 3.6
Electric Utilities 3.5
Energy Equipment & Services 3.3
Media 3.1
Capital Markets 2.9
Food Products 2.8
Industrial Conglomerates 2.7
Household Products 2.2
Multiline Retail 2.1
Semiconductors & Semiconductor
Equipment 1.8
Metals & Mining 1.6
Software 1.6
Chemicals 1.4
Air Freight & Logistics 1.2
Communications Equipment 1.2
Electrical Equipment 1.2
Health Care Providers & Services 1.2
Insurance 0.5
Exchange Traded Funds 2.2
Short-Term Investment 7.1
Liabilities in Excess of Cash and
Other Assets (2.0)
-----
100.0%
=====
</Table>
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. JPMorgan Chase & Co.
2. AT&T, Inc.
3. Bank of America Corp.
4. Verizon Communications, Inc.
5. Johnson & Johnson
6. ExxonMobil Corp.
7. CVS Caremark Corp.
8. Pfizer, Inc.
9. Kimberly-Clark Corp.
10. Chevron Corp.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGER RICHARD A. ROSEN, CFA, OF MACKAY SHIELDS
LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY VALUE FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK FOR
THE 12-MONTH REPORTING PERIOD?
Excluding all sales charges, MainStay Value Fund returned -34.96% for Investor
Class shares,(1) -35.00% for Class A shares, -35.55% for Class B shares and
- -35.52% for Class C shares for the 12 months ended October 31, 2008. Over the
same period, the Fund's Class I shares returned -34.73%, Class R1 shares
returned -34.76% and Class R2 shares returned -34.96%. All share classes
outperformed the -37.28% return of the average Lipper(2) large-cap value fund
and the -36.80% return of the Russell 1000(R) Value Index(3) for the 12 months
ended October 31, 2008. The Russell 1000(R) Value Index is the Fund's broad-
based securities-market index. See pages 5 and 6 for Fund returns with sales
charges.
WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE RELATIVE TO THE RUSSELL 1000(R)
VALUE INDEX DURING THE REPORTING PERIOD?
Good relative performance in the consumer discretionary and consumer staples
sectors offset weaker results in the energy and health care sectors. Most of the
Fund's holdings in the financials sector were significantly lower, but an
underweighted position in the sector helped the Fund's relative performance.
WHICH FUND HOLDINGS WERE THE STRONGEST CONTRIBUTORS DURING THE REPORTING PERIOD?
Even in a broadly declining market, some sectors and securities performed
relatively well. Several of the Fund's consumer-related holdings outperformed
during the reporting period. Discount retailer Wal-Mart Stores gained ground, as
consumer interest in lower-priced goods increased. General Mills also moved
higher, as earnings increased and investors rewarded the staple nature of the
company's products. Although specialty retailer TJX and supermarket chain Kroger
both closed the reporting period slightly lower than where they began, both were
strong performers on a relative basis.
While most holdings within the financials sector moved significantly lower
during the reporting period, a few managed to perform well relative to the
Russell 1000(R) Value Index. These included Wells Fargo & Co., which advanced
during the reporting period, and PNC Financial Services Group, which declined
only slightly. Also, having an underweighted position relative to the Russell
1000(R) Value Index in the financials sector helped the Fund's relative
performance.
Health care stocks performed reasonably well as investors gravitated to the
traditionally defensive sector. The Fund's strongest health care holding in
absolute terms was generic drug manufacturer Barr Pharmaceuticals, which
advanced sharply on an acquisition offer from rival Teva Pharmaceutical. We sold
the Fund's position in Barr Pharmaceuticals in August after the deal was
announced.
WHICH POSITIONS DETRACTED FROM THE FUND'S PERFORMANCE DURING THE REPORTING
PERIOD?
Although we avoided many of the disasters in the financials sector, most of the
Fund's financial holdings were hard hit during the reporting period. Property &
casualty insurer Hartford Financial Services Group faced liquidity worries, and
the value of the company's shares plummeted before we sold them in late October.
Fortunately, our sales occurred above the stock's closing price at the end of
the reporting period. Life and mortgage insurer Genworth Financial was also down
dramatically during the reporting period, but we limited the negative impact on
Fund performance by selling the Fund's entire position in the stock. Fund
holdings in Citigroup, Bank of America and Goldman Sachs Group also lost
significant value during the reporting period.
The Fund's energy and materials holdings were generally poor performers. The
share price of Freeport-McMoRan Copper & Gold fell precipitously as copper
prices declined. Energy companies Suncor Energy and Baker Hughes suffered as
crude oil prices softened. We reduced the Fund's positions in Suncor Energy and
other energy holdings. Even so, we maintained select positions in energy and
materials companies that were generating solid cash flow and maintaining
attractive prices by historical standards.
The principal risk of investing in value stocks is that they may never reach
what the portfolio manager believes is their full value or that they may even go
down in value. Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions and the risks inherent in management's ability to
anticipate those changes that can adversely affect the value of the Fund's
holdings.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the perfor-mance shown for Investor Class shares
might have been lower.
2. See footnote on page 7 for more information about Lipper Inc.
3. See footnote on page 7 for more information on the Russell 1000(R) Value
Index.
10 MainStay Value Fund
Health care insurer Coventry Health Care detracted from the Fund's performance
throughout much of the reporting period. We sold the stock in October, after the
company announced disappointing results and shrinking margins.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2008, the Fund was overweight relative to the Russell 1000(R)
Value Index in the consumer discretionary, consumer staples, information
technology, telecommunication services and industrials sectors. On the same
date, the Fund was underweight in the financials, energy and utilities sectors.
The Fund's weightings were roughly neutral to the Index in health care and
materials.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecast made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 92.7%+
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 3.9%
Honeywell International, Inc. 197,500 $ 6,013,874
Northrop Grumman Corp. 70,900 3,324,501
United Technologies Corp. 112,300 6,172,008
-------------
15,510,383
-------------
AIR FREIGHT & LOGISTICS 1.2%
FedEx Corp. 71,800 4,693,566
-------------
CAPITAL MARKETS 2.9%
Bank of New York Mellon Corp.
(The) 155,178 5,058,803
Goldman Sachs Group, Inc.
(The) 54,030 4,997,775
Merrill Lynch & Co., Inc. 76,800 1,427,712
-------------
11,484,290
-------------
CHEMICALS 1.4%
E.I. du Pont de Nemours & Co. 173,900 5,564,800
-------------
COMMERCIAL BANKS 5.2%
PNC Financial Services Group,
Inc. 93,300 6,220,311
U.S. Bancorp 217,200 6,474,732
Wells Fargo & Co. 237,300 8,080,065
-------------
20,775,108
-------------
COMMUNICATIONS EQUIPMENT 1.2%
Nokia OYJ, Sponsored ADR (a) 299,500 4,546,410
-------------
COMPUTERS & PERIPHERALS 3.6%
Hewlett-Packard Co. 209,700 8,027,316
International Business
Machines Corp. 65,200 6,061,644
-------------
14,088,960
-------------
DIVERSIFIED FINANCIAL SERVICES 10.2%
V Bank of America Corp. 642,926 15,539,521
Citigroup, Inc. 479,066 6,539,251
V JPMorgan Chase & Co. 448,992 18,520,920
-------------
40,599,692
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 7.5%
V AT&T, Inc. 598,400 16,019,168
V Verizon Communications,
Inc. 461,100 13,680,837
-------------
29,700,005
-------------
ELECTRIC UTILITIES 3.5%
Duke Energy Corp. 454,500 7,444,710
FirstEnergy Corp. 125,700 6,556,512
-------------
14,001,222
-------------
ELECTRICAL EQUIPMENT 1.2%
Rockwell Automation, Inc. 168,400 4,659,628
-------------
ENERGY EQUIPMENT & SERVICES 3.3%
Baker Hughes, Inc. 139,200 4,865,040
Diamond Offshore Drilling,
Inc. 52,300 4,644,240
Transocean, Inc. (b) 44,843 3,691,924
-------------
13,201,204
-------------
FOOD & STAPLES RETAILING 5.6%
V CVS Caremark Corp. 298,000 9,133,700
Kroger Co. (The) 260,900 7,164,314
Wal-Mart Stores, Inc. 108,700 6,066,547
-------------
22,364,561
-------------
FOOD PRODUCTS 2.8%
ConAgra Foods, Inc. 301,300 5,248,646
General Mills, Inc. 83,600 5,663,064
-------------
10,911,710
-------------
HEALTH CARE PROVIDERS & SERVICES 1.2%
Cardinal Health, Inc. 121,200 4,629,840
-------------
HOUSEHOLD PRODUCTS 2.2%
V Kimberly-Clark Corp. 145,000 8,887,050
-------------
INDUSTRIAL CONGLOMERATES 2.7%
3M Co. 108,600 6,982,980
General Electric Co. 186,900 3,646,419
-------------
10,629,399
-------------
INSURANCE 0.5%
Prudential Financial, Inc. 69,100 2,073,000
-------------
MEDIA 3.1%
Cablevision Systems Corp.
Class A 235,000 4,166,550
Walt Disney Co. (The) 307,900 7,974,610
-------------
12,141,160
-------------
METALS & MINING 1.6%
Freeport-McMoRan Copper &
Gold, Inc. Class B 126,300 3,675,330
Nucor Corp. 70,000 2,835,700
-------------
6,511,030
-------------
MULTILINE RETAIL 2.1%
Kohl's Corp. (b) 71,700 2,518,821
Target Corp. 141,300 5,668,956
-------------
8,187,777
-------------
OIL, GAS & CONSUMABLE FUELS 8.7%
V Chevron Corp. 117,004 8,728,499
ConocoPhillips 116,300 6,049,926
V ExxonMobil Corp. 164,100 12,163,092
Hess Corp. 90,200 5,430,942
Suncor Energy, Inc. 86,500 2,069,080
-------------
34,441,539
-------------
PHARMACEUTICALS 9.8%
V Johnson & Johnson 216,400 13,273,976
V Pfizer, Inc. 514,000 9,102,940
</Table>
+ Percentages indicated are based on Fund net assets.
Among the Fund's 10 largest holdings, as of October 31, 2008,
excluding short-term investment. May be subject to change daily.
12 MainStay Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
PHARMACEUTICALS (CONTINUED)
Teva Pharmaceutical
Industries, Ltd., Sponsored
ADR (a) 191,000 $ 8,190,080
Wyeth 258,300 8,312,094
-------------
38,879,090
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1.8%
Intel Corp. 433,300 6,932,800
-------------
SOFTWARE 1.6%
Microsoft Corp. 292,000 6,520,360
-------------
SPECIALTY RETAIL 3.9%
Home Depot, Inc. (The) 227,100 5,357,289
Lowe's Cos., Inc. 291,300 6,321,210
TJX Cos., Inc. 147,900 3,957,804
-------------
15,636,303
-------------
Total Common Stocks
(Cost $431,788,670) 367,570,887
-------------
EXCHANGE TRADED FUNDS 2.2% (C)
- ----------------------------------------------------------------
iShares Russell 1000 Value
Index Fund 131,800 6,990,672
Market Vectors Agribusiness
ETF (b) 70,900 1,912,173
-------------
Total Exchange Traded Funds
(Cost $10,946,262) 8,902,845
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 7.1%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 7.1%
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$28,097,501 (Collateralized
by a Federal Home Loan Bank
Security with a rate of
2.67% and a maturity date
of 3/4/09, with a Principal
Amount of $28,590,000 and a
Market Value of
$28,661,475) $28,097,267 28,097,267
-------------
Total Short-Term Investment
(Cost $28,097,267) 28,097,267
-------------
Total Investments
(Cost $470,832,199) (d) 102.0% 404,570,999
Liabilities in Excess of
Cash and Other Assets (2.0) (8,043,496)
----- ------------
Net Assets 100.0% $ 396,527,503
===== ============
</Table>
<Table>
(a) ADR--American Depositary Receipt.
(b) Non-income producing security.
(c) Exchange Traded Fund--represents a basket
of securities that are traded on an
exchange.
(d) At October 31, 2008, cost is $472,673,054
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 19,036,283
Gross unrealized depreciation (87,138,338)
------------
Net unrealized depreciation $(68,102,055)
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $470,832,199) $404,570,999
Receivables:
Investment securities sold 2,318,213
Dividends and interest 869,163
Fund shares sold 58,522
Other assets 46,843
------------
Total assets 407,863,740
------------
LIABILITIES:
Payables:
Investment securities purchased 10,323,542
Transfer agent (See Note 3) 279,657
Fund shares redeemed 260,419
Manager (See Note 3) 173,609
NYLIFE Distributors (See Note 3) 128,789
Shareholder communication 103,433
Professional fees 44,242
Custodian 14,851
Trustees 1,427
Accrued expenses 6,268
------------
Total liabilities 11,336,237
------------
Net assets $396,527,503
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 296,157
Additional paid-in capital 480,488,927
------------
480,785,084
Accumulated undistributed net
investment income 5,323,313
Accumulated net realized loss on
investments, written options and
foreign currency transactions (23,319,694)
Net unrealized depreciation on
investments (66,261,200)
------------
Net assets $396,527,503
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $121,211,915
============
Shares of beneficial interest
outstanding 9,026,026
============
Net asset value per share
outstanding $ 13.43
Maximum sales charge (5.50% of
offering price) 0.78
------------
Maximum offering price per share
outstanding $ 14.21
============
CLASS A
Net assets applicable to
outstanding shares $168,581,631
============
Shares of beneficial interest
outstanding 12,569,416
============
Net asset value per share
outstanding $ 13.41
Maximum sales charge (5.50% of
offering price) 0.78
------------
Maximum offering price per share
outstanding $ 14.19
============
CLASS B
Net assets applicable to
outstanding shares $ 71,476,692
============
Shares of beneficial interest
outstanding 5,405,376
============
Net asset value and offering price
per share outstanding $ 13.22
============
CLASS C
Net assets applicable to
outstanding shares $ 6,067,892
============
Shares of beneficial interest
outstanding 458,807
============
Net asset value and offering price
per share outstanding $ 13.23
============
CLASS I
Net assets applicable to
outstanding shares $ 29,162,562
============
Shares of beneficial interest
outstanding 2,154,055
============
Net asset value and offering price
per share outstanding $ 13.54
============
CLASS R1
Net assets applicable to
outstanding shares $ 985
============
Shares of beneficial interest
outstanding 73
============
Net asset value and offering price
per share outstanding $ 13.57
============
CLASS R2
Net assets applicable to
outstanding shares $ 25,826
============
Shares of beneficial interest
outstanding 1,916
============
Net asset value and offering price
per share outstanding $ 13.48
============
</Table>
14 MainStay Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 13,258,223
Interest 360,129
Income from securities
loaned--net 137,046
-------------
Total income 13,755,398
-------------
EXPENSES:
Manager (See Note 3) 3,611,732
Transfer agent--Investor Class
(See Note 3) 397,565
Transfer agent--Class A (See Note
3) 827,452
Transfer agent--Classes B and C
(See Note 3) 458,267
Transfer agent --Classes I, R1
and R2 (See Note 3) 1,385
Distribution/Service--Investor
Class (See Note 3) 228,297
Distribution/Service--Class A
(See Note 3) 821,448
Service--Class B (See Note 3) 286,638
Service--Class C (See Note 3) 23,465
Distribution/Service--Class R2
(See Note 3) 27
Distribution--Class B (See Note
3) 859,914
Distribution--Class C (See Note
3) 70,395
Shareholder communication 156,347
Professional fees 95,688
Registration 85,406
Recordkeeping (b) 63,128
Trustees 18,173
Custodian 17,805
Shareholder service--Class R1
(See Note 3) 1
Shareholder service--Class R2
(See Note 3) 11
Miscellaneous 34,234
-------------
Total expenses before waiver 8,057,378
Expense waiver from Manager (See
Note 3) (631,762)
-------------
Net expenses 7,425,616
-------------
Net investment income 6,329,782
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, WRITTEN OPTIONS AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gain (loss) on:
Security transactions $ (22,489,345)
Written option transactions 290,885
Foreign currency transactions 199
-------------
Net realized loss on investments,
written options and foreign
currency transactions (22,198,261)
-------------
Net change in unrealized
appreciation on investments (202,803,052)
-------------
Net realized and unrealized loss on
investments, written options and
foreign currency transactions (225,001,313)
-------------
Net decrease in net assets
resulting from operations $(218,671,531)
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$33,346.
(b) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 6,329,782 $ 7,288,750
Net realized gain (loss)
on investments, written
options and foreign
currency transactions (22,198,261) 70,259,285
Net change in unrealized
appreciation on
investments (202,803,052) 10,585,895
-----------------------------
Net increase (decrease) in
net assets resulting from
operations (218,671,531) 88,133,930
-----------------------------
Dividends and distributions to
shareholders:
From net investment income:
Class A (3,992,924) (3,604,019)
Class B (323,082) (491,067)
Class C (25,973) (35,302)
Class I (648) (241,911)
Class R1 -- (12)
Class R2 -- (100,317)
-----------------------------
(4,342,627) (4,472,628)
-----------------------------
From net realized gain on
investments:
Class A (52,313,598) (55,415,823)
Class B (15,626,249) (20,801,027)
Class C (1,242,018) (1,456,684)
Class I (15,209) (2,289,339)
Class R1 (151) (146)
Class R2 (1,090) (1,418,228)
-----------------------------
(69,198,315) (81,381,247)
-----------------------------
Total dividends and
distributions to
shareholders (73,540,942) (85,853,875)
-----------------------------
Capital share transactions:
Net proceeds from sale of
shares 71,692,332 52,364,803
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 70,886,486 82,670,949
Cost of shares redeemed (154,472,103) (188,175,701)
-----------------------------
Decrease in net assets
derived from capital
share transactions (11,893,285) (53,139,949)
-----------------------------
Net decrease in net
assets (304,105,758) (50,859,894)
NET ASSETS:
Beginning of year 700,633,261 751,493,155
-----------------------------
End of year $ 396,527,503 $ 700,633,261
=============================
Accumulated undistributed
net investment income at
end of year $ 5,323,313 $ 3,430,834
=============================
</Table>
16 MainStay Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS CLASS A
-------------- -----------------------------------------------------------
FEBRUARY 28,
2008**
THROUGH
OCTOBER 31, YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 18.50 $ 23.23 $ 23.27 $ 20.09 $ 18.39 $ 16.56
-------- -------- -------- -------- -------- --------
Net investment income (a) 0.16 0.24 0.26 0.24 0.16 0.14
Net realized and
unrealized gain (loss)
on investments (5.23) (7.57) 2.39 3.21 (d) 1.70 1.74
-------- -------- -------- -------- -------- --------
Total from investment
operations (5.07) (7.33) 2.65 3.45 1.86 1.88
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income -- (0.16) (0.15) (0.25) (0.16) (0.05)
From net realized gain
on investments -- (2.33) (2.54) (0.02) -- --
-------- -------- -------- -------- -------- --------
Total dividends and
distributions -- (2.49) (2.69) (0.27) (0.16) (0.05)
-------- -------- -------- -------- -------- --------
Net asset value at end of
period $ 13.43 $ 13.41 $ 23.23 $ 23.27 $ 20.09 $ 18.39
======== ======== ======== ======== ======== ========
Total investment return
(b)(f) (27.41%)(e) (35.00%) 12.46% 17.30%(c)(d) 10.13% 11.36%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.43%++ 1.32% 1.13% 1.11% 0.82% 0.77%
Net expenses 1.27%++ 1.16% 1.17% 1.17% 1.21% 1.30%
Expenses (before
waiver/reimbursement) 1.45%++ 1.25% 1.21% 1.30%(c) 1.28% 1.30%
Portfolio turnover rate 57% 57% 50% 48% 43% 53%
Net assets at end of
period (in 000's) $121,212 $168,582 $531,440 $514,015 $128,918 $118,818
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 22.99 $ 23.12 $ 19.96 $ 18.28 $16.55
------- ------- ------- ------- ------
Net investment income (a) 0.10 0.09 0.07 0.02 0.00++
Net realized and
unrealized gain (loss)
on investments (7.49) 2.38 3.20 (d) 1.67 1.75
------- ------- ------- ------- ------
Total from investment
operations (7.39) 2.47 3.27 1.69 1.75
------- ------- ------- ------- ------
Less dividends and
distributions:
From net investment
income (0.04) (0.06) (0.09) (0.01) (0.02)
From net realized gain
on investments (2.33) (2.54) (0.02) -- --
------- ------- ------- ------- ------
Total dividends and
distributions (2.37) (2.60) (0.11) (0.01) (0.02)
------- ------- ------- ------- ------
Net asset value at end of
period $ 13.23 $ 22.99 $ 23.12 $ 19.96 $18.28
======= ======= ======= ======= ======
Total investment return
(b)(f) (35.52%) 11.61% 16.44%(c)(d)9.27% 10.56%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 0.55% 0.38% 0.34% 0.07% 0.02%
Net expenses 1.97% 1.92% 1.92% 1.96% 2.05%
Expenses (before
waiver/reimbursement) 2.12% 1.96% 2.05%(c) 2.03% 2.05%
Portfolio turnover rate 57% 50% 48% 43% 53%
Net assets at end of
period (in 000's) $ 6,068 $12,475 $13,381 $13,555 $4,418
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumed the
reinvestments of dividends and distributions. Class I, Class R1 and Class R2
shares are not subject to sales charges.
(c) Includes nonrecurring reimbursements from Manager for professional fees. The
effect on total return was less than one-hundredth of a percent.
(d) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.01 per
share on net realized gains on investments and the effect on total investment
return was 0.05%, respectively.
(e) Total return is not annualized.
(f) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
18 MainStay Value Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 22.99 $ 23.12 $ 19.96 $ 18.28 $ 16.55
------- -------- -------- -------- --------
0.10 0.09 0.06 0.01 0.00++
(7.50) 2.38 3.21 (d) 1.68 1.75
------- -------- -------- -------- --------
(7.40) 2.47 3.27 1.69 1.75
------- -------- -------- -------- --------
(0.04) (0.06) (0.09) (0.01) (0.02)
(2.33) (2.54) (0.02) -- --
------- -------- -------- -------- --------
(2.37) (2.60) (0.11) (0.01) (0.02)
------- -------- -------- -------- --------
$ 13.22 $ 22.99 $ 23.12 $ 19.96 $ 18.28
======= ======== ======== ======== ========
(35.55%) 11.66%(e) 16.44%(c)(d) 9.27% 10.56%
0.55% 0.39% 0.30% 0.07% 0.02%
1.97% 1.92% 1.92% 1.96% 2.05%
2.12% 1.96% 2.05%(c) 2.03% 2.05%
57% 50% 48% 43% 53%
$71,477 $156,553 $191,086 $560,139 $563,838
</Table>
<Table>
<Caption>
CLASS I
- --------------------------------------------------------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
------------------------------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 23.26 $23.24 $ 20.06 $18.43 $17.86
------- ------ ------- ------ ------
0.41 0.35 0.32 0.21 0.09
(7.71) 2.41 3.21(d) 1.69 0.48
------- ------ ------- ------ ------
(7.30) 2.76 3.53 1.90 0.57
------- ------ ------- ------ ------
(0.09) (0.20) (0.33) (0.27) --
(2.33) (2.54) (0.02) -- --
------- ------ ------- ------ ------
(2.42) (2.74) (0.35) (0.27) --
------- ------ ------- ------ ------
$ 13.54 $23.26 $ 23.24 $20.06 $18.43
======= ====== ======= ====== ======
(34.73%) 13.00% 17.78%(c)(d) 10.36% 3.19%(e)
3.12% 1.54% 1.44% 1.13% 1.11%++
0.71% 0.70% 0.75% 0.90% 0.96%++
0.94% 0.75% 0.88%(c) 0.97% 0.96%++
57% 50% 48% 43% 53%
$29,163 $ 152 $19,671 $ 1 $ 1
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
-----------------------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
-----------------------------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 23.24 $23.23 $20.05 $18.42 $17.86
------- ------ ------ ------ ------
Net investment income (a) 0.32 0.34 0.31 0.21 0.07
Net realized and
unrealized gain (loss)
on investments (7.66) 2.40 3.20 (d) 1.69 0.49
------- ------ ------ ------ ------
Total from investment
operations (7.34) 2.74 3.51 1.90 0.56
------- ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income -- (0.19) (0.31) (0.27) --
From net realized gain
on investments (2.33) (2.54) (0.02) -- --
------- ------ ------ ------ ------
Total dividends and
distributions (2.33) (2.73) (0.33) (0.27) --
------- ------ ------ ------ ------
Net asset value at end of
period $ 13.57 $23.24 $23.23 $20.05 $18.42
======= ====== ====== ====== ======
Total investment return
(b)(f) (34.76%) 12.89% 17.67%(c)(d) 10.31% 3.14%(e)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.71% 1.48% 1.43% 1.03% 1.01%++
Net expenses 0.81% 0.81% 0.85% 1.00% 1.06%++
Expenses (before
waiver/reimbursement) 0.96% 0.86% 0.98%(c) 1.07% 1.06%++
Portfolio turnover rate 57% 50% 48% 43% 53%
Net assets at end of
period (in 000's) $ 1 $ 2 $ 1 $ 1 $ 1
</Table>
<Table>
** Commencement of operations
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumed the
reinvestments of dividends and distributions. Class I, Class R1 and Class R2
shares are not subject to sales charges.
(c) Includes nonrecurring reimbursements from Manager for professional fees. The
effect on total return was less than one-hundredth of a percent.
(d) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses were $0.01 per
share on net realized gains on investments and the effect on total investment
return was 0.05%, respectively.
(e) Total return is not annualized.
(f) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
20 MainStay Value Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R2
--------------------------------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
--------------------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 23.15 $23.20 $ 20.01 $ 18.38 $17.86
------- ------ ------- ------- ------
0.26 0.32 0.25 0.16 0.12
(7.60) 2.33 3.22 (d) 1.67 0.40
------- ------ ------- ------- ------
(7.34) 2.65 3.47 1.83 0.52
------- ------ ------- ------- ------
-- (0.16) (0.26) (0.20) --
(2.33) (2.54) (0.02) -- --
------- ------ ------- ------- ------
(2.33) (2.70) (0.28) (0.20) --
------- ------ ------- ------- ------
$ 13.48 $23.15 $ 23.20 $ 20.01 $18.38
======= ====== ======= ======= ======
(34.96%) 12.48% 17.46%(c)(d) 10.02% 2.91%(e)
1.48% 1.43% 1.16% 0.79% 0.76%++
1.06% 1.06% 1.10% 1.24% 1.31%++
1.23% 1.11% 1.23%(c) 1.31% 1.31%++
57% 50% 48% 43% 53%
$ 26 $ 11 $13,340 $11,356 $4,856
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Value Fund (the "Fund"), a diversified fund.
The Fund currently offers seven classes of shares. Class A shares commenced on
January 3, 1995. Class B shares commenced on May 1, 1986. Class C shares
commenced on September 1, 1998. Class I shares, Class R1 shares and Class R2
shares commenced on January 2, 2004. Investor Class shares commenced on February
28, 2008. Investor Class and Class A shares are offered at net asset value per
share plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Investor Class and
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and a 1% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. Class I, Class R1 and Class R2 shares are not subject to a sales
charge. Depending upon eligibility, Class B shares convert to either Investor
Class or Class A shares eight years after the date they were purchased.
Additionally, depending upon eligibility, Investor Class shares may convert to
Class A shares and Class A shares may convert to Investor Class shares. The
seven classes of shares have the same voting (except for issues that relate
solely to one class), dividend, liquidation and other rights and bear the same
conditions except that Class B and Class C shares are subject to higher
distribution fee rates than Investor Class, Class A and Class R2 shares under a
distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I and Class
R1 shares are not subject to a distribution or service fee. Class R1 and Class
R2 shares are authorized to pay to the Manager, as defined in Note 3, its
affiliates, or third-party service providers, as compensation for services
rendered to shareholders of Class R1 or Class R2 shares, a shareholder service
fee.
The Fund's investment objective is to realize maximum long-term total return
from a combination of capital growth and income.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Options
contracts are valued at the last posted settlement price on the market where
such options are principally traded. Investments in other mutual funds are
valued at their net asset values as of the close of the New York Stock Exchange
on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor ,as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund did not hold
securities that were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
22 MainStay Value Fund
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options that expire are
treated as realized gains. Premiums received from writing options that are
exercised or are canceled in closing purchase transactions are added to the
proceeds or netted against the amount paid on the transaction to determine the
realized gain or loss. By writing a covered call option, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of a decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written.
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
When writing a covered call option, the Fund, in return for the premium on the
option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the obligation
as the writer continues, has retained the risk of loss should the price of the
underlying security decline. After writing a put option, the Fund may incur a
loss equal to the difference between the exercise price of the option and the
sum of the market value of the underlying security plus the premium received
from the sale of the option.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security or foreign currency it anticipates purchasing. The Fund may purchase
put options on its securities or foreign currencies to protect against a decline
in the value of the security or foreign currency or to close out covered written
put positions. The Fund may also purchase options to seek to enhance returns.
Risks may arise from an imperfect correlation between the change in market value
of the securities or foreign currencies held by the Fund and the prices of
options relating to the securities or foreign currencies purchased or sold by
the Fund and from the possible lack of a liquid secondary market for an option.
The maximum exposure to loss for any purchased option is limited to the premium
initially paid for the option. (See Note 5.)
(I) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Funds' cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(J) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement")
between NYLIM and the Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.72% on assets up to $200 million, 0.65% on assets from
$200 million to $500 million and 0.50% on assets in excess of $500 million.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
24 MainStay Value Fund
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage, other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.27%; Class A, 1.17%; Class B,
2.02%; Class C, 2.02%; Class I, 0.71%; Class R1, 0.81% and Class R2, 1.06%. This
expense limitation may be modified or terminated only with the approval of the
Board of Trustees. NYLIM may recoup the amount of certain management fee waivers
or expense reimbursements from the Fund pursuant to the agreement if such action
does not cause the Fund to exceed the existing expense limitation and the
recoupment is made within three years after the year in which NYLIM incurred the
expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $3,611,732 and waived its fees in the amount of $631,762.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2010 2011 TOTAL
$907,175 $320,473 $631,762 $1,859,410
- --------------------------------------------------
</Table>
The Fund had $235,721 of waived fees for which the recoupment period expired
during the year ended October 31, 2008.
Prior to April 1, 2008, NYLIM had a written expense limitation agreement under
which it had agreed to waive a portion of the Fund's management fee or reimburse
the expenses of the appropriate class of the Fund so that the class' total
ordinary operating expenses did not exceed the following percentages of average
daily net assets for each class: Class A, 1.17%; Class B, 1.92%; Class C, 1.92%;
Class I, 0.71%; Class R1, 0.81% and Class R2, 1.06%.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
these services provided to the Fund by the Manager amounted to $63,128 for the
period from November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to Investor Class, Class A, Class B, Class C, and Class R2 shares,
has adopted distribution plans (the "Plans") in accordance with the provisions
of Rule 12b-1 under the 1940 Act.
Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor
receives a monthly distribution fee from the Fund at an annual rate of 0.25% of
the average daily net assets of the Fund's Investor Class, Class A and Class R2
shares, which is an expense of the Investor Class, Class A and Class R2 shares
of the Fund, for distribution or service activities as designated by the
Distributor. Pursuant to the Class B and Class C Plans, the Fund pays the
Distributor a monthly distribution fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Plans provide that the
Class B and Class C shares of the Fund also incur a service fee at the annual
rate of 0.25% of the average daily net asset value of the Class B and Class C
shares of the Fund. Class I and Class R1 shares are not subject to a
distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R1 and Class R2
shares, the Manager has agreed to provide, through its affiliates or independent
third parties, various shareholder and administrative support services to
shareholders of the Class R1 and Class R2 shares. For its services, the Manager
is entitled to a Shareholder Service Fee accrued daily and paid monthly at an
annual rate of 0.10% of the average daily net assets attributable to the Class
R1 and Class R2 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares was $12,033
and $24,296, respectively, for the year ended October 31, 2008 . The Fund was
also advised that the Distributor retained
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
contingent deferred sales charges on redemptions of Investor Class, Class A,
Class B and Class C shares of $40, $3,881, $145,151 and $1,998, respectively,
for the year ended October 31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $1,684,669.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $264,789 0.2%
- ------------------------------------------------------
Class C 218 0.0++
- ------------------------------------------------------
Class I 989 0.0++
- ------------------------------------------------------
Class R1 985 100.0
- ------------------------------------------------------
Class R2 973 3.8
- ------------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $19,216.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$5,323,313 $(21,478,839) $-- $(68,102,055) $(84,257,581)
- --------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN (LOSS) ON ADDITIONAL
INCOME (LOSS) INVESTMENTS PAID-IN CAPITAL
$(94,676) $94,676 $--
- ---------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gain
(loss) and distribution redesignations.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $21,478,839 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2016 $21,479
- -----------------------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Ordinary Income $21,030,694 $14,152,385
Long-Term Capital Gains 52,510,248 71,701,490
- -----------------------------------------------------
$73,540,942 $85,853,875
- -----------------------------------------------------
</Table>
NOTE 5--WRITTEN OPTIONS:
During the year ended October 31, 2008, the Fund had the following transactions
in written options:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options Outstanding at
October 31, 2007 -- $ --
- ----------------------------------------------------
Options--Written 1,570 290,885
- ----------------------------------------------------
Options--Expired (1,570) (290,885)
- ----------------------------------------------------
Options--Canceled in closing
transactions -- --
- ----------------------------------------------------
Options Outstanding at
October 31, 2008 -- $ --
- ----------------------------------------------------
</Table>
26 MainStay Value Fund
NOTE 6--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 8--PURCHASES AND SALES OF
SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $302,550 and $396,942, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 972,151 $ 18,100,434
Shares redeemed (1,105,382) (18,742,164)
-------------------------
Net decrease in shares
outstanding before
conversion (133,231) (641,730)
Shares converted into
Investor Class (See Note
1) 9,563,073 168,412,158
Shares converted from
Investor Class (See Note
1) (403,816) (6,685,141)
-------------------------
Net increase 9,026,026 $161,085,287
=========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 841,552 $ 15,161,281
Shares issued to
shareholders in
reinvestment of dividends
and distributions 2,738,278 54,704,352
Shares redeemed (5,669,456) (102,755,321)
---------------------------
Net decrease in shares
outstanding before
conversion (2,089,626) (32,889,688)
Shares converted into Class
A (See Note 1) 1,083,791 19,239,392
Shares converted from Class
A (See Note 1) (9,297,228) (163,532,013)
---------------------------
Net decrease (10,303,063) $(177,182,309)
===========================
Year ended October 31,
2007:
Shares sold 1,139,017 $ 25,593,223
Shares issued to
shareholders in
reinvestment of dividends
and distributions 2,665,453 57,265,150
Shares redeemed (4,425,720) (99,815,142)
---------------------------
Net decrease in shares
outstanding before
conversion (621,250) (16,956,769)
Shares converted from Class
B (See Note 1) 1,400,046 31,337,429
---------------------------
Net increase 778,796 $ 14,380,660
===========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 468,919 $ 8,311,600
Shares issued to
shareholders in
reinvestment of dividends
and distributions 783,199 15,470,650
Shares redeemed (1,684,722) (29,642,920)
---------------------------
Net decrease in shares
outstanding before
conversion (432,604) (5,860,670)
Shares converted from Class
B (See Note 1) (970,181) (17,434,396)
---------------------------
Net decrease (1,402,785) $ (23,295,066)
===========================
Year ended October 31,
2007:
Shares sold 602,634 $ 13,412,077
Shares issued to
shareholders in
reinvestment of dividends
and distributions 966,251 20,575,033
Shares redeemed (1,614,322) (36,057,616)
---------------------------
Net decrease in shares
outstanding before
conversion (45,437) (2,070,506)
Shares reacquired upon
conversion into Class A
(See Note 1) (1,411,381) (31,337,429)
---------------------------
Net decrease (1,456,818) $ (33,407,935)
===========================
</Table>
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 66,078 $ 1,210,761
Shares issued to
shareholders in
reinvestment of dividends
and distributions 35,147 694,385
Shares redeemed (185,004) (3,231,612)
---------------------------
Net decrease (83,779) $ (1,326,466)
===========================
Year ended October 31,
2007:
Shares sold 91,666 $ 2,025,373
Shares issued to
shareholders in
reinvestment of dividends
and distributions 36,667 780,811
Shares redeemed (164,525) (3,683,969)
---------------------------
Net decrease (36,192) $ (877,785)
===========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 2,154,268 $ 28,886,685
Shares issued to
shareholders in
reinvestment of dividends
and distributions 792 15,857
Shares redeemed (7,531) (98,237)
---------------------------
Net increase 2,147,529 $ 28,804,305
===========================
Year ended October 31,
2007:
Shares sold 460,915 $ 10,235,944
Shares issued to
shareholders in
reinvestment of dividends
and distributions 117,811 2,531,250
Shares redeemed (1,418,753) (32,856,427)
---------------------------
Net decrease (840,027) $ (20,089,233)
===========================
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31,
2008:
Shares issued to
shareholders in
reinvestment of dividends
and distributions 8 $ 152
---------------------------
Net increase 8 $ 152
===========================
Year ended October 31,
2007:
Shares issued to
shareholders in
reinvestment of dividends
and distributions 7 $ 160
---------------------------
Net increase 7 $ 160
===========================
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 1,495 $ 21,571
Shares issued to
shareholders in
reinvestment of dividends
and distributions 55 1,090
Shares redeemed (102) (1,849)
---------------------------
Net increase 1,448 $ 20,812
===========================
Year ended October 31,
2007:
Shares sold 49,659 $ 1,098,186
Shares issued to
shareholders in
reinvestment of dividends
and distributions 70,904 1,518,545
Shares redeemed (695,193) (15,762,547)
---------------------------
Net decrease (574,630) $ (13,145,816)
===========================
</Table>
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
28 MainStay Value Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Value Fund ("the Fund"), one of
the funds constituting The MainStay Funds, as of October 31, 2008, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year 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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Value Fund of The MainStay Funds as of October 31, 2008, the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with U.S.
generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
mainstayinvestments.com 29
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Value Fund (the "Fund"), which was comprised solely of
Independent Trustees, unanimously approved the Management and Subadvisory
Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider
30 MainStay Value Fund
of shareholder services, which has been recognized by independent third-parties
on numerous occasions. The Board noted the role that the MainStay Family of
Funds historically has played in serving the investment needs of New York Life
Insurance Company policyholders, who often maintain smaller account balances
than other retail investors. The Board acknowledged that it had approved NYLIM's
recommendation to create a new "Investor Class" of shares designed principally
to address the higher shareholder-servicing costs typically associated with
smaller shareholder accounts. The Board considered the experience of senior
personnel at NYLIM providing management and administrative services to the Fund,
as well as NYLIM's reputation and financial condition. The Board also reviewed
NYLIM's willingness to invest in personnel designed to benefit the Fund, and
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
manager, the number of accounts managed by the portfolio manager and MacKay
Shields' method for compensating portfolio manager. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio manager and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position
mainstayinvestments.com 31
is important in order for NYLIM to continue to provide high-quality ongoing
services to the Fund and its shareholders. The Board noted, for example,
increased costs borne by NYLIM and its affiliates due to new and ongoing
regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
32 MainStay Value Fund
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
mainstayinvestments.com 33
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $52,510,248.
For the fiscal year ended October 31, 2008, the Fund designates approximately
$12,060,497 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividends paid by the Fund during the fiscal year ended October 31, 2008
should be multiplied by 0.8% to arrive at the amount eligible for qualified
interest income and 63.8% for the corporate dividends received deduction.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
34 MainStay Value Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
mainstayinvestments.com 35
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
36 MainStay Value Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 37
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
38 MainStay Value Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A014522 (RECYCLE LOGO) MS308-08 MSV11-12/08
15
(MAINSTAY LOGO)
MAINSTAY
DIVERSIFIED INCOME FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY LOGO)
MAINSTAY
DIVERSIFIED INCOME FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 25
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 30
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 40
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 41
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 45
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 45
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 45
- ---------------------------------------------
TRUSTEES AND OFFICERS 46
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 4.5% INITIAL SALES CHARGES
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------------
With sales charges (20.02%) 0.24% 3.09%
Excluding sales charges (16.26) 1.17 3.57
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
LEHMAN BROTHERS
MAINSTAY DIVERSIFIED AGGREGATE BOND DIVERSIFIED INCOME
INCOME FUND INDEX INDEX
-------------------- --------------- ------------------
10/31/98 9550 10000 10000
9910 10053 10714
9900 10787 11102
10417 12358 11924
10355 13085 12645
12795 13727 15474
13874 14486 17292
14167 14651 18034
15111 15411 19678
16190 16240 21282
10/31/08 13558 16290 17845
</Table>
CLASS A SHARES--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------------
With sales charges (20.03%) 0.24% 3.09%
Excluding sales charges (16.27) 1.16 3.57
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
LEHMAN BROTHERS
MAINSTAY DIVERSIFIED AGGREGATE BOND DIVERSIFIED INCOME
INCOME FUND INDEX INDEX
-------------------- --------------- ------------------
10/31/98 23875 25000 25000
24776 25133 26785
24750 26968 27754
26043 30895 29810
25887 32713 31613
31986 34318 38685
34685 36216 43230
35417 36627 45084
37778 38527 49194
40474 40601 53205
10/31/08 33890 40725 44613
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------------
With sales charges (20.86%) 0.08% 2.80%
Excluding sales charges (16.88) 0.40 2.80
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
LEHMAN BROTHERS
MAINSTAY DIVERSIFIED AGGREGATE BOND DIVERSIFIED INCOME
INCOME FUND INDEX INDEX
-------------------- --------------- ------------------
10/31/98 10000 10000 10000
10315 10053 10714
10212 10787 11102
10678 12358 11924
10525 13085 12645
12917 13727 15474
13909 14486 17292
14080 14651 18034
14926 15411 19678
15856 16240 21282
10/31/08 13179 16290 17845
</Table>
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this
paragraph, change in share price, and reinvestment of dividend and capital-
gain distributions. The graphs assume an initial investment of $25,000 for
Class A shares and $10,000 for all other classes and reflect the deduction
of all sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 4.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to
a contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed
within the first six years of purchase, and have an annual 12b-1 fee of
1.00%. Class C shares are sold with no initial sales charge, are subject to
a CDSC of 1.00%, if redeemed within one year of purchase, and have an annual
12b-1 fee of 1.00%. Class I shares are sold with no initial sales charge or
CDSC, have no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Performance figures reflect certain fee waivers
and/or expense limitations, without which total returns may have been lower.
These fee waivers
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------------
With sales charges (17.68%) 0.40% 2.80%
Excluding sales charges (16.88) 0.40 2.80
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
LEHMAN BROTHERS
MAINSTAY DIVERSIFIED AGGREGATE BOND DIVERSIFIED INCOME
INCOME FUND INDEX INDEX
-------------------- --------------- ------------------
10/31/98 10000 10000 10000
10315 10053 10714
10212 10787 11102
10678 12358 11924
10525 13085 12645
12917 13727 15474
13909 14486 17292
14080 14651 18034
14926 15411 19678
15856 16240 21282
10/31/08 13179 16290 17845
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------------
(15.86%) 1.52% 3.88%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
LEHMAN BROTHERS
MAINSTAY DIVERSIFIED AGGREGATE BOND DIVERSIFIED INCOME
INCOME FUND INDEX INDEX
-------------------- --------------- ------------------
10/31/98 10000 10000 10000
10404 10053 10714
10420 10787 11102
10993 12358 11924
10955 13085 12645
13568 13727 15474
14765 14486 17292
15108 14651 18034
16178 15411 19678
17392 16240 21282
10/31/08 14634 16290 17845
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ----------------------------------------------------------------------------
Barclays Capital Aggregate Bond Index(4) 0.30% 3.48% 5.00%
Diversified Income Index(5) (16.15) 2.89 5.96
Average Lipper multi-sector income fund(6) (15.36) 1.74 3.69
</Table>
and/or expense limitations are contractual and may be modified or terminated
only with the approval of the Board of Trustees. The Manager may recoup the
amount of certain management fee waivers or expense reimbursements from the
Fund pursuant to the contract if such action does not cause the Fund to
exceed existing expense limitations and the recoupment is made within three
years after the year in which the Manager incurred the expense.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A shares through February
27, 2008, adjusted for differences in certain contractual fees and expenses.
Unadjusted, the performance shown for Investor Class shares might have been
lower.
3. Performance figures for Class I shares, first offered on January 2, 2004,
include the historical performance of Class A shares through December 31,
2003, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
4. Barclays Capital has recently completed its acquisition of Lehman Brothers(R)
North American Investment Banking and Capital Markets businesses, and as part
of the transaction has changed the name of the index from "Lehman
Brothers(R)" to "Barclays Capital." The Barclays Capital Aggregate Bond Index
is an unmanaged index that consists of the following other unmanaged Barclays
Capital Indices: the Government Index, the Corporate Index, the Mortgage-
Backed Securities Index and the Asset-Backed Securities Index. To qualify for
inclusion in the Barclays Capital Aggregate Bond Index, securities must be
U.S. dollar denominated and investment grade and have a fixed-rate coupon, a
remaining maturity of at least one year, and a par amount outstanding of at
least $250 million. Results assume reinvestment of all income and capital
gains. An investment cannot be made directly in an index. The Barclays
Capital Aggregate Bond Index is considered to be the Fund's broad-based
securities-market index for comparison purposes.
5. The Fund's Diversified Income Index is a composite, which assumes equal
investments in the Barclays Capital Global Aggregate Bond Index, the Credit
Suisse High Yield Index, and the JPM EMBI Global Diversified Index. All
indices are unmanaged. The indices measure the performance of securities in
the global investment-grade bond sector, the U.S. high-yield bond sector and
the global emerging market sector, respectively. Results assume that all
income and capital gains are reinvested in the index or indices that produce
them. An investment cannot be made directly in an index or this composite.
6. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND GRAPHS
AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Diversified Income Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY DIVERSIFIED INCOME FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $841.20 $6.48 $1,018.10 $ 7.10
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $834.70 $6.00 $1,018.60 $ 6.60
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $830.80 $9.89 $1,014.30 $10.89
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $831.70 $9.90 $1,014.30 $10.89
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $837.40 $4.43 $1,020.30 $ 4.88
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.40% for Investor Class, 1.30% for Class A, 2.15% for Class B and Class C
and 0.96% for Class I) multiplied by the average account value over the
period, divided by 366 and multiplied by 184 (to reflect the one-half year
period). The table above represents actual expenses incurred during the one-
half year period and does not take into account the Fund's written expense
limitation agreement.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2008
(COMPOSITION PIE CHART)
<Table>
Corporate Bonds 23.60
U.S. Government & Federal Agencies 23.20
Foreign Government Bonds 22.40
Short-Term Investment 14.00
Yankee Bonds 9.80
Convertible Bonds 3.90
Loan Assignments & Participations 2.60
Convertible Preferred Stocks 1.30
Asset-Backed Securities 0.80
Mortgage-Backed Securities 0.80
Municipal Bonds 0.40
Preferred Stocks 0.30
Common Stocks 0.30
Warrants 0.00
Liabilities in Excess of Cash and Other
Assets (3.40)
</Table>
++ Less than one-tenth of a percent.
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Federal National Mortgage Association,
4.625%-6.25%, due 2/1/11-1/2/14
2. United Kingdom Treasury Bonds,
4.75%-6.00%,
due 3/7/12-12/7/28
3. United States Treasury Notes,
3.375%-4.875%,
due 6/30/13-8/15/18
4. Federal National Mortgage Association
(Mortgage Pass-Through Securities),
5.50%-6.50%,
due 9/1/34-12/25/38
5. Republic of Germany, 3.75%-5.00%,
due 7/4/11-1/4/17
6. United Mexican States, 5.625%-9.00%, due
12/20/12-1/15/17
7. Government National Mortgage Association
(Mortgage Pass-Through Securities),
6.00%-6.50%,
due 8/15/32-12/25/38
8. Hellenic Republic, 4.50%, due 5/20/14
9. Overseas Private Investment Corporation,
5.142%, due 12/15/23
10. Federal Republic of Brazil,
8.25%-11.00%, due 1/20/34-8/17/40
</Table>
8 MainStay Diversified Income Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS GARY GOODENOUGH, JOSEPH PORTERA AND J.
MATTHEW PHILO, CFA, OF MACKAY SHIELDS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY DIVERSIFIED INCOME FUND
PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK
DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Diversified Income Fund returned -16.26%
for Investor Class shares,(1) -16.27% for Class A shares, -16.88% for Class B
shares and -16.88% for Class C shares for the 12 months ended October 31, 2008.
Over the same period, the Fund's Class I shares returned -15.86%. All share
classes underperformed the -15.36% return of the average Lipper(2) multi-sector
income fund and the 0.30% return of the Barclays Capital Aggregate Bond Index(3)
for the 12-month reporting period. Class I shares outperformed--and Investor
Class, Class A, Class B and Class C shares underperformed--the -16.15% return of
the Diversified Income Index(4) for the 12 months ended October 31, 2008. The
Barclay's Capital Aggregate Bond Index is the Fund's broad-based securities-
market index. See pages 5 and 6 for Fund returns with sales charges.
WHAT KEY FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
The Fund's exposure to emerging-market debt detracted from its results relative
to the Fund's Diversified Income Index, as the last months of the reporting
period were among the most difficult in recent memory for this fixed-income
sector. Despite better growth prospects and sizable reserve cushions, emerging-
market debt saw yield spreads(5) widen, as investors sought lower-risk
investments in a massive
flight to quality. Liquidity premiums rose dramatically as volatility soared. We
started reducing the Fund's exposure to emerging-market debt by the middle of
2008.
Our decision to add exposure to convertible debt further detracted from
performance. Although convertible securities initially performed well, they
later underperformed as bond spreads widened and the equities to which they were
linked fell dramatically in the second half of the reporting period.
On the positive side, the Fund benefited from its allocation to investment-grade
debt. We prudently increased the Fund's exposure to U.S. Treasury securities,
which benefited from investors' flight to quality, and the Fund had little
exposure to securitized products, such as mortgage-backed securities and asset-
backed securities, during most of the reporting period. Somewhat offsetting the
benefits of this defensive positioning were the Fund's investment-grade bank
holdings, which detracted from performance.
Our decision to add to the Fund's nondollar-denominated government bond exposure
helped the Fund's performance. Like U.S. Treasurys, bonds from other developed-
market nations rallied in the global flight to quality. Minimal exposure to
foreign currencies also boosted the Fund's relative results. Considered by many
to be a "safe haven," securities denominated in U.S. dollars were in great
demand, which forced
The values of debt securities fluctuate depending on various factors, including
interest rates, issuer creditworthiness, market conditions and maturities.
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. Foreign securities may be
subject to greater risks than U.S. investments, including currency fluctuations,
less-liquid trading markets, greater price volatility, political and economic
instability, less publicly available information and changes in tax or currency
laws or monetary policy. These risks are likely to be greater in emerging
markets than in developed markets. High-yield debt securities ("junk bonds") are
generally considered speculative because they present a greater risk of loss
than higher-quality debt securities and may be subject to greater price
volatility. The Fund may invest in derivatives, which may increase the
volatility of the Fund's net asset value and may result in a loss to the Fund.
The principal risk of mortgage dollar rolls is that the security the Fund
receives at the end of the transaction may be worth less than the security the
Fund sold to the same counterparty at the beginning of the transaction. The
principal risk of mortgage-related and asset-backed securities is that the
underlying debt may be prepaid ahead of schedule if interest rates fall, thereby
reducing the value of the Fund's investments. If interest rates rise, less of
the debt may be prepaid and the Fund may lose money. The Fund may experience a
portfolio turnover of more than 100% and may generate taxable short-term capital
gains.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 6 for more information on Lipper Inc.
3. See footnote on page 6 for more information on the Barclay's Capital
Aggregate Bond Index.
4. See footnote on page 6 for more information on the Diversified Income Index.
5. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The terms may also refer to the difference in yield between two specific
securities or types of securities at a given time.
mainstayinvestments.com 9
the liquidation of many leveraged "carry trades"(6) that had been funded in U.S.
dollars and Japanese yen.
HOW DID YOU POSITION THE FUND'S PORTFOLIO IN THE HIGH-YIELD MARKET?
Throughout the reporting period, the Fund was more conservatively positioned in
high-yield securities than the Fund's Diversified Income Index and was
underweight in lower-rated high-yield bonds relative to this Index. Although
increased economic risks were quickly developing, we believed that these risks
were not adequately discounted into the high-yield market and that many high-
yield securities failed to provide adequate compensation for the risks they
entailed. Our positioning contributed positively to the Fund's results relative
to this Index, as lower-quality bonds underperformed higher-quality high-yield
bonds during the reporting period.
From a sector perspective, the Fund maintained an emphasis on the health care,
utilities and gaming sectors, with more modest positions in the retail, housing,
consumer and service sectors. As employment, credit availability and income came
under greater downward pressure, steering away from sectors that were closely
connected to consumers proved to be a successful strategy.
HOW DID THE FUND'S ASIAN HOLDINGS AFFECT ITS PERFORMANCE DURING THE REPORTING
PERIOD?
Many Asian nations seemed better prepared than the United States to deal with
financial turmoil because of moderate current account balances, substantial
reserves and extensive trade with China. China itself was not immune to global
troubles. The Fund owned securities of Chinese real estate companies, which came
under pressure when the credit crunch intensified. In the spring of 2008, we
began to reduce the Fund's exposure to Chinese real estate companies, and by the
end of the reporting period, we had eliminated the positions entirely.
While the Fund's Chinese holdings detracted from its overall performance for the
reporting period, we believed that at the end of October, the Fund's remaining
Asian exposure offered significant value and a margin of safety.
DID YOU MAKE ANY SIGNIFICANT WEIGHTING CHANGES DURING THE REPORTING PERIOD?
We dramatically reduced the Fund's risk profile in the final months of the
reporting period. We did so primarily by trimming the Fund's holdings of
emerging-market debt and convertible debt in favor of cash. We also sought to
reduce the Fund's exposure to commodity producers as commodity prices declined
during the reporting period.
Within the Fund's high-yield corporate bond allocation, we reduced exposure to
the airline and media industries. Media companies were burdened by a very weak
advertising environment, as growth slowed in most major media, especially print.
More specifically, we reduced or eliminated significant positions in the
securities of Northwest Airlines and Delta Air Lines before and after Northwest
was acquired by Delta. We also reduced the Fund's exposure to directory
publisher Idearc, arts & crafts retailer Michaels Stores and food producer
Pilgrim's Pride. We added to or established meaningful positions in the fixed-
income securities of medical products manufacturer Biomet, electric power
utility TXU, medical device manufacturer ReAble Therapeutics and integrated
telecommunications/media company Videotron.
We increased the Fund's weighting relative to the Fund's Diversified Income
Index in nondollar developed-market government debt during the reporting period.
In implementing all of these weighting changes, the Fund's credit duration and
portfolio beta(7) declined.
6. A currency "carry trade" is a strategy that seeks to benefit from differences
in interest rates of securities denominated in different currencies. Often
the strategy uses substantial leverage.
7. Beta is a measure of volatility in relation to the market as a whole. A beta
higher than 1 indicates that a security or portfolio will tend to exhibit
higher volatility than the market. A beta lower than 1 indicates that a
security or portfolio will tend to exhibit lower volatility than the market.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Diversified Income Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2008
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 87.6%+
ASSET-BACKED SECURITIES 0.8%
- --------------------------------------------------------------------
AUTOMOBILE 0.1%
Superior Wholesale Inventory
Financing Trust
Series 2007-AE1, Class A
4.66%, due 1/15/12 (a) $ 50,000 $ 45,484
-------------
CONSUMER LOANS 0.1%
Atlantic City Electric
Transition Funding LLC
Series 2002-1, Class A4
5.55%, due 10/20/23 75,000 63,532
-------------
CREDIT CARDS 0.3%
Bank of America Credit Card
Trust
Series 2006-C4, Class C4
4.79%, due 11/15/11 (a) 130,000 123,229
Citibank Credit Card
Issuance Trust
Series 2006-C4, Class C4
4.33%, due 1/9/12 (a) 140,000 125,427
-------------
248,656
-------------
DIVERSIFIED FINANCIAL SERVICES 0.1%
Dunkin Securitization
Series 2006-1, Class A2
5.779%, due 6/20/31 (b) 110,000 92,446
USXL Funding LLC
Series 2006-1A, Class A
5.379%, due 4/15/14 (b)(c) 39,400 35,898
-------------
128,344
-------------
HOME EQUITY 0.2%
Citicorp Residential
Mortgage Securities, Inc.
Series 2006-3, Class A3
5.61%, due 11/25/36 (d) 100,000 97,048
Series 2006-1, Class A3
5.706%, due 7/25/36 (d) 120,000 116,702
-------------
213,750
-------------
Total Asset-Backed
Securities
(Cost $764,359) 699,766
-------------
CONVERTIBLE BONDS 3.9%
- --------------------------------------------------------------------
AEROSPACE & DEFENSE 0.1%
Triumph Group, Inc.
2.625%, due 10/1/26 60,000 55,800
-------------
AIRLINES 0.1%
AMR Corp.
4.50%, due 2/15/24 102,000 96,645
-------------
BIOTECHNOLOGY 0.1%
Gilead Sciences, Inc.
0.625%, due 5/1/13 48,000 59,820
-------------
COAL 0.1%
Peabody Energy Corp.
4.75%, due 12/15/66 54,000 40,028
-------------
COMMERCIAL SERVICES 0.1%
Alliance Data Systems Corp.
1.75%, due 8/1/13 (b) 50,000 37,375
-------------
COMPUTERS 0.3%
CACI International, Inc.
2.125%, due 5/1/14 68,000 57,290
EMC Corp.
1.75%, due 12/1/11 234,000 224,055
-------------
281,345
-------------
DIVERSIFIED FINANCIAL SERVICES 0.2%
Nasdaq Stock Market, Inc.
(The)
2.50%, due 8/15/13 (b) 263,000 197,250
-------------
ELECTRONICS 0.2%
Fisher Scientific
International, Inc.
3.25%, due 3/1/24 106,000 121,503
Itron, Inc.
2.50%, due 8/1/26 43,000 35,690
TTM Technologies, Inc.
3.25%, due 5/15/15 34,000 19,890
-------------
177,083
-------------
ENERGY--ALTERNATE SOURCES 0.2%
Covanta Holding Corp.
1.00%, due 2/1/27 214,000 177,888
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
Among the Fund's 10 largest holdings, as of October 31, 2008,
excluding short-term investment. May be subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CONVERTIBLE BONDS (CONTINUED)
ENVIRONMENTAL CONTROLS 0.2%
Waste Connections, Inc.
3.75%, due 4/1/26 $ 191,000 $ 197,207
-------------
FOOD 0.3%
Spartan Stores, Inc.
3.375%, due 5/15/27 40,000 33,100
3.375%, due 5/15/27 (b) 163,000 134,882
Tyson Foods, Inc.
3.25%, due 10/15/13 46,000 35,708
-------------
203,690
-------------
HEALTH CARE-PRODUCTS 0.4%
Medtronic, Inc.
1.625%, due 4/15/13 424,000 367,820
-------------
INSURANCE 0.0%++
Conseco, Inc.
(zero coupon), beginning
9/30/10
3.50%, due 9/30/35 35,000 13,169
-------------
INTERNET 0.0%++
At Home Corp.
4.75%, due 12/31/49 (c)(e) 504,238 50
-------------
OIL & GAS 0.5%
Chesapeake Energy Corp.
2.50%, due 5/15/37 211,000 133,194
St. Mary Land & Exploration
Co.
3.50%, due 4/1/27 68,000 47,005
Transocean, Inc.
Series C
1.50%, due 12/15/37 198,000 151,717
Series A
1.625%, due 12/15/37 57,000 50,445
-------------
382,361
-------------
OIL & GAS SERVICES 0.4%
Cameron International Corp.
2.50%, due 6/15/26 140,000 134,050
Schlumberger, Ltd.
Series B
2.125%, due 6/1/23 154,000 203,665
-------------
337,715
-------------
PHARMACEUTICALS 0.4%
Teva Pharmaceutical Finance
Co. B.V.
Series D
1.75%, due 2/1/26 286,000 299,942
-------------
SEMICONDUCTORS 0.0%++
ON Semiconductor Corp.
2.625%, due 12/15/26 47,000 28,905
-------------
SOFTWARE 0.1%
Sybase, Inc.
1.75%, due 2/22/25 102,000 115,260
-------------
TELECOMMUNICATIONS 0.2%
Anixter International, Inc.
1.00%, due 2/15/13 59,000 39,235
SBA Communications Corp.
1.875%, due 5/1/13 (b) 208,000 136,760
-------------
175,995
-------------
Total Convertible Bonds
(Cost $4,460,720) 3,245,348
-------------
CORPORATE BONDS 23.6%
- --------------------------------------------------------------------
ADVERTISING 0.4%
Interpublic Group of Cos.,
Inc.
6.25%, due 11/15/14 135,000 89,775
7.25%, due 8/15/11 85,000 70,550
Lamar Media Corp.
6.625%, due 8/15/15 280,000 205,800
-------------
366,125
-------------
AEROSPACE & DEFENSE 0.4%
BE Aerospace, Inc.
8.50%, due 7/1/18 70,000 60,200
Hawker Beechcraft
Acquisition Co. LLC/Hawker
Beechcraft Co.
8.50%, due 4/1/15 125,000 75,000
9.75%, due 4/1/17 35,000 19,600
Sequa Corp.
11.75%, due 12/1/15 (b) 90,000 55,800
United Technologies Corp.
6.125%, due 7/15/38 185,000 159,567
-------------
370,167
-------------
AGRICULTURE 0.2%
Reynolds American, Inc.
7.625%, due 6/1/16 80,000 65,630
7.75%, due 6/1/18 80,000 64,029
-------------
129,659
-------------
AIRLINES 0.1%
DAE Aviation Holdings, Inc.
11.25%, due 8/1/15 (b) 110,000 82,500
Delta Air Lines, Inc.
(Escrow Shares)
2.875%, due 2/6/24 55,000 1,238
2.875%, due 2/18/49 (b) 30,000 675
</Table>
12 MainStay Diversified Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
AIRLINES (CONTINUED)
Delta Air Lines, Inc. (Escrow Shares) (continued)
8.00%, due 6/3/49 $ 81,000 $ 1,823
8.30%, due 12/15/29 505,000 10,731
9.75%, due 5/15/49 5,000 106
10.00%, due 8/15/49 35,000 744
10.375%, due 12/15/22 10,000 213
Northwest Airlines, Inc.
(Escrow Shares)
7.625%, due 11/15/23 117,700 441
7.875%, due 12/31/49 25,000 31
8.70%, due 3/15/49 5,000 6
8.875%, due 6/1/49 30,000 38
9.875%, due 3/15/37 65,000 81
10.00%, due 2/1/09 168,300 210
-------------
98,837
-------------
APPAREL 0.1%
Unifi, Inc.
11.50%, due 5/15/14 95,000 68,400
-------------
AUTO MANUFACTURERS 0.1%
Daimler Finance North
America LLC
7.30%, due 1/15/12 31,000 25,498
Ford Motor Co.
7.45%, due 7/16/31 35,000 11,025
General Motors Corp.
6.75%, due 5/1/28 75,000 17,625
-------------
54,148
-------------
AUTO PARTS & EQUIPMENT 0.6%
American Tire Distributors,
Inc.
10.133%, due 4/1/12 (a) 70,000 54,600
10.75%, due 4/1/13 80,000 61,200
FleetPride Corp.
11.50%, due 10/1/14 (b) 235,000 211,500
Goodyear Tire & Rubber Co.
(The)
6.678%, due 12/1/09 (a) 20,000 18,325
8.625%, due 12/1/11 65,000 54,925
Lear Corp.
Series B
8.50%, due 12/1/13 40,000 15,200
8.75%, due 12/1/16 125,000 46,250
Tenneco Automotive, Inc.
8.625%, due 11/15/14 20,000 9,450
-------------
471,450
-------------
BUILDING MATERIALS 0.3%
Compression Polymers Corp.
10.50%, due 7/1/13 55,000 35,475
Texas Industries, Inc.
7.25%, due 7/15/13 (b) 245,000 192,325
-------------
227,800
-------------
CHEMICALS 0.1%
Millennium America, Inc.
7.625%, due 11/15/26 149,000 29,800
Mosaic Global Holdings, Inc.
7.625%, due 12/1/16 (b) 40,000 34,931
Tronox Worldwide LLC/Tronox
Finance Corp.
9.50%, due 12/1/12 (g) 230,000 50,600
-------------
115,331
-------------
COAL 0.2%
Peabody Energy Corp.
7.375%, due 11/1/16 95,000 80,275
7.875%, due 11/1/26 60,000 46,950
-------------
127,225
-------------
COMMERCIAL SERVICES 0.8%
Cardtronics, Inc.
9.25%, due 8/15/13 100,000 78,500
Series B
9.25%, due 8/15/13 65,000 51,025
Great Lakes Dredge & Dock
Corp.
7.75%, due 12/15/13 100,000 72,000
iPayment, Inc.
9.75%, due 5/15/14 180,000 135,000
Language Line, Inc.
11.125%, due 6/15/12 125,000 119,375
Lender Processing Services,
Inc.
8.125%, due 7/1/16 85,000 72,675
Service Corp. International
7.375%, due 10/1/14 90,000 73,575
7.625%, due 10/1/18 90,000 70,650
-------------
672,800
-------------
COMPUTERS 0.4%
SunGard Data Systems, Inc.
4.875%, due 1/15/14 40,000 30,800
9.125%, due 8/15/13 130,000 107,900
10.625%, due 5/15/15 (b) 255,000 215,475
-------------
354,175
-------------
DISTRIBUTION & WHOLESALE 0.1%
ACE Hardware Corp.
9.125%, due 6/1/16 (b) 110,000 82,500
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES 1.1%
AmeriCredit Corp.
8.50%, due 7/1/15 $ 160,000 $ 117,200
General Motors Acceptance
Corp. LLC
5.625%, due 5/15/09 95,000 80,561
8.00%, due 11/1/31 720,000 326,442
Harley-Davidson Funding
Corp.
6.80%, due 6/15/18 (b) 120,000 95,382
LaBranche & Co., Inc.
11.00%, due 5/15/12 75,000 66,750
Morgan Stanley
5.05%, due 1/21/11 140,000 127,554
6.75%, due 4/15/11 60,000 55,987
OMX Timber Finance
Investments LLC
Series 1
5.42%, due 1/29/20
(b)(c)(e) 100,000 69,272
Ucar Finance, Inc.
10.25%, due 2/15/12 8,000 7,620
-------------
946,768
-------------
ELECTRIC 1.3%
AES Eastern Energy, L.P.
Series 1999-A
9.00%, due 1/2/17 298,807 313,747
Energy Future Holdings Corp.
10.875%, due 11/1/17 (b) 300,000 231,000
NRG Energy, Inc.
7.25%, due 2/1/14 70,000 61,250
7.375%, due 2/1/16 120,000 103,500
PNM Resources, Inc.
9.25%, due 5/15/15 75,000 61,500
Reliant Energy Mid-Atlantic
Power Holdings LLC
Series C
9.681%, due 7/2/26 145,000 131,950
Reliant Energy, Inc.
7.625%, due 6/15/14 25,000 19,250
7.875%, due 6/15/17 210,000 160,650
-------------
1,082,847
-------------
ELECTRICAL COMPONENTS & EQUIPMENT 0.1%
Belden, Inc.
7.00%, due 3/15/17 80,000 61,200
Emerson Electric Co.
6.00%, due 8/15/32 50,000 42,068
-------------
103,268
-------------
ENTERTAINMENT 1.3%
Chukchansi Economic
Development Authority
8.00%, due 11/15/13 (b) 45,000 23,850
Gaylord Entertainment Co.
8.00%, due 11/15/13 200,000 136,500
Isle of Capri Casinos, Inc.
7.00%, due 3/1/14 200,000 97,000
Jacobs Entertainment, Inc.
9.75%, due 6/15/14 115,000 49,450
Mohegan Tribal Gaming
Authority
6.875%, due 2/15/15 10,000 5,800
Penn National Gaming, Inc.
6.75%, due 3/1/15 110,000 85,250
6.875%, due 12/1/11 135,000 114,075
Pinnacle Entertainment, Inc.
8.25%, due 3/15/12 90,000 62,325
Speedway Motorsports, Inc.
6.75%, due 6/1/13 290,000 220,400
United Artists Theatre
Circuit, Inc.
Series BA7
9.30%, due 7/1/15 (c)(e) 73,513 44,108
Vail Resorts, Inc.
6.75%, due 2/15/14 295,000 225,675
-------------
1,064,433
-------------
ENVIRONMENTAL CONTROLS 0.3%
Geo Sub Corp.
11.00%, due 5/15/12 260,000 222,300
-------------
FINANCE--AUTO LOANS 0.1%
Ford Motor Credit Co. LLC
7.375%, due 10/28/09 145,000 120,365
7.875%, due 6/15/10 5,000 3,360
-------------
123,725
-------------
FINANCE--OTHER SERVICES 0.4%
American Real Estate
Partners, L.P./American
Real Estate Finance Corp.
8.125%, due 6/1/12 530,000 360,400
-------------
FOOD 0.2%
ASG Consolidated LLC/ASG
Finance, Inc.
(zero coupon), due 11/1/11
11.50%, beginning 11/1/08 95,000 82,175
Stater Brothers Holdings
7.75%, due 4/15/15 115,000 94,300
-------------
176,475
-------------
FOREST PRODUCTS & PAPER 0.8%
Bowater, Inc.
9.375%, due 12/15/21 195,000 50,700
9.50%, due 10/15/12 5,000 1,400
</Table>
14 MainStay Diversified Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
FOREST PRODUCTS & PAPER (CONTINUED)
Domtar Corp.
7.875%, due 10/15/11 $ 170,000 $ 146,200
Georgia-Pacific Corp.
7.00%, due 1/15/15 (b) 110,000 80,850
7.125%, due 1/15/17 (b) 180,000 125,100
7.75%, due 11/15/29 4,000 2,400
8.00%, due 1/15/24 68,000 43,180
8.875%, due 5/15/31 160,000 103,200
NewPage Corp.
10.00%, due 5/1/12 115,000 78,200
-------------
631,230
-------------
HAND & MACHINE TOOLS 0.1%
Thermadyne Holdings Corp.
9.50%, due 2/1/14 65,000 50,700
-------------
HEALTH CARE--PRODUCTS 1.1%
Biomet, Inc.
10.00%, due 10/15/17 105,000 96,600
11.625%, due 10/15/17 160,000 139,200
Catalent Pharma Solutions,
Inc.
9.50%, due 4/15/15 145,000 84,100
DJO Finance LLC/DJO Finance
Corp.
10.875%, due 11/15/14 255,000 205,275
Hanger Orthopedic Group,
Inc.
10.25%, due 6/1/14 165,000 150,150
Invacare Corp.
9.75%, due 2/15/15 175,000 157,500
ReAble Therapeutics Finance
LLC/ReAble Therapeutics
Finance Corp.
11.75%, due 11/15/14 45,000 31,950
VWR Funding, Inc.
Series B
10.25%, due 7/15/15 (f) 155,000 92,225
-------------
957,000
-------------
HEALTH CARE--SERVICES 1.3%
Alliance Imaging, Inc.
7.25%, due 12/15/12 100,000 86,000
Series B
7.25%, due 12/15/12 125,000 107,500
Community Health Systems,
Inc.
8.875%, due 7/15/15 180,000 150,750
HCA, Inc.
6.30%, due 10/1/12 345,000 236,325
8.75%, due 9/1/10 35,000 30,800
Highmark, Inc.
6.80%, due 8/15/13 (b)(c) 245,000 258,884
Skilled Healthcare Group,
Inc.
11.00%, due 1/15/14 52,000 46,020
Vanguard Health Holding Co.
II LLC
9.00%, due 10/1/14 165,000 136,950
-------------
1,053,229
-------------
HOLDING COMPANY--DIVERSIFIED 0.4%
Leucadia National Corp.
8.125%, due 9/15/15 285,000 252,225
Susser Holdings LLC
10.625%, due 12/15/13 130,000 110,500
-------------
362,725
-------------
HOUSEHOLD PRODUCTS & WARES 0.2%
ACCO Brands Corp.
7.625%, due 8/15/15 100,000 57,500
Jarden Corp.
7.50%, due 5/1/17 85,000 63,325
Libbey Glass, Inc.
9.928%, due 6/1/11 (a) 80,000 51,600
-------------
172,425
-------------
INSURANCE 0.7%
Crum & Forster Holdings
Corp.
7.75%, due 5/1/17 290,000 201,550
Fund American Cos., Inc.
5.875%, due 5/15/13 155,000 116,468
HUB International Holdings,
Inc.
9.00%, due 12/15/14 (b) 195,000 146,250
Lumbermens Mutual Casualty
Co.
8.45%, due 12/1/97 (b)(g) 35,000 350
9.15%, due 7/1/26 (b)(g) 535,000 5,350
USI Holdings Corp.
6.679%, due 11/15/14
(a)(b) 35,000 22,094
9.75%, due 5/15/15 (b) 95,000 59,850
-------------
551,912
-------------
INTERNET 0.1%
Expedia, Inc.
8.50%, due 7/1/16 (b) 125,000 92,500
-------------
IRON & STEEL 0.3%
Allegheny Ludlum Corp.
6.95%, due 12/15/25 20,000 16,664
Allegheny Technologies, Inc.
8.375%, due 12/15/11 185,000 192,786
-------------
209,450
-------------
LODGING 0.5%
Boyd Gaming Corp.
7.75%, due 12/15/12 345,000 282,900
MGM Mirage, Inc.
13.00%, due 11/15/13 25,000 22,063
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
LODGING (CONTINUED)
MTR Gaming Group, Inc.
Series B
9.00%, due 6/1/12 $ 50,000 $ 27,750
Wynn Las Vegas Capital Corp.
6.625%, due 12/1/14 70,000 51,625
-------------
384,338
-------------
MACHINERY--CONSTRUCTION & MINING 0.1%
Caterpillar, Inc.
6.05%, due 8/15/36 140,000 111,266
-------------
MEDIA 2.0%
Charter Communications
Operating LLC
8.00%, due 4/30/12 (b) 105,000 80,850
CSC Holdings, Inc.
6.75%, due 4/15/12 75,000 64,875
8.50%, due 6/15/15 (b) 45,000 38,025
CW Media Holdings, Inc.
13.50%, due 8/15/15 (b) 45,000 29,250
Houghton Mifflin Harcourt
Publishing Co.
7.20%, due 3/15/11 470,000 446,530
HSN, Inc.
11.25%, due 8/1/16 (b) 130,000 107,900
ION Media Networks, Inc.
8.003%, due 1/15/12 (a)(b) 115,000 63,250
11.003%, due 1/15/13 (b) 59,640 20,874
LBI Media, Inc.
8.50%, due 8/1/17 (b) 110,000 66,000
Morris Publishing Group LLC
7.00%, due 8/1/13 220,000 22,000
Rainbow National Services
LLC
8.75%, due 9/1/12 (b) 90,000 79,200
10.375%, due 9/1/14 (b) 170,000 147,900
Time Warner Entertainment
Co., L.P.
10.15%, due 5/1/12 415,000 425,692
Vertis, Inc.
18.50%, due 10/1/12 65,000 44,200
Ziff Davis Media, Inc.
(zero coupon), due 5/1/12
(c)(e)(g) 135,000 8,438
8.788%, due 7/15/11
(c)(e)(g) 35,326 30,027
-------------
1,675,011
-------------
METAL FABRICATE & HARDWARE 0.2%
Metals USA, Inc.
11.125%, due 12/1/15 75,000 52,500
Mueller Water Products, Inc.
7.375%, due 6/1/17 80,000 52,400
Neenah Foundary Co.
9.50%, due 1/1/17 150,000 89,250
-------------
194,150
-------------
MINING 0.2%
Freeport-McMoRan Copper &
Gold, Inc.
7.084%, due 4/1/15 (a) 110,000 85,765
8.25%, due 4/1/15 55,000 44,000
8.375%, due 4/1/17 90,000 70,650
-------------
200,415
-------------
MISCELLANEOUS--MANUFACTURING 0.3%
Actuant Corp.
6.875%, due 6/15/17 85,000 72,675
Polypore, Inc.
8.75%, due 5/15/12 75,000 60,000
RBS Global, Inc./Rexnord
Corp.
9.50%, due 8/1/14 220,000 151,800
-------------
284,475
-------------
OIL & GAS 1.9%
Chaparral Energy, Inc.
8.50%, due 12/1/15 300,000 153,000
Chesapeake Energy Corp.
6.50%, due 8/15/17 125,000 92,031
6.875%, due 11/15/20 25,000 17,687
7.625%, due 7/15/13 60,000 51,000
Forest Oil Corp.
7.25%, due 6/15/19 110,000 74,800
8.00%, due 12/15/11 200,000 178,000
Hilcorp Energy I,
L.P./Hilcorp Finance Co.
9.00%, due 6/1/16 (b) 100,000 73,000
Linn Energy LLC
9.875%, due 7/1/18 (b) 100,000 67,500
Mariner Energy, Inc.
7.50%, due 4/15/13 230,000 158,700
Newfield Exploration Co.
6.625%, due 9/1/14 15,000 11,587
6.625%, due 4/15/16 15,000 11,100
7.125%, due 5/15/18 115,000 81,219
Parker Drilling Co.
9.625%, due 10/1/13 80,000 66,800
Pemex Project Funding Master
Trust
5.75%, due 3/1/18 120,000 93,600
Petroquest Energy, Inc.
10.375%, due 5/15/12 120,000 90,600
Regency Energy
Partners/Regency Energy
Finance Corp.
8.375%, due 12/15/13 85,000 64,600
SandRidge Energy, Inc.
8.00%, due 6/1/18 (b) 90,000 59,850
</Table>
16 MainStay Diversified Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
OIL & GAS (CONTINUED)
Stone Energy Corp.
6.75%, due 12/15/14 $ 100,000 $ 64,000
Venoco, Inc.
8.75%, due 12/15/11 1,000 733
Whiting Petroleum Corp.
7.00%, due 2/1/14 300,000 213,000
-------------
1,622,807
-------------
OIL & GAS SERVICES 0.3%
Allis-Chalmers Energy, Inc.
8.50%, due 3/1/17 70,000 42,000
9.00%, due 1/15/14 70,000 45,500
Complete Production
Services, Inc.
8.00%, due 12/15/16 180,000 122,400
-------------
209,900
-------------
PHARMACEUTICALS 0.4%
GlaxoSmithKline Capital,
Inc.
5.65%, due 5/15/18 50,000 44,310
Medco Health Solutions, Inc.
7.25%, due 8/15/13 240,000 229,547
Warner Chilcott Corp.
8.75%, due 2/1/15 110,000 96,800
-------------
370,657
-------------
PIPELINES 0.7%
ANR Pipeline Co.
9.625%, due 11/1/21 45,000 46,663
Copano Energy LLC
8.125%, due 3/1/16 115,000 84,525
Copano Energy LLC/Copano
Energy Finance Corp.
7.75%, due 6/1/18 (b) 55,000 37,950
El Paso Natural Gas Co.
7.50%, due 11/15/26 25,000 19,055
7.625%, due 8/1/10 205,000 200,095
MarkWest Energy Partners,
L.P./MarkWest Energy
Finance Corp.
Series B
6.875%, due 11/1/14 145,000 104,762
8.50%, due 7/15/16 40,000 29,400
8.75%, due 4/15/18 70,000 50,400
-------------
572,850
-------------
REAL ESTATE INVESTMENT TRUSTS 0.6%
Host Hotels & Resorts, L.P.
6.875%, due 11/1/14 115,000 85,675
Series M
7.00%, due 8/15/12 20,000 16,200
Host Marriott, L.P.
6.375%, due 3/15/15 40,000 29,000
Omega Healthcare Investors,
Inc.
7.00%, due 4/1/14 145,000 120,350
Trustreet Properties, Inc.
7.50%, due 4/1/15 230,000 228,677
-------------
479,902
-------------
RETAIL 0.4%
CVS Caremark Corp.
5.789%, due 1/10/26 (b) 96,080 71,086
Harry & David Holdings, Inc.
9.00%, due 3/1/13 25,000 12,000
Rite Aid Corp.
8.625%, due 3/1/15 160,000 56,800
9.375%, due 12/15/15 50,000 18,500
9.50%, due 6/15/17 110,000 39,600
Star Gas Partners, L.P./Star
Gas Finance Co.
Series B
10.25%, due 2/15/13 171,000 124,830
-------------
322,816
-------------
SOFTWARE 0.2%
SS&C Technologies, Inc.
11.75%, due 12/1/13 145,000 136,300
-------------
TELECOMMUNICATIONS 1.6%
Centennial Cellular
Operating Co./Centennial
Communications Corp.
10.125%, due 6/15/13 170,000 150,450
Centennial Communications
Corp./ Cellular Operating
Co. LLC/
Puerto Rico Operations
8.125%, due 2/1/14 25,000 21,375
GCI, Inc.
7.25%, due 2/15/14 135,000 108,000
Lucent Technologies, Inc.
6.45%, due 3/15/29 360,000 176,400
New Cingular Wireless
Services, Inc.
8.75%, due 3/1/31 150,000 139,524
PAETEC Holding Corp.
9.50%, due 7/15/15 5,000 2,838
Qwest Communications
International, Inc.
7.25%, due 2/15/11 215,000 173,612
Series B
7.50%, due 2/15/14 190,000 130,625
Qwest Corp.
5.625%, due 11/15/08 15,000 15,000
7.50%, due 10/1/14 180,000 138,600
7.50%, due 6/15/23 195,000 125,775
8.875%, due 3/15/12 100,000 87,500
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
17
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
Sprint Nextel Corp.
6.00%, due 12/1/16 $ 95,000 $ 65,787
Windstream Regatta Holdings,
Inc.
11.00%, due 12/1/17 (b) 40,000 18,800
-------------
1,354,286
-------------
TEXTILES 0.4%
INVISTA
9.25%, due 5/1/12 (b) 355,000 294,650
-------------
TRANSPORTATION 0.1%
KAR Holdings, Inc.
8.75%, due 5/1/14 10,000 6,500
10.00%, due 5/1/15 190,000 107,350
-------------
113,850
-------------
TRUCKING & LEASING 0.1%
Greenbrier Cos., Inc.
8.375%, due 5/15/15 70,000 53,375
-------------
Total Corporate Bonds
(Cost $26,184,196) 19,681,052
-------------
FOREIGN GOVERNMENT BONDS 22.4%
- --------------------------------------------------------------------
ARGENTINA 0.1%
Republic of Argentina
(zero coupon), due
12/15/35 3,000,000 120,000
-------------
AUSTRIA 1.0%
Republic of Austria
4.65%, due 1/15/18 E 643,000 831,255
-------------
BRAZIL 2.2%
Brazil Nota do Tesouro
Nacional
Series F
10.00%, due 1/1/12 $ 1,650,000 657,053
V Federal Republic of
Brazil
8.25%, due 1/20/34 1,011,000 980,670
11.00%, due 8/17/40 175,000 203,525
-------------
1,841,248
-------------
COLOMBIA 0.8%
Republic of Colombia
7.375%, due 1/27/17 400,000 360,000
8.125%, due 5/21/24 300,000 273,000
-------------
633,000
-------------
GERMANY 2.9%
V Republic of Germany
3.75%, due 1/4/17 440,000 555,569
4.25%, due 7/4/14 665,000 883,377
5.00%, due 7/4/11 755,000 1,014,691
-------------
2,453,637
-------------
GREECE 1.8%
V Hellenic Republic
4.50%, due 5/20/14 1,200,000 1,499,788
-------------
INDONESIA 0.4%
Republic of Indonesia
6.875%, due 1/17/18 240,000 157,131
Series Reg S
7.25%, due 4/20/15(b) 180,000 138,600
-------------
295,731
-------------
LEBANON 0.2%
Republic of Lebanon
8.25%, due 4/12/21 275,000 200,750
-------------
MEXICO 2.4%
V United Mexican States
5.625%, due 1/15/17 395,000 351,550
9.00%, due 12/20/12 M$ 20,600,000 1,632,631
-------------
1,984,181
-------------
PANAMA 1.2%
Republic of Panama
6.70%, due 1/26/36 $ 243,000 189,540
8.875%, due 9/30/27 325,000 302,250
9.375%, due 4/1/29 550,000 533,500
-------------
1,025,290
-------------
PERU 0.6%
Republic of Peru
6.55%, due 3/14/37 300,000 207,000
7.35%, due 7/21/25 150,000 126,750
8.75%, due 11/21/33 152,000 138,320
-------------
472,070
-------------
PHILIPPINES 0.5%
Republic of Philippines
9.50%, due 2/2/30 250,000 255,000
9.875%, due 1/15/19 150,000 161,250
-------------
416,250
-------------
RUSSIA 0.6%
Russian Federation
7.50%, due 3/31/30 (b) 588,000 514,218
-------------
SOUTH AFRICA 0.2%
Republic of South Africa
6.50%, due 6/2/14 200,000 166,000
-------------
</Table>
18 MainStay Diversified Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
FOREIGN GOVERNMENT BONDS (CONTINUED)
TURKEY 1.4%
Republic of Turkey
(zero coupon), due 1/13/10 YTL 234,000 $ 117,277
7.25%, due 3/15/15 $ 400,000 328,000
7.375%, due 2/5/25 470,000 366,600
9.50%, due 1/15/14 350,000 329,000
-------------
1,140,877
-------------
UKRAINE 0.1%
Ukraine Government
6.875%, due 3/4/11 (b) 175,000 108,500
-------------
UNITED KINGDOM 5.0%
V United Kingdom Treasury
Bonds
4.75%, due 9/7/15 L 1,095,000 1,810,999
5.00%, due 3/7/12 970,000 1,628,492
5.00%, due 3/7/18 137,000 228,297
6.00%, due 12/7/28 285,000 523,955
-------------
4,191,743
-------------
URUGUAY 0.6%
Republic of Uruguay
8.00%, due 11/18/22 $ 173,130 117,728
9.25%, due 5/17/17 450,000 378,000
-------------
495,728
-------------
VENEZUELA 0.4%
Republic of Venezuela
6.00%, due 12/9/20 300,000 124,500
9.25%, due 5/7/28 475,000 218,500
-------------
343,000
-------------
Total Foreign Government
Bonds
(Cost $21,715,138) 18,733,266
-------------
LOAN ASSIGNMENTS & PARTICIPATIONS 2.7%
- --------------------------------------------------------------------
AEROSPACE & DEFENSE 0.1%
DAE Aviation Holdings
Tranche B2 Term Loan
7.17%, due 7/31/14 46,923 34,254
Tranche B1 Term Loan
7.37%, due 7/31/14 47,479 34,659
-------------
68,913
-------------
AUTOMOBILE 0.1%
Ford Motor Co.
(zero coupon), due
12/16/13 100,000 54,929
-------------
BUILDINGS & REAL ESTATE 0.2%
LNR Property Corp.
Initial Tranche B Term
Loan
6.04%, due 7/12/11 308,000 158,620
-------------
DIVERSIFIED/CONGLOMERATE SERVICE 0.1%
SunGuard Data Systems, Inc.
Term Loan
4.55%, due 2/28/14 164,520 125,446
-------------
HEALTHCARE, EDUCATION & CHILDCARE 0.8%
Capella Healthcare, Inc.
1st Lien Term Loan
7.20%, due 3/2/15 99,500 82,585
Community Health Systems,
Inc.
New Term Loan B
5.16%, due 7/25/14 183,762 146,757
HCA, Inc.
Term Loan B
6.01%, due 11/18/13 402,825 331,474
Talecris Biotherapeutics,
Inc.
2nd Lien Term Loan
9.31%, due 12/6/14 120,000 104,400
-------------
665,216
-------------
MACHINERY 0.1%
BHM Technologies LLC
1st Lien Term Loan
6.50%, due 7/21/13 294,894 66,351
-------------
PRINTING & PUBLISHING 0.3%
Nielsen Finance LLC
Dollar Term Loan
4.80%, due 8/9/13 343,003 247,133
-------------
RETAIL STORE 0.2%
Neiman Marcus Group, Inc.
(The)
Term Loan B
4.57%, due 4/6/13 123,418 92,563
Toys "R" Us (Delaware), Inc.
Term Loan
9.59%, due 1/19/13 145,000 104,219
-------------
196,782
-------------
TELECOMMUNICATIONS 0.2%
Alltel Communications, Inc.
Term Loan B3
5.50%, due 5/15/15 158,400 150,827
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED)
UTILITIES 0.6%
Calpine Corp.
1st Priority Term Loan
6.65%, due 3/29/14 $ 342,413 $ 273,074
TXU Corp.
Term Loan B3
6.44%, due 10/10/14 99,000 76,812
Term Loan B2
6.66%, due 10/10/14 227,700 177,511
-------------
527,397
-------------
Total Loan Assignments &
Participations
(Cost $3,086,964) 2,261,614
-------------
MORTGAGE-BACKED SECURITIES 0.8%
- --------------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) 0.8%
Banc of America Commercial
Mortgage, Inc.
Series 2005-5, Class A2
5.001%, due 10/10/45 295,000 277,312
Bayview Commercial Asset
Trust Series 2006-4A,
Class A1
3.489%, due 12/24/36
(a)(b)(c) 87,389 74,564
LB-UBS Commercial Mortgage
Trust
Series 2004-C2, Class A2
3.246%, due 3/15/29 209,876 207,364
Series 2004-C7, Class A1
3.625%, due 10/15/29 72,865 71,537
Timberstar Trust
Series 2006-1, Class A
5.668%, due 10/15/36
(b)(e) 40,000 36,206
Wachovia Bank Commercial
Mortgage Trust Series
2004-C14, Class A1
3.477%, due 8/15/41 17,936 17,681
-------------
Total Mortgage-Backed
Securities
(Cost $720,290) 684,664
-------------
MUNICIPAL BONDS 0.4%
- --------------------------------------------------------------------
OHIO 0.2%
Buckeye, Ohio, Tobacco
Settlement Financing
Authority
5.75%, due 6/1/34 250,000 166,500
-------------
TEXAS 0.1%
Harris County Texas
Industrial Development
Corp.
Solid Waste Deer Park
5.683%, due 3/1/23 120,000 118,760
-------------
WEST VIRGINIA 0.1%
Tobacco Settlement Finance
Authority of West Virginia
7.467%, due 6/1/47 100,000 85,855
-------------
Total Municipal Bonds
(Cost $462,543) 371,115
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES 23.2%
- --------------------------------------------------------------------
FANNIE MAE
(COLLATERALIZED MORTGAGE OBLIGATION) 0.1%
Series 2006-B1, Class AB
6.00%, due 6/25/16 103,935 105,503
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) 0.4%
3.00%, due 8/1/10 66,043 65,251
4.291%, due 3/1/35 (a) 82,590 82,374
5.028%, due 6/1/35 (a) 195,573 196,012
-------------
343,637
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION 11.0%
4.625%, due 5/1/13 1,135,000 1,098,465
4.875%, due 5/18/12 6,450,000 6,609,605
5.125%, due 1/2/14 150,000 146,561
6.25%, due 2/1/11 1,260,000 1,306,658
-------------
9,161,289
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) 3.7%
5.50%, due 11/25/38 TBA
(h) 1,670,000 1,631,381
6.00%, due 9/1/34 77,849 77,967
6.00%, due 9/1/35 79,737 79,949
6.00%, due 11/25/38 TBA
(h) 830,000 829,481
6.50%, due 12/25/38 TBA
(h) 390,000 394,509
-------------
3,013,287
-------------
FREDDIE MAC
(COLLATERALIZED MORTGAGE OBLIGATION) 0.2%
Series 2632, Class NH
3.50%, due 6/15/13 146,268 144,001
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) 1.8%
6.00%, due 8/15/32 2 2
6.00%, due 11/25/38 TBA
(h) 710,000 710,000
</Table>
20 MainStay Diversified Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (MORTGAGE PASS-THROUGH
SECURITIES) (CONTINUED)
6.50%, due 12/25/38 TBA
(h) $ 850,000 $ 859,031
-------------
1,569,033
-------------
OVERSEAS PRIVATE INVESTMENT CORPORATION 1.5%
5.142%, due 12/15/23 1,171,099 1,215,999
-------------
UNITED STATES TREASURY BOND 0.2%
4.375%, due 2/15/38 200,000 200,594
-------------
UNITED STATES TREASURY NOTES 4.3%
3.375%, due 6/30/13 15,000 15,457
4.00%, due 8/15/18 280,000 280,372
4.75%, due 8/15/17 2,505,000 2,651,387
4.875%, due 8/15/16 640,000 682,050
-------------
3,629,266
-------------
Total U.S. Government & Federal Agencies
(Cost $19,399,895) 19,382,609
-------------
YANKEE BONDS 9.8% (I)
- --------------------------------------------------------------------
ADVERTISING 1.6%
AES El Salvador Trust
6.75%, due 2/1/16 (b) 200,000 144,501
Cia de Saneamento Basico do
Estado de Sao Paulo
7.50%, due 11/3/16 (b) 215,000 156,950
Dresdner Bank A.G. for
Kyivstar GSM
7.75%, due 4/27/12 (b) 275,000 253,000
Independencia International,
Ltd.
9.875%, due 1/31/17 100,000 40,000
Majapahit Holding B.V.
7.25%, due 6/28/17 (b) 100,000 60,000
National Power Corp.
6.875%, due 11/2/16 (b) 200,000 150,000
Odebrecht Finance, Ltd.
7.50%, due 10/18/17 (b) 250,000 167,500
TNK-BP Finance S.A.
7.875%, due 3/13/18 (b) 300,000 132,000
UBS Luxembourg S.A. for OJSC
Vimpel Communications
Series Reg S
8.25%, due 5/23/16 (b) 300,000 153,000
Ultrapetrol Bahamas, Ltd.
9.00%, due 11/24/14 100,000 70,000
Virgin Media Finance PLC
9.125%, due 8/15/16 45,000 29,700
-------------
1,356,651
-------------
BANKS 0.5%
ATF Capital B.V.
9.25%, due 2/21/14 (b) 560,000 296,800
RSHB Capital S.A. for OJSC
Russian Agricultural Bank
6.97%, due 9/21/16 100,000 57,500
TuranAlem Finance B.V.
7.75%, due 4/25/13 (b) 100,000 36,000
-------------
390,300
-------------
BEVERAGES 0.1%
Coca-Cola HBC Finance B.V.
5.125%, due 9/17/13 50,000 47,147
-------------
BIOTECHNOLOGY 0.2%
FMC Finance III S.A.
6.875%, due 7/15/17 155,000 123,225
-------------
BUILDING MATERIALS 0.6%
Asia Aluminum Holdings, Ltd.
8.00%, due 12/23/11 (b) 500,000 150,000
Votorantim Overseas IV
7.75%, due 6/24/20 400,000 321,000
-------------
471,000
-------------
CHEMICALS 0.1%
Nova Chemicals Corp.
5.953%, due 11/15/13 (a) 65,000 43,550
-------------
COAL 0.2%
Raspadskaya Securities, Ltd.
7.50%, due 5/22/12 290,000 141,387
-------------
COMMERCIAL SERVICES 0.0%++
Quebecor World, Inc.
8.75%, due 3/15/16 (b)(g) 5,000 700
9.75%, due 1/15/15 (b)(g) 160,000 22,400
-------------
23,100
-------------
DISTRIBUTION & WHOLESALE 0.2%
Marfrig Overseas, Ltd.
9.625%, due 11/16/16 365,000 175,200
-------------
DIVERSIFIED FINANCIAL SERVICES 0.1%
TNK-BP Finance S.A.
7.50%, due 7/18/16 (b) 215,000 94,600
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
21
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
ELECTRIC 0.7%ELECTRIC (CONTINUED)
AES China Generating Co., Ltd.
8.25%, due 6/26/10430,000388,541
Intergen N.V.
9.00%, due 6/30/17 (b)210,000168,000
Majapahit Holding B.V.
7.75%, due 10/17/16 (b)100,00065,000
621,541
ELECTRONICS 0.3%ELECTRONICS (CONTINUED)
NXP B.V./NXP Funding LLC
7.875%, due 10/15/14555,000274,725
ENERGY--ALTERNATE SOURCES 0.1%ENERGY--ALTERNATE SOURCES (CONTINUED)
Paiton Energy Funding B.V.
9.34%, due 2/15/1496,10548,053
ENTERTAINMENT 0.3%ENTERTAINMENT (CONTINUED)
Galaxy Entertainment Finance Co., Ltd.
Series Reg S
9.875%, due 12/15/12500,000175,000
9.875%, due 12/15/12 (b)150,00057,000
232,000
FOREST PRODUCTS & PAPER 0.4%FOREST PRODUCTS & PAPER (CONTINUED)
Catalyst Paper Corp.
Series D
8.625%, due 6/15/11210,000123,900
Smurfit Capital Funding PLC
7.50%, due 11/20/25300,000219,000
342,900
INSURANCE 0.0%++INSURANCE (CONTINUED)
Fairfax Financial Holdings, Ltd.
7.375%, due 4/15/1810,0007,600
7.75%, due 7/15/3735,00022,750
8.30%, due 4/15/2610,0007,500
37,850
IRON & STEEL 0.1%IRON & STEEL (CONTINUED)
Steel Capital S.A. for OAO Severstal
9.75%, due 7/29/13 (b)140,00058,800
LEISURE TIME 0.2%LEISURE TIME (CONTINUED)
Royal Caribbean Cruises, Ltd.
8.75%, due 2/2/11225,000193,500
MEDIA 1.5%MEDIA (CONTINUED)
BSKYB Finance UK PLC
6.50%, due 10/15/35 (b)95,00071,392
CanWest MediaWorks, Inc.
8.00%, due 9/15/1270,00044,800
CanWest MediaWorks, L.P.
9.25%, due 8/1/15 (b)120,00073,200
Grupo Televisa S.A.
6.00%, due 5/15/18290,000210,025
Independent News & Media
Finance, Ltd.
5.75%, due 5/17/09300,000368,982
Quebecor Media, Inc.
7.75%, due 3/15/16290,000200,825
Sun Media Corp.
7.625%, due 2/15/13210,000176,400
Videotron, Ltee
6.375%, due 12/15/15120,00091,200
1,236,824
MINING 0.1%MINING (CONTINUED)
ALROSA Finance S.A.
8.875%, due 11/17/14100,00055,500
OIL & GAS 1.4%OIL & GAS (CONTINUED)
Citic Resources Finance, Ltd.
6.75%, due 5/15/14 (b)200,000104,000
Gaz Capital S.A. (MTN)
4.56%, due 12/9/12500,000446,092
KazMunaiGaz Finance Sub B.V.
8.375%, due 7/2/13 (b)250,000167,500
Petroleos de Venezuela S.A.
5.25%, due 4/12/17770,000292,600
Salomon Brothers A.G. for OAO Siberian Oil Co.
10.75%, due 1/15/09100,00098,281
Tengizchevroil Finance Co. S.A.R.L.
6.124%, due 11/15/14 (b)92,86459,433
1,167,906
PHARMACEUTICALS 0.0%++PHARMACEUTICALS (CONTINUED)
Angiotech Pharmaceuticals, Inc.
6.56%, due 12/1/13 (a)60,00036,600
SAVINGS & LOANS 0.1%SAVINGS & LOANS (CONTINUED)
TransCapitalInvest, Ltd. for OJSC AK Transneft
8.70%, due 8/7/18 (b)200,000118,000
22 MainStay Diversified Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
YANKEE BONDS (CONTINUED)
TELECOMMUNICATIONS 1.0%
Inmarsat Finance PLC
(zero coupon), due
11/15/12 10.375%,
beginning 11/15/08 $ 250,000 $ 198,750
Intelsat Subsidiary Holding
Co., Ltd.
8.50%, due 1/15/13 (b) 210,000 182,700
Millicom International
Cellular S.A.
10.00%, due 12/1/13 165,000 128,700
Nortel Networks, Ltd.
10.75%, due 7/15/16 (b) 140,000 73,850
10.75%, due 7/15/16 150,000 79,125
Shaw Communications, Inc.
7.50%, due 11/20/13 225,000 186,950
-------------
850,075
-------------
TRANSPORTATION 0.0%++
Kansas City Southern de
Mexico S.A. de C.V.
7.375%, due 6/1/14 30,000 23,475
-------------
Total Yankee Bonds
(Cost $12,728,755) 8,163,909
-------------
Total Long-Term Bonds
(Cost $89,522,860) 73,223,343
-------------
<Caption>
SHARES
COMMON STOCKS 0.3%
- --------------------------------------------------------------------
ADVERTISING 0.0%++
Vertis Holdings, Inc. (e) 70 1
-------------
AIRLINES 0.1%
Delta Air Lines, Inc. (j) 8,152 89,509
-------------
MEDIA 0.1%
Adelphia Contingent Value
Vehicle (c)(e)(g)(j) 100,330 1,003
Haights Cross
Communications, Inc.
(c)(e)(j)(k) 15,988 54,359
Ziff Davis (Physical certs)
(c)(e) 267 3
-------------
55,365
-------------
RETAIL 0.0%++
Star Gas Partners, L.P. (j) 6,025 13,376
-------------
SOFTWARE 0.1%
Quadramed Corp. (c)(j) 5,117 30,446
-------------
TELECOMMUNICATIONS 0.0% ++
Loral Space &
Communications, Ltd. (j) 1,760 20,240
-------------
Total Common Stocks
(Cost $358,098) 208,937
-------------
CONVERTIBLE PREFERRED STOCKS 1.3%
- --------------------------------------------------------------------
BANKS 0.3%
Bank of America Corp.
7.25% Series L 381 266,700
-------------
CHEMICALS 0.1%
Celanese Corp.
4.25% 4,335 82,772
-------------
DIVERSIFIED FINANCIAL SERVICES 0.3%
Citigroup, Inc.
8.75% Series C 595 12,715
Citigroup, Inc.
6.50% Series T 6,330 203,889
-------------
216,604
-------------
INSURANCE 0.1%
American International
Group, Inc.
8.50% 2,500 11,125
MetLife, Inc.
6.38% 4,800 41,616
-------------
52,741
-------------
INVESTMENT COMPANY 0.0%++
Vale Capital, Ltd.
5.50% Series RIO 1,200 33,900
-------------
MINING 0.0%++
Freeport-McMoRan Copper &
Gold, Inc.
6.75% 610 29,756
-------------
PHARMACEUTICALS 0.2%
Schering-Plough Corp.
6.00% 1,140 153,649
-------------
SOFTWARE 0.2%
QuadraMed Corp. (b)(c)
5.50% 10,400 136,136
-------------
TELECOMMUNICATIONS 0.1%
Crown Castle International
Corp.
6.25% 2,900 109,475
-------------
Total Convertible Preferred
Stocks
(Cost $1,876,318) 1,081,733
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
23
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
PREFERRED STOCK 0.3%
- --------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS 0.3%
Sovereign Real Estate
Investment Corp.
12.00% (b)(c)(e) 295 $ 280,988
-------------
Total Preferred Stock
(Cost $264,173) 280,988
-------------
<Caption>
NUMBER OF
WARRANTS VALUE
WARRANTS 0.0%++
- --------------------------------------------------------------------
MEDIA 0.0%++
Haights Cross
Communications, Inc.
Strike Price $0.001
Expire 12/10/11
(c)(e)(g)(k) 223 $ 756
-------------
Total Warrants
(Cost $36) 756
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 14.0%
- --------------------------------------------------------------------
REPURCHASE AGREEMENT 14.0%
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$11,710,568
(Collateralized by a
Federal Home Loan Bank
Security with a rate of
2.673% and a maturity date
of 3/4/09 with a Principal
Amount of $11,915,000 and
a Market Value of
$11,944,788) $ 11,710,470 11,710,470
-------------
Total Short-Term Investment
(Cost $11,710,470) 11,710,470
-------------
Total Investments
(Cost $103,731,955) (l) 103.5% 86,506,227
Liabilities in Excess of
Cash and Other Assets (3.5) (2,912,974)
----- ------------
Net Assets 100.0% $ 83,593,253
===== ============
</Table>
<Table>
+++ On a daily basis NYLIM confirms that the
value of the Fund's liquid assets (liquid
portfolio securities and cash) is
sufficient to cover its potential senior
securities (e.g., futures, swaps,
options).
++ Less than one-tenth of a percent.
(a) Floating rate. Rate shown is the rate in
effect at October 31, 2008.
(b) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(c) Illiquid security. The total market value
of these securities at October 31, 2008
is $1,024,932, which represents 1.3% of
the Fund's net assets.
(d) Subprime mortgage investment and other
asset-backed securities. The total market
value of the securities at October 31,
2008 is $213,750, which represents 0.2%
of the Fund's net assets.
(e) Fair valued security. The total market
value of these securities at October 31,
2008 is $525,211, which represents 0.6%
of the Fund's net assets.
(f) PIK ("Payment in Kind")--interest or
dividend payment is made with additional
securities.
(g) Issue in default.
(h) TBA: Securities purchased on a forward
commitment basis with an approximate
principal amount and maturity date. The
actual principal amount and maturity date
will be determined upon settlement. The
market value of these securities at
October 31, 2008 is $4,424,402, which
represents 5.3% of the Fund's net assets.
All or a portion of these securities were
acquired under a mortgage dollar roll
agreement.
(i) Yankee Bond--dollar-denominated bond
issued in the United States by a foreign
bank or corporation.
(j) Non-income producing security.
(k) Restricted security.
(l) At October 31, 2008, cost is $104,420,788
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 456,608
Gross unrealized depreciation (18,371,169)
------------
Net unrealized depreciation $(17,914,561)
============
</Table>
The following abbreviations are used in the above portfolio:
<Table>
L--British Pound Sterling
YTL--Turkish Lira
M$--Mexican Peso
E--Euro
</Table>
24 MainStay Diversified Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $92,021,485) $ 74,795,757
Repurchase agreement, at value
(identified cost $11,710,470) 11,710,470
Cash 21,920
Cash denominated in foreign
currencies
(identified cost $17,742) 15,419
Receivables:
Dividends and interest 1,679,338
Investment securities sold 1,175,347
Fund shares sold 112,357
Other assets 30,463
Unrealized appreciation on foreign
currency forward contracts 909,086
------------
Total assets 90,450,157
------------
LIABILITIES:
Payables:
Investment securities purchased 6,041,142
Fund shares redeemed 99,688
Shareholder communication 51,319
Transfer agent (See Note 3) 47,742
Manager (See Note 3) 37,402
NYLIFE Distributors (See Note 3) 37,313
Custodian 36,366
Professional fees 31,947
Trustees 303
Accrued expenses 4,097
Dividend payable 112,056
Unrealized depreciation on foreign
currency forward contracts 357,529
------------
Total liabilities 6,856,904
------------
Net assets $ 83,593,253
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 116,730
Additional paid-in capital 106,690,653
------------
106,807,383
Accumulated undistributed net
investment income 1,918,502
Accumulated net realized loss on
investments, written option
transactions and foreign currency
transactions (8,427,863)
Net unrealized depreciation on
investments (17,225,728)
Net unrealized appreciation on
translation of other assets and
liabilities in foreign currencies
and foreign currency forward
contracts 520,959
------------
Net assets $ 83,593,253
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 9,989,561
============
Shares of beneficial interest
outstanding 1,387,005
============
Net asset value per share
outstanding $ 7.20
Maximum sales charge (4.50% of
offering price) 0.34
------------
Maximum offering price per share
outstanding $ 7.54
============
CLASS A
Net assets applicable to
outstanding shares $ 45,292,762
============
Shares of beneficial interest
outstanding 6,322,500
============
Net asset value per share
outstanding $ 7.16
Maximum sales charge (4.50% of
offering price) 0.34
------------
Maximum offering price per share
outstanding $ 7.50
============
CLASS B
Net assets applicable to
outstanding shares $ 18,567,333
============
Shares of beneficial interest
outstanding 2,598,995
============
Net asset value and offering price
per share outstanding $ 7.14
============
CLASS C
Net assets applicable to
outstanding shares $ 9,484,255
============
Shares of beneficial interest
outstanding 1,328,310
============
Net asset value and offering price
per share outstanding $ 7.14
============
CLASS I
Net assets applicable to
outstanding shares $ 259,342
============
Shares of beneficial interest
outstanding 36,184
============
Net asset value and offering price
per share outstanding $ 7.17
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
25
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 6,660,565
Dividends 159,430
Income from securities
loaned--net 50,084
------------
Total income 6,870,079
------------
EXPENSES:
Manager (See Note 3) 648,580
Distribution--Class B (See Note
3) 189,507
Distribution--Class C (See Note
3) 96,527
Transfer agent--Investor Class
(See Note 3) 25,775
Transfer agent--Class A (See Note
3) 125,915
Transfer agent--Classes B and C
(See Note 3) 120,906
Transfer agent--Class I (See Note
3) 419
Distribution/Service--Investor
Class (See Note 3) 17,277
Distribution/Service--Class A
(See Note 3) 152,944
Service--Class B (See Note 3) 63,169
Service--Class C (See Note 3) 32,176
Custodian 68,890
Shareholder communication 64,976
Registration 60,067
Professional fees 51,259
Recordkeeping (a) 28,143
Trustees 3,665
Miscellaneous 13,338
------------
Total expenses before waiver 1,763,533
Expense waiver from Manager (See
Note 3) (64,252)
------------
Net expenses 1,699,281
------------
Net investment income 5,170,798
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions $ (2,334,162)
Foreign currency transactions 763,252
------------
Net realized loss on investments,
written option transactions and
foreign currency transactions (1,570,910)
------------
Net change in unrealized
appreciation (depreciation) on:
Security transactions (21,427,811)
Translation of other assets and
liabilities in foreign
currencies and foreign
currency forward contracts 688,240
------------
Net change in unrealized
appreciation on investments and
foreign currency transactions (20,739,571)
------------
Net realized and unrealized loss on
investments, written option
transactions and foreign currency
transactions (22,310,481)
------------
Net decrease in net assets
resulting from operations $(17,139,683)
============
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
26 MainStay Diversified Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 5,170,798 $ 5,215,146
Net realized gain (loss) on
investments and foreign
currency transactions (1,570,910) 2,044,124
Net change in unrealized
appreciation on investments
and foreign currency
transactions (20,739,571) 75,872
---------------------------
Net increase (decrease) in
net assets resulting from
operations (17,139,683) 7,335,142
---------------------------
Dividends to shareholders:
From net investment income:
Investor Class (352,751) --
Class A (3,249,169) (3,741,394)
Class B (1,127,794) (1,549,496)
Class C (580,376) (645,805)
Class I (15,760) (13,279)
---------------------------
Total dividends to
shareholders (5,325,850) (5,949,974)
---------------------------
Capital share transactions:
Net proceeds from sale of
shares 27,636,704 23,037,979
Net asset value of shares
issued to shareholders in
reinvestment of dividends 4,029,360 4,506,261
Cost of shares redeemed (34,655,359) (32,150,036)
---------------------------
Decrease in net assets
derived from capital
share transactions (2,989,295) (4,605,796)
---------------------------
Net decrease in net
assets (25,454,828) (3,220,628)
NET ASSETS:
Beginning of year 109,048,081 112,268,709
---------------------------
End of year $ 83,593,253 $109,048,081
===========================
Accumulated undistributed
(distributions in excess
of) net investment income
at end of year $ 1,918,502 $ (644,207)
===========================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
27
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS CLASS A
-------------- ---------------------------------------------------
FEBRUARY 28,
2008**
THROUGH
OCTOBER 31, YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 8.86 $ 9.02 $ 8.91 $ 8.81 $ 9.01 $ 8.77
------- ------- ------- ------- ------- -------
Net investment income (a) 0.29 0.44 0.45 0.40 0.39 0.40
Net realized and
unrealized gain (loss)
on investments (1.77) (1.96) 0.21 0.18 (0.24) 0.37
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.11 0.12 (0.04) (0.01) 0.04 (0.05)
------- ------- ------- ------- ------- -------
Total from investment
operations (1.37) (1.40) 0.62 0.57 0.19 0.72
------- ------- ------- ------- ------- -------
Less dividends:
From net investment
income (0.29) (0.46) (0.51) (0.47) (0.39) (0.48)
------- ------- ------- ------- ------- -------
Net asset value at end of
period $ 7.20 $ 7.16 $ 9.02 $ 8.91 $ 8.81 $ 9.01
======= ======= ======= ======= ======= =======
Total investment return
(b)(e) (15.88%)(c) (16.27%) 7.14% 6.67% 2.11% 8.44%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 5.07% ++ 5.13% 5.01% 4.60% 4.32% 4.48%
Net expenses 1.40% ++ 1.30% 1.30% 1.30% 1.34% 1.41%
Expenses (before waiver) 1.51% ++ 1.34% 1.39% 1.46% 1.40% 1.41%
Portfolio turnover rate 81%(d) 81% 64% 87%(d) 105% 84%
Net assets at end of
period (in 000's) $ 9,990 $45,293 $68,637 $65,566 $40,076 $37,179
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 8.99 $ 8.89 $ 8.78 $ 8.99 $ 8.75
------- ------- ------- ------- -------
Net investment income (a) 0.37 0.38 0.34 0.32 0.33
Net realized and
unrealized gain (loss)
on investments (1.95) 0.20 0.18 (0.25) 0.39
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.12 (0.04) (0.01) 0.04 (0.06)
------- ------- ------- ------- -------
Total from investment
operations (1.46) 0.54 0.51 0.11 0.66
------- ------- ------- ------- -------
Less dividends:
From net investment
income (0.39) (0.44) (0.40) (0.32) (0.42)
------- ------- ------- ------- -------
Net asset value at end of
period $ 7.14 $ 8.99 $ 8.89 $ 8.78 $ 8.99
======= ======= ======= ======= =======
Total investment return
(b)(e) (16.88%) 6.23% 6.01% 1.23% 7.68%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 4.32% 4.26% 3.85% 3.57% 3.73%
Net expenses 2.11% 2.05% 2.05% 2.09% 2.16%
Expenses (before waiver) 2.20% 2.13% 2.21% 2.15% 2.16%
Portfolio turnover rate 81%(d) 64% 87%(d) 105% 84%
Net assets at end of
period (in 000's) $ 9,484 $12,081 $12,355 $14,004 $14,449
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charge and assumes the
reinvestments of dividends and distributions. Class I shares are not subject
to sales charges.
(c) Total return is not annualized.
(d) The portfolio turnover rate not including mortgage dollar rolls were 72% and
66% for the years ended October 31, 2008 and 2006, respectively.
(e) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
28 MainStay Diversified Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2008 2007 2006 2005 2004
$ 8.99 $ 8.89 $ 8.78 $ 8.99 $ 8.75
------- ------- ------- ------- -------
0.37 0.38 0.34 0.32 0.33
(1.95) 0.20 0.18 (0.25) 0.39
0.12 (0.04) (0.01) 0.04 (0.06)
------- ------- ------- ------- -------
(1.46) 0.54 0.51 0.11 0.66
------- ------- ------- ------- -------
(0.39) (0.44) (0.40) (0.32) (0.42)
------- ------- ------- ------- -------
$ 7.14 $ 8.99 $ 8.89 $ 8.78 $ 8.99
======= ======= ======= ======= =======
(16.88%) 6.23% 6.01% 1.23% 7.68%
4.32% 4.26% 3.85% 3.57% 3.73%
2.11% 2.05% 2.05% 2.09% 2.16%
2.20% 2.13% 2.21% 2.15% 2.16%
81%(d) 64% 87%(d) 105% 84%
$18,567 $28,069 $34,148 $71,515 $77,933
</Table>
<Table>
<Caption>
CLASS I
-------------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
-------------------------------------------------------------
2008 2007 2006 2005 2004
$ 9.02 $ 8.91 $ 8.81 $ 9.02 $ 8.96
--------- -------- -------- -------- --------
0.47 0.48 0.43 0.42 0.33
(1.94) 0.21 0.18 (0.25) 0.16
0.11 (0.04) (0.01) 0.04 (0.02)
--------- -------- -------- -------- --------
(1.36) 0.65 0.60 0.21 0.47
--------- -------- -------- -------- --------
(0.49) (0.54) (0.50) (0.42) (0.41)
--------- -------- -------- -------- --------
$ 7.17 $ 9.02 $ 8.91 $ 8.81 $ 9.02
========= ======== ======== ======== ========
(15.86%) 7.50% 7.09% 2.32% 5.44%(c)
5.49% 5.37% 4.94% 4.69% 4.77%++
0.96% 0.96% 0.96% 0.97% 1.12%++
1.03% 1.04% 1.12% 1.03% 1.12%++
81%(d) 64% 87%(d) 105% 84%
$ 259 $ 262 $ 199 $ 232 $ 72
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
29
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Diversified Income Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class A shares and Class B
shares commenced on February 28, 1997. Class C shares commenced on September 1,
1998. Class I shares commenced on January 2, 2004. Investor Class shares
commenced on February 28, 2008. Investor Class and Class A shares are offered at
net asset value per share plus an initial sales charge. No sales charge applies
on investments of $1 million or more (and certain other qualified purchases) in
Investor Class and Class A shares, but a contingent deferred sales charge is
imposed on certain redemptions of such shares within one year of the date of
purchase. Class B shares and Class C shares are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase of Class B shares and a 1%
contingent deferred sales charge may be imposed on redemptions made within one
year of purchase of Class C shares. Class I shares are not subject to a sales
charge. Depending upon eligibility, Class B shares convert to either Investor
Class or Class A shares eight years after the date they were purchased.
Additionally, depending upon eligibility, Investor Class shares may convert to
Class A shares and Class A shares may convert to Investor Class shares. The five
classes of shares have the same voting (except for issues that relate solely to
one class), dividend, liquidation and other rights and bear the same conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Investor Class and Class A shares under a distribution plan pursuant
to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a
distribution or service fee.
The Fund's investment objective is to provide current income and competitive
overall return by investing primarily in domestic and foreign debt securities.
The Fund invests in high-yield securities (sometimes called "junk bonds"), which
are generally considered speculative because they present a greater risk of
loss, including default, than higher quality debt securities. These securities
pay investors a premium--a high interest rate or yield--because of the increased
risk of loss. These securities can also be subject to greater price volatility.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or broker selected by the Fund's Manager (as defined in Note 3(A))
in consultation with the Fund's Subadvisor, if any, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques, if
such prices are deemed by the Fund's Manager, in consultation with the Fund's
Subadvisor, if any, to be representative of market values, at the regular close
of trading of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("valuation date").
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange on each valuation date. Securities
that are not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Prices normally are taken from the principal market
in which each security trades. Options contracts are valued at the last posted
settlement price on the market where such options are principally traded.
Investments in other mutual funds are valued at their net asset values as of the
close of the New York Stock Exchange on the date of valuation.
Foreign currency forward contracts are valued at their fair market values
determined on the basis of the mean between the last current bid and ask prices
based on dealer or exchange quotations.
Loan assignments, participations and commitments are valued at the average of
bid quotations obtained from a pricing service. The Trust has engaged an
independent pricing service to provide market value quotations from dealers in
loans. As of October 31, 2008, 100% of total investments in loans were valued
based on prices from such services.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or
30 MainStay Diversified Income Fund
less are valued at amortized cost. The amortized cost method involves valuing a
security at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor, as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund held
securities with a value of $525,511 that were valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3(A), conclude that such events may
have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund's Board of Trustees, adjust the value of the local price to reflect the
impact on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain thresholds. In such cases, the securities are
fair valued by applying factors provided by a third party vendor in accordance
with the Fund's policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3, determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and the Fund
pay dividends of net investment income monthly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at net asset value, unless the shareholder
elects otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made.
mainstayinvestments.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Expenses (other than transfer agent expenses and fees incurred under the
shareholder services plans and the distribution plans further discussed in Note
3 (B)) are allocated to separate classes of shares pro rata based upon their
relative net asset value on the date the expenses are incurred. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options that expire are
treated as realized gains. Premiums received from writing options that are
exercised or are canceled in closing purchase transactions are added to the
proceeds or netted against the amount paid on the transaction to determine the
realized gain or loss. By writing a covered call option, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of a decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in return for the premium
on the option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the obligation
as the writer continues, has retained the risk of loss should the price of the
underlying security decline. After writing a put option, the Fund may incur a
loss equal to the difference between the exercise price of the option and the
sum of the market value of the underlying security plus the premium received
from the sale of the option.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security or foreign currency it anticipates purchasing. The Fund may purchase
put options on its securities or foreign currencies to protect against a decline
in the value of the security or foreign currency or to close out covered written
put positions. The Fund may also purchase options to seek to enhance returns.
Risks may arise from an imperfect correlation between the change in market value
of the securities or foreign currencies held by the Fund and the prices of
options relating to the securities or foreign currencies purchased or sold by
the Fund and from the possible lack of a liquid secondary market for an option.
The maximum exposure to loss for any purchased option is limited to the premium
initially paid for the option.
(I) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan
assignments and loan participations. Loan assignments and participations
("loans") are agreements to make money available (a "commitment") to a borrower
in a specified amount, at a specified rate and within a specified time. Such
loans are typically senior, secured and collateralized in nature. The Fund
records an investment when the borrower withdraws money and records interest as
earned. These loans pay interest at rates that are periodically reset by
reference to a base lending rate plus a spread. These base lending rates are
generally the prime rate offered by a designated U.S. bank or the London
InterBank Offered Rate ("LIBOR").
The loans in which the Fund invests are generally readily marketable, but may be
subject to some restrictions on resale. For example, the Fund may be
contractually obligated to receive approval from the agent bank and/or borrower
prior to the sale of these investments.
The Fund assumes the credit risk of the borrower, the selling participant and
any other persons interpositioned between the Fund and the borrower
("intermediate participants"). In the event that the borrower, selling
participant or intermediate participants become insolvent or enters into
bankruptcy, the Fund may incur certain costs and delays in realizing payment, or
may suffer a loss of principal and/or interest.
Unfunded commitments represent the remaining obligation of the Fund to the
borrower. At any point in time, up to the maturity date of the issue, the
borrower may demand the unfunded portion. These unfunded amounts are marked to
market and recorded in the Statement of Assets and
32 MainStay Diversified Income Fund
Liabilities. At October 31, 2008, the Fund did not hold unfunded commitments.
(J) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward contract is
an agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. During the period the forward contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" such contract on a daily basis to reflect the
market value of the contract at the end of each day's trading. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into foreign currency forward
contracts primarily to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates or to try to enhance the Fund's returns.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. While the
Fund may enter into forward contracts to reduce currency exchange risks, changes
in currency exchange rates may result in poorer overall performance for the Fund
than if it had not engaged in such transactions. Exchange rate movements can be
large, depending on the currency, and can last for extended periods of time,
affecting the value of the Funds assets. Moreover, there may be an imperfect
correlation between the Fund's holdings of securities denominated in a
particular currency and the forward contracts entered into by the Fund. Such
imperfect correlation may prevent the Fund from achieving the intended hedge or
expose the Fund to the risk of currency exchange loss. The unrealized
appreciation on forward contracts reflects the Fund's exposure at period end to
credit loss in the event of a counterparty's failure to perform its obligations.
(See Note 5.)
(K) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date, and
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities that are denominated in foreign currency amounts are
presented at the exchange rates and market values at the close of the period.
The realized and unrealized changes in net assets arising from fluctuations in
exchange rates and market prices of securities are not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(L) MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the Portfolio of Investments and liabilities for such purchase
commitments are included as payables for investments purchased. During the roll
period, the Fund foregoes principal and interest paid on the securities. The
Fund is compensated by the difference between the current sales price and the
forward price for the future as well as by the earnings on the cash proceeds of
the initial sale. MDRs may be renewed without physical delivery of the
securities subject to the contract. The Fund maintains liquid assets from its
portfolio having a value not less than the repurchase price, including accrued
interest. MDR transactions involve certain risks, including the risk that the
MBS returned to the Fund at the end of the roll, while substantially similar,
could be inferior to what was initially sold to the counterparty.
(M) SECURITIES LENDING. In order to realized additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Funds' cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
mainstayinvestments.com 33
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(N) RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. The Fund may not
have the right to demand that such securities be registered. Disposal of these
securities may involve time-consuming negotiations and expenses and it may be
difficult to obtain a prompt sale at an acceptable price. (See Note 5.)
(O) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement")
between NYLIM and the Subadvisor, NYLIM pays for the services of the Subadvisor.
Effective August 1, 2008, the Trust, on behalf of the Fund, pays the Manager a
monthly fee for services performed and facilities furnished at an annual rate of
the Fund's average daily net assets as follows: 0.60% on assets up to $500
million, 0.55% on assets from $500 million to $1.0 billion and 0.50% on assets
in excess of $1.0 billion. Prior to August 1, 2008, the Fund was contractually
obligated to pay the Manager at an annual rate of: 0.60% on assets up to $500
million and 0.55% on assets in excess of $500 million.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage, other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.40%; Class A, 1.30%; Class B,
2.15%; Class C, 2.15%; and Class I, 0.96%. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. NYLIM
may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed the existing expense limitation and the recoupment is
made within three years after the year in which NYLIM incurred the expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $648,580 and waived its fees in the amount of $64,252.
34 MainStay Diversified Income Fund
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2010 2011 TOTAL
$190,789 $93,916 $64,252 $348,957
- -------------------------------------------
</Table>
Between March 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 1.30%; Class B,
2.05%; Class C, 2.05%; and Class I, 0.96%. Prior to March 1, 2007, NYLIM had a
different expense limitation agreement in place with respect to the Fund.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
these services provided to the Fund by the Manager amounted to $28,143 for the
period from November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Investor Class and Class A Plans, the Distributor receives a
monthly distribution fee from the Fund at an annual rate of 0.25% of the average
daily net assets of the Fund's Investor Class and Class A shares, which is an
expense of the Investor Class and Class A shares of the Fund for distribution or
service activities as designated by the Distributor. Pursuant to the Class B and
Class C Plans, the Fund pays the Distributor a monthly distribution fee, which
is an expense of the Class B and Class C shares of the Fund, at the annual rate
of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Plans provide that the Class B and Class C shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B and Class C shares of the Fund. Class I shares are not
subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were $3,744
and $18,689, respectively for the year ended October 31, 2008. The Fund was also
advised that the Distributor retained contingent deferred sales charges on
redemptions of Investor Class, Class A, Class B and Class C shares of $24, $295,
$32,136 and $2,036, respectively, for the year ended October 31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $273,015.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $7,235,029 16.0%
- --------------------------------------------------
Class C 94 0.0++
- --------------------------------------------------
Class I 999 0.4
- --------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
mainstayinvestments.com 35
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $3,871.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$2,873,549 $(8,024,812) $(129,012) $(17,933,855) $(23,214,130)
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to distributions payable, defaulted bonds release, mark to market
on foreign currency forward contracts, and wash sales deferrals.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income and accumulated net
realized gain on investments arising from permanent differences; net assets at
October 31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$2,717,761 $(2,413,673) $(304,088)
</Table>
The reclassifications for the Fund are primarily due to mark to market on
foreign currency gain (loss), paydowns gain (loss), expiring of a portion of the
capital loss carryforwards, and partnership basis adjustments.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $8,024,812 were available as shown in the table below, to the extent provided
by the regulations to offset future realized gains of the Fund through the years
indicated. To the extent that these loss carryforwards are used to offset future
capital gains, it is probable that the capital gains so offset will not be
distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2009 $ 943
2010 1,161
2011 523
2014 1,450
2016 3,948
- ----------------------------------------------------
$8,025
- ----------------------------------------------------
</Table>
The Fund had $319,118 of capital loss carryforwards that expired.
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distribution paid from:
Ordinary Income $5,325,850 $5,949,974
- ----------------------------------------------------
</Table>
NOTE 5--FOREIGN CURRENCY FORWARD CONTRACTS, FOREIGN CURRENCY TRANSACTIONS AND
RESTRICTED SECURITIES:
As of October 31, 2008, the Fund held the following foreign currency forward
contracts:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
PURCHASED SOLD (DEPRECIATION)
Foreign Currency Buy Contracts
- -------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, expiring 11/10/08 BRL 2,530,354 $1,157,455 $ 7,618
- -------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, expiring 12/2/08 BRL 1,000,000 579,039 (122,714)
- -------------------------------------------------------------------------------------------------
Mexican Peso vs. U.S. Dollar, expiring 11/7/08 MXN 2,581,859 203,200 (2,732)
- -------------------------------------------------------------------------------------------------
Mexican Peso vs. U.S. Dollar, expiring 11/10/08 MXN17,786,152 1,368,840 10,915
- -------------------------------------------------------------------------------------------------
Mexican Peso vs. U.S. Dollar, expiring 11/21/08 MXN 6,044,690 570,200 (102,834)
- -------------------------------------------------------------------------------------------------
</Table>
36 MainStay Diversified Income Fund
As of October 31, 2008, the Fund held the following foreign currency forward
contracts (continued):
<Table>
<Caption>
CONTRACT CONTRACT
AMOUNT AMOUNT
SOLD PURCHASED
Foreign Currency Sale Contracts
Brazilian Real vs. U.S. Dollar, expiring 11/10/08 BRL 1,679,154 $ 777,200 $ 4,052
- -------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, expiring 11/24/08 BRL 1,636,845 735,000 (14,368)
- -------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, expiring 12/2/08 BRL 1,000,000 601,866 145,541
- -------------------------------------------------------------------------------------------------
Euro Dollar vs. U.S. Dollar, expiring 11/24/08 EUR 686,822 897,676 22,966
- -------------------------------------------------------------------------------------------------
Euro Dollar vs. U.S. Dollar, expiring 11/28/08 EUR 3,868,198 4,836,240 (89,389)
- -------------------------------------------------------------------------------------------------
Mexican Peso vs. U.S. Dollar, expiring 11/7/08 MXN 5,671,000 500,000 59,676
- -------------------------------------------------------------------------------------------------
Mexican Peso vs. U.S. Dollar, expiring 11/10/08 MXN28,596,270 2,460,000 241,653
- -------------------------------------------------------------------------------------------------
Mexican Peso vs. U.S. Dollar, expiring 11/21/08 MXN 6,044,690 586,402 119,035
- -------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 11/17/08 GBP 2,133,967 3,722,520 290,997
- -------------------------------------------------------------------------------------------------
Pound Sterling vs. U.S. Dollar, expiring 11/28/08 GBP 482,356 749,630 (25,492)
- -------------------------------------------------------------------------------------------------
Turkish Lira vs. U.S. Dollar, expiring 11/10/08 TRY 144,500 100,000 6,633
- -------------------------------------------------------------------------------------------------
Unrealized appreciation on foreign currency
forward contracts $551,557
- -------------------------------------------------------------------------------------------------
</Table>
As of October 31, 2008, the Fund held the following foreign currencies:
<Table>
<Caption>
CURRENCY COST VALUE
Argentinian Peso ARS28,422 $ 9,209 $ 8,393
Canadian Dollar CAD 8,438 8,508 7,000
Pound Sterling GBP 16 25 26
- ---------------------------------------------------
$17,742 $15,419
- ---------------------------------------------------
</Table>
As of October 31, 2008, the Fund held the following restricted securities:
<Table>
<Caption>
SHARES/PRINCIPAL
DATE(S) OF AMOUNT/NUMBER 10/31/08 PERCENTAGE OF
SECURITY ACQUISITION OF WARRANTS COST VALUE NET ASSETS
At Home Corp.
Convertible Bond 7/25/01 504,238 $ 8,348 $ 50 0.0%++
- --------------------------------------------------------------------------------------------------------------
Haights Cross Communications, Inc.
Common Stock 8/31/07 15,988 181,730 54,359 0.1
- --------------------------------------------------------------------------------------------------------------
Warrants 8/31/07 223 36 756 0.0++
- --------------------------------------------------------------------------------------------------------------
QuadraMed Corp.
Covertible Preferred Stock 6/16/04 10,400 253,700 136,136 0.2
- --------------------------------------------------------------------------------------------------------------
$443,814 $191,301 0.3%
- --------------------------------------------------------------------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
mainstayinvestments.com 37
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of U.S. Government
securities were $30,640 and $28,688, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $49,144 and $62,548, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31, 2008 (a):
Shares sold 363,906 $ 3,194,393
Shares issued to
shareholders in
reinvestment of dividends 38,653 323,248
Shares redeemed (260,939) (2,187,508)
----------------------------
Net increase in shares
outstanding before
conversion 141,620 1,330,133
Shares converted into
Investor Class (See Note
1) 1,372,106 11,929,136
Shares converted from
Investor Class (See Note
1) (126,721) (1,059,104)
----------------------------
Net increase 1,387,005 $ 12,200,165
============================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 1,626,679 $ 14,143,866
Shares issued to
shareholders in
reinvestment of dividends 288,892 2,478,099
Shares redeemed (2,235,774) (19,096,286)
----------------------------
Net decrease in shares
outstanding before
conversion (320,203) (2,474,321)
Shares converted into Class
A (See Note 1) 360,683 3,084,017
Shares converted from Class
A (See Note 1) (1,330,336) (11,519,220)
----------------------------
Net decrease (1,289,856) $(10,909,524)
============================
Year ended October 31,
2007:
Shares sold 1,149,704 $ 10,304,191
Shares issued to
shareholders in
reinvestment of dividends 327,021 2,928,502
Shares redeemed (1,646,829) (14,791,791)
----------------------------
Net decrease in shares
outstanding before
conversion (170,104) (1,559,098)
Shares converted from Class
B (See Note 1) 427,323 3,826,085
----------------------------
Net increase 257,219 $ 2,266,987
============================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 542,124 $ 4,710,795
Shares issued to
shareholders in
reinvestment of dividends 98,845 843,502
Shares redeemed (881,629) (7,509,537)
----------------------------
Net decrease in shares
outstanding before
conversion (240,660) (1,955,240)
Shares converted from Class
B (See Note 1) (281,916) (2,434,829)
----------------------------
Net decrease (522,576) $(4,390,069)
============================
Year ended October 31,
2007:
Shares sold 413,771 $ 3,700,995
Shares issued to
shareholders in
reinvestment of dividends 127,495 1,139,305
Shares redeemed (833,891) (7,460,313)
----------------------------
Net decrease in shares
outstanding before
conversion (292,625) (2,620,013)
Shares reacquired upon
conversion into Class A
(See Note 1) (428,453) (3,826,085)
----------------------------
Net decrease (721,078) $ (6,446,098)
============================
</Table>
38 MainStay Diversified Income Fund
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 628,002 $ 5,486,628
Shares issued to
shareholders in
reinvestment of dividends 43,358 370,512
Shares redeemed (687,173) (5,808,860)
----------------------------
Net decrease (15,813) $ 48,280
============================
Year ended October 31,
2007:
Shares sold 1,011,064 $ 8,957,253
Shares issued to
shareholders in
reinvestment of dividends 47,679 425,175
Shares redeemed (1,105,039) (9,869,120)
----------------------------
Net decrease (46,296) $ (486,692)
============================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 11,549 $ 101,022
Shares issued to
shareholders in
reinvestment of dividends 1,641 13,999
Shares redeemed (6,028) (53,168)
----------------------------
Net increase 7,162 $ 61,853
============================
Year ended October 31,
2007:
Shares sold 8,384 $ 75,540
Shares issued to
shareholders in
reinvestment of dividends 1,483 13,279
Shares redeemed (3,212) (28,812)
----------------------------
Net increase 6,655 $ 60,007
============================
</Table>
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
mainstayinvestments.com 39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Diversified Income Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
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
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Diversified Income Fund of The MainStay Funds as of October 31, 2008,
the results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended,
in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
40 MainStay Diversified Income Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Diversified Income Fund (the "Fund"), which was
comprised solely of Independent Trustees, unanimously approved the Management
and Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider
mainstayinvestments.com 41
of shareholder services, which has been recognized by independent third-parties
on numerous occasions. The Board noted the role that the MainStay Family of
Funds historically has played in serving the investment needs of New York Life
Insurance Company policyholders, who often maintain smaller account balances
than other retail investors. The Board acknowledged that it had approved NYLIM's
recommendation to create a new "Investor Class" of shares designed principally
to address the higher shareholder-servicing costs typically associated with
smaller shareholder accounts. The Board considered the experience of senior
personnel at NYLIM providing management and administrative services to the Fund,
as well as NYLIM's reputation and financial condition. The Board also reviewed
NYLIM's willingness to invest in personnel designed to benefit the Fund, and
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and MacKay
Shields' method for compensating portfolio managers. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio managers and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position
42 MainStay Diversified Income Fund
is important in order for NYLIM to continue to provide high-quality ongoing
services to the Fund and its shareholders. The Board noted, for example,
increased costs borne by NYLIM and its affiliates due to new and ongoing
regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
mainstayinvestments.com 43
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
44 MainStay Diversified Income Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
For the fiscal year ended October 31, 2008, the Fund designates approximately
$115,184 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividends paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 93.9% for qualified interest income and 1.3% for the
corporate dividend received deduction..
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distribution received by shareholders in
calendar year 2008. The amounts that will be reported on such 1099-DIV will be
amounts you are to use on your federal income tax return and will differ from
the amounts which we must report for the Fund's fiscal year ended October 31,
2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
mainstayinvestments.com 45
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
46 MainStay Diversified Income Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 47
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
48 MainStay Diversified Income Fund
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 49
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO14645 (RECYCLE LOGO) MS308-08 MSDI11-12/08
16
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
LARGE CAP GROWTH FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
LARGE CAP GROWTH FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 14
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 22
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 29
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 30
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 34
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 34
- ---------------------------------------------
TRUSTEES AND OFFICERS 35
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (39.74%)0.52% 0.31%
Excluding sales charges (36.23) 1.66 0.88
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS A SHARES(3)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (39.86%)0.48% 0.29%
Excluding sales charges (36.36) 1.62 0.86
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS B SHARES(4)--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (40.03%)0.49% 0.12%
Excluding sales charges (36.88) 0.88 0.12
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the Mainstay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class
C shares are sold with no initial sales charge, are subject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 1.00%. Class I shares are sold with no initial sales charge or CDSC, have
no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Class R1 shares are sold with no initial sales
charge or CDSC and have no annual 12b-1 fee. Class R2 shares are sold with no
initial sales charge or CDSC and have an annual 12b-1 fee of 0.25%. Class R1
and Class R2 shares are only available through corporate-sponsored retirement
programs, which include certain minimum program requirements. Class R3 shares
are sold with no initial sales charge or CDSC, have an annual 12b-1 fee of
0.50% and are available in certain individual retirement accounts or in
certain retirement plans. Performance figures reflect certain fee waivers
and/or expense limitations, without which total returns may have been lower.
These fee waivers and/or expense limitations are contractual and may be
modified
THE FOOTNOTES ON THE FOLLOWING TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES(4)--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (37.42%)0.88% 0.12%
Excluding sales charges (36.79) 0.88 0.12
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS I SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------------------
(36.05%) 2.12% 1.24%
</Table>
(PERFORMANCE GRAPH)
CLASS R1 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------------------
(36.11%) 1.97% 1.11%
</Table>
(PERFORMANCE GRAPH)
or terminated only with the approval of the Board of Trustees. The Manager
may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the contract if such action does not
cause the Fund to exceed existing expense limitations and the recoupment is
made within three years after the year in which the Manager incurred the
expense. On April 1, 2005, FMI Winslow Growth Fund was reorganized into
MainStay Large Cap Growth Fund Class A shares. Prior to the reorganization,
FMI Winslow Growth Fund had no sales charge and its total net expenses were
capped at 1.30%. The total expenses of MainStay Large Cap Growth Fund Class A
shares are currently capped at 1.18%. Fund performance for all share classes
prior to April 1, 2005, has not been adjusted to reflect the current sales
charge and expense cap; had it been, the performance shown might have been
lower.
2. Performance figures for Investor Class shares, first offered to the public on
February 28, 2008, include the historical performance of Class A shares
through February 27, 2008, adjusted for differences in certain contractual
expenses and fees. Unadjusted, the performance shown for Investor Class
shares might have been lower.
3. Performance figures for Class A shares include the historical performance of
the FMI Winslow Growth Fund (a predecessor to the Fund) through March 31,
2005, adjusted to reflect the current maximum sales charge applicable to
Class A shares. Unadjusted, the performance shown for Class A shares might
have been lower.
4. Performance figures for Class B, Class C, Class I, Class R1 and Class R2
shares, each of which was first offered to the public on April 1, 2005,
include the historical performance of Class A shares through March 31, 2005,
adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class B, C, I, R1 and R2 shares might
have been lower.
5. Performance figures for Class R3 shares which were first offered to the
public on April 28, 2006, include the historical performance of Class A
shares through April 27, 2006, adjusted for differences in certain
contractual expenses and fees. Unadjusted, the performance shown for Class R3
shares might have been lower.
THE FOOTNOTE ON THE PRECEDING PAGE AND THE DISCLOSURE AND FOOTNOTES ON THE
FOLLOWING PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND SHOULD BE
CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Large Cap Growth Fund
CLASS R2 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------
(36.22%) 1.72% 0.86%
</Table>
(PERFORMANCE GRAPH)
CLASS R3 SHARES(5)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------
(36.36%) 1.44% 0.60%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- -----------------------------------------------------------------------
Russell 1000(R) Growth Index(6) (36.95%) (1.29%) (2.10%)
S&P 500(R) Index(7) (36.10) 0.26 0.40
Average Lipper large-cap growth fund(8) (38.55) (1.58) (0.71)
</Table>
6. The Russell 1000(R) Growth Index is an unmanaged index that measures the
performance of those Russell 1000(R) companies with higher price-to-book
ratios and higher forecasted growth values. The Russell 1000(R) Index is an
unmanaged index that measures the performance of the 1,000 largest U.S.
companies based on total market capitalization. Results assume the
reinvestment of all income and capital gains. The Russell 1000(R) Growth
Index is considered to be the Fund's broad-based securities-market index for
comparison purposes. An investment cannot be made directly in an index.
7. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume reinvestment of all
income and capital gains. An investment cannot be made directly in an index.
8. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
On April 1, 2005, FMI Winslow Growth Fund was reorganized as MainStay Large Cap
Growth Fund Class A shares. Performance for MainStay Large Cap Growth Fund Class
A shares includes the historical performance of the FMI Winslow Growth Fund from
inception (July 1, 1995) through March 31, 2005 adjusted to reflect the current
maximum sales charge applicable and fees and expenses for such shares.
Performance for Class B, C, and I shares, first offered April 1, 2005, include
the historical performance of Class A shares adjusted for differences in certain
contractual expenses and fees. Performance for Investor Class shares, first
offered February 28, 2008, includes the historical performance of Class A shares
from inception (July 1, 1995) through February 27, 2008, adjusted for
differences in certain contractual expenses and fees. Prior to the
reorganization (July 1, 1995, through March 31, 2005), the Fund operated as the
FMI Winslow Growth Fund, had no sales charge, and its total net expenses were
capped at 1.30%. The total expenses of MainStay Large Cap Growth Fund Class A
shares are currently capped at 1.18%. Fund performance for all share classes
prior to April 1, 2005, has not been adjusted to reflect the current expense
cap. If the above adjustments had not been made, or if Fund performance for all
share classes prior to April 1, 2005, had been adjusted to reflect the current
expense caps, the performance numbers shown would have been different.
THE FOOTNOTES ON THE PRECEDING TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY LARGE CAP GROWTH FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $687.10 $5.85 $1,018.20 $ 7.00
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $686.70 $5.05 $1,019.20 $ 6.04
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $684.10 $9.02 $1,014.40 $10.79
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $684.10 $9.02 $1,014.40 $10.79
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $688.20 $3.39 $1,021.10 $ 4.06
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $687.90 $3.82 $1,020.60 $ 4.57
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $687.00 $4.88 $1,019.40 $ 5.84
- --------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $686.70 $5.94 $1,018.10 $ 7.10
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.38% for Investor Class, 1.19% for Class A, 2.13% for Class B and Class C,
0.80% for Class I, 0.90% for Class R1, 1.15% for Class R2 and 1.40% for Class
R3) multiplied by the average account value over the period, divided by 366
and multiplied by 184 (to reflect the one-half year period). The table above
represents actual expenses incurred during the one-half year period and does
not take into account the Fund's written expense limitation agreement.
8 MainStay Large Cap Growth Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2008
<Table>
<Caption>
Communications Equipment 7.5%
Biotechnology 7.4
Food & Staples Retailing 6.3
IT Services 6.1
Computers & Peripherals 5.6
Health Care Equipment & Supplies 5.6
Aerospace & Defense 4.6
Machinery 4.6
Software 4.6
Health Care Providers & Services 4.2
Internet Software & Services 3.8
Chemicals 3.7
Life Sciences Tools & Services 3.5
Road & Rail 3.4
Pharmaceuticals 3.2
Capital Markets 2.6
Multiline Retail 2.5
Energy Equipment & Services 2.2
Oil, Gas & Consumable Fuels 2.2
Construction & Engineering 2.1
Trading Companies & Distributors 1.8
Household Products 1.6
Air Freight & Logistics 1.3
Diversified Financial Services 1.3
Internet & Catalog Retail 1.1
Electrical Equipment 1.0
Electronic Equipment & Instruments 1.0
Specialty Retail 1.0
Electric Utilities 0.8
Short-Term Investment 5.5
Liabilities in Excess of Cash and
Other Assets (2.1)
=====
100.0%
=====
</Table>
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Medco Health Solutions, Inc.
2. QUALCOMM, Inc.
3. Gilead Sciences, Inc.
4. Genzyme Corp.
5. Monsanto Co.
6. Danaher Corp.
7. Microsoft Corp.
8. Hewlett-Packard Co.
9. Wal-Mart Stores, Inc.
10. Visa, Inc. Class A
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS CLARK J. WINSLOW, JUSTIN H. KELLY, CFA,
AND R. BART WEAR, CFA, OF WINSLOW CAPITAL MANAGEMENT, LLC, THE FUND'S
SUBADVISOR.
HOW DID MAINSTAY LARGE CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12-MONTH REPORTING PERIOD?
Excluding all sales charges, MainStay Large Cap Growth Fund returned -36.23% for
Investor Class shares,(1) -36.36% for Class A shares, -36.88% for Class B shares
and -36.79% for Class C shares for
the 12 months ended October 31, 2008. Over the same period, the Fund returned
- -36.05% for Class
I shares, -36.11% for Class R1 shares, -36.22% for Class R2 shares and -36.36%
for Class R3 shares.
All share classes outperformed the -38.55% return
of the average Lipper(2) large-cap growth fund
and the -36.95% return of the Russell 1000(R) Growth Index for the 12 months
ended October 31, 2008. The Russell 1000(R) Growth Index(3) is the Fund's broad-
based securities-market index. See pages 5 and 6 for Fund returns with sales
charges.
WHAT ACCOUNTED FOR THE FUND'S RELATIVE PERFORMANCE?
Since we were concerned about the duration and depth of global credit-market
problems, the Fund had nearly zero exposure to some of the weakest financial
companies during the reporting period. Our stock selections in the health care,
energy, materials and financials sectors all contributed positively to the
Fund's performance relative to the Russell 1000(R) Growth Index. In contrast,
stock selection in the consumer staples, consumer discretionary and information
technology sectors detracted from the Fund's relative performance.
WHICH SECTORS WERE AMONG THE FUND'S STRONGEST PERFORMERS FOR THE 12 MONTHS ENDED
OCTOBER 31, 2008, AND WHICH SECTORS WERE THE WEAKEST?
Even in a broadly declining market, some sectors and securities performed better
than others. The three strongest-contributing sectors relative to the Russell
1000(R) Growth Index were materials, health care and energy. The three weakest-
contributing sectors were telecommunication services, consumer staples and
information technology.
DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS WERE THE STRONGEST
CONTRIBUTORS TO THE FUND'S ABSOLUTE RETURN AND WHICH STOCKS WERE PARTICULARLY
WEAK?
The three stocks that made the strongest contribution to the Fund's absolute
performance were all in the energy sector: Southwestern Energy, Peabody Energy
and Apache. Although Peabody Energy generated a negative total return, the
position strongly outpaced the Fund as a whole. The three stocks that detracted
the most from the Fund's absolute performance were Schlumberger Ltd., SPX and
Research in Motion.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
The Fund established a position in Charles Schwab, based on the company's strong
account growth and ability to control expenses. The Fund also initiated a
position in Target to take advantage of the stock's attractive valuation. We
believed that the company would be able to gain market share in a difficult
economic environment.
Southwestern Energy had been a particularly strong contributor to the Fund's
performance since its purchase in early 2007. We began trimming the position in
late 2007 and sold it completely in June 2008 because of its high valuation. We
also had concerns about whether high natural gas prices could be sustained. We
sold Research in Motion because of a lower-than-anticipated profit margin and
deteriorating growth in the mobile phone industry.
WERE THERE ANY CHANGES TO THE FUND'S WEIGHTINGS DURING THE REPORTING PERIOD?
During the reporting period, the Fund's largest weighting increase was in health
care, which moved the Fund from slightly overweight to substantially overweight
relative to the Russell 1000(R) Growth Index. We also increased the Fund's
allocation to industrials from underweight to overweight relative to the
benchmark.
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. Growth stocks may be more
volatile than other stocks because they are generally more sensitive to investor
perceptions and market moves. During periods of growth-stock underperformance,
the Fund's performance may suffer. Foreign securities may be subject to greater
risks than U.S. investments, including currency fluctuations, less-liquid
trading markets, greater price volatility, political and economic instability,
less publicly available information, and changes in tax or currency laws or
monetary policy.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 7 for more information on Lipper Inc.
3. See footnote on page 7 for more information on the Russell 1000(R) Growth
Index.
10 MainStay Large Cap Growth Fund
The Fund's largest weighting decreases were in information technology, which
moved from overweight to underweight relative to the Russell 1000(R) Growth
Index, and telecommunication services, which remained overweight but by a
smaller margin. The Fund also decreased its already underweight positions in the
consumer staples and consumer discretionary sectors during the reporting period.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
The Fund's sector weights are principally driven by our bottom-up stock
selection process. The Fund's largest current overweight position is health
care, with a focus on biotechnology companies and those companies that we
believe will be the beneficiaries of the generic drug movement. In light of
technology cycles and price pressures, the Fund has deemphasized pharmaceutical
companies and medical devices.
Despite fiscal and monetary stimulus, lower home prices, high energy costs, food
inflation and deleveraging have prompted us to keep the Fund substantially
underweight in the consumer staples and consumer discretionary sectors.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 96.6%+
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 4.6%
Precision Castparts Corp. 284,400 $ 18,431,964
Rockwell Collins, Inc. 465,000 17,311,950
United Technologies Corp. 666,400 36,625,344
--------------
72,369,258
--------------
AIR FREIGHT & LOGISTICS 1.3%
C.H. Robinson Worldwide,
Inc. 388,300 20,106,174
--------------
BIOTECHNOLOGY 7.4%
Cephalon, Inc. (a) 206,100 14,781,492
V Genzyme Corp. (a) 676,900 49,332,472
V Gilead Sciences, Inc. (a) 1,135,100 52,044,335
--------------
116,158,299
--------------
CAPITAL MARKETS 2.6%
BlackRock, Inc. 116,300 15,274,842
Charles Schwab Corp. (The) 1,307,400 24,997,488
--------------
40,272,330
--------------
CHEMICALS 3.7%
Ecolab, Inc. 286,200 10,663,812
V Monsanto Co. 537,400 47,817,852
--------------
58,481,664
--------------
COMMUNICATIONS EQUIPMENT 7.5%
Cisco Systems, Inc. (a) 2,246,700 39,923,859
Juniper Networks, Inc. (a) 800,500 15,001,370
V QUALCOMM, Inc. 1,630,200 62,371,452
--------------
117,296,681
--------------
COMPUTERS & PERIPHERALS 5.6%
Apple, Inc. (a) 227,300 24,455,207
EMC Corp. (a) 1,416,100 16,681,658
V Hewlett-Packard Co. 1,211,800 46,387,704
--------------
87,524,569
--------------
CONSTRUCTION & ENGINEERING 2.1%
Fluor Corp. 352,300 14,067,339
Quanta Services, Inc. (a) 926,000 18,297,760
--------------
32,365,099
--------------
DIVERSIFIED FINANCIAL SERVICES 1.3%
IntercontinentalExchange,
Inc. (a) 242,540 20,751,722
--------------
ELECTRIC UTILITIES 0.8%
FirstEnergy Corp. 240,900 12,565,344
--------------
ELECTRICAL EQUIPMENT 1.0%
First Solar, Inc. (a) 111,100 15,965,070
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 1.0%
Dolby Laboratories, Inc.
Class A (a) 505,800 15,968,106
--------------
ENERGY EQUIPMENT & SERVICES 2.2%
FMC Technologies, Inc. (a) 445,100 15,574,049
Weatherford International,
Ltd. (a) 1,091,600 18,426,208
--------------
34,000,257
--------------
FOOD & STAPLES RETAILING 6.3%
Costco Wholesale Corp. 331,300 18,887,413
CVS Caremark Corp. 1,163,000 35,645,950
V Wal-Mart Stores, Inc. 774,400 43,219,264
--------------
97,752,627
--------------
HEALTH CARE EQUIPMENT & SUPPLIES 5.6%
Alcon, Inc. 157,500 13,878,900
Baxter International, Inc. 498,900 30,178,461
Mindray Medical
International,
Ltd., ADR (b) 669,990 14,444,984
St. Jude Medical, Inc. (a) 784,100 29,819,323
--------------
88,321,668
--------------
HEALTH CARE PROVIDERS & SERVICES 4.2%
V Medco Health Solutions,
Inc. (a) 1,733,600 65,790,120
--------------
HOUSEHOLD PRODUCTS 1.6%
Procter & Gamble Co. (The) 383,100 24,725,274
--------------
INTERNET & CATALOG RETAIL 1.1%
Priceline.com, Inc. (a) 323,700 17,036,331
--------------
INTERNET SOFTWARE & SERVICES 3.8%
Equinix, Inc. (a) 357,400 22,308,908
Google, Inc. Class A (a) 104,780 37,653,741
--------------
59,962,649
--------------
IT SERVICES 6.1%
Cognizant Technology
Solutions Corp. Class A
(a) 1,491,000 28,627,200
Mastercard, Inc. Class A 177,000 26,164,140
V Visa, Inc. Class A 734,800 40,671,180
--------------
95,462,520
--------------
LIFE SCIENCES TOOLS & SERVICES 3.5%
Illumina, Inc. (a) 493,800 15,223,854
Thermo Fisher Scientific,
Inc. (a) 972,300 39,475,380
--------------
54,699,234
--------------
</Table>
+ Percentages indicated are based on Fund net assets.
Among the Fund's 10 largest holdings, as of October 31, 2008,
excluding short-term investment. May be subject to change daily.
12 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
MACHINERY 4.6%
V Danaher Corp. 801,200 $ 47,463,088
SPX Corp. 643,300 24,921,442
--------------
72,384,530
--------------
MULTILINE RETAIL 2.5%
Kohl's Corp. (a) 453,700 15,938,481
Target Corp. 563,900 22,623,668
--------------
38,562,149
--------------
OIL, GAS & CONSUMABLE FUELS 2.2%
CONSOL Energy, Inc. 410,300 12,879,317
Southwestern Energy Co. (a) 609,900 21,724,638
--------------
34,603,955
--------------
PHARMACEUTICALS 3.2%
Allergan, Inc. 450,800 17,883,236
Teva Pharmaceutical
Industries, Ltd.,
Sponsored ADR (b) 765,700 32,833,216
--------------
50,716,452
--------------
ROAD & RAIL 3.4%
Norfolk Southern Corp. 342,300 20,517,462
Union Pacific Corp. 488,000 32,583,760
--------------
53,101,222
--------------
SOFTWARE 4.6%
V Microsoft Corp. 2,078,000 46,401,740
Oracle Corp. (a) 1,372,100 25,095,709
--------------
71,497,449
--------------
SPECIALTY RETAIL 1.0%
Lowe's Cos., Inc. 721,600 15,721,644
--------------
TRADING COMPANIES & DISTRIBUTORS 1.8%
Fastenal Co. 696,400 28,037,064
--------------
Total Common Stocks
(Cost $1,840,496,837) 1,512,199,461
--------------
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT 5.5%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 5.5%
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$85,614,054
(Collateralized by a
Federal Home Loan Bank
Security with a rate of
2.67% and a maturity date
of 3/4/09, with a
Principal Amount of
$87,110,000 and a
Market Value of
$87,327,775) $85,613,341 $ 85,613,341
--------------
Total Short-Term Investment
(Cost $85,613,341) 85,613,341
--------------
Total Investments
(Cost $1,926,110,178) (c) 102.1% 1,597,812,802
Liabilities in Excess of
Cash and Other Assets (2.1) (32,720,641)
----- ------------
Net Assets 100.0% $1,565,092,161
===== ============
</Table>
<Table>
(a) Non-income producing security.
(b) ADR--American Depositary Receipt.
(c) At October 31, 2008, cost is
$1,948,785,309 for federal income tax
purposes and net unrealized depreciation
is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 17,548,402
Gross unrealized depreciation (368,520,909)
-------------
Net unrealized depreciation $(350,972,507)
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $1,926,110,178) $1,597,812,802
Receivables:
Fund shares sold 19,530,852
Investment securities sold 12,662,899
Dividends and interest 325,863
Other assets 97,747
--------------
Total assets 1,630,430,163
--------------
LIABILITIES:
Payables:
Investment securities purchased 55,496,160
Fund shares redeemed 7,976,965
Transfer agent (See Note 3) 726,168
Manager (See Note 3) 601,208
NYLIFE Distributors (See Note 3) 254,989
Shareholder communication 154,770
Professional fees 81,832
Custodian 32,010
Trustees 5,172
Accrued expenses 8,728
--------------
Total liabilities 65,338,002
--------------
Net assets $1,565,092,161
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 3,308,343
Additional paid-in capital 2,170,822,845
--------------
2,174,131,188
Accumulated net realized loss on
investments and foreign currency
transactions (280,741,651)
Net unrealized depreciation on
investments (328,297,376)
--------------
Net assets $1,565,092,161
==============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 46,762,220
==============
Shares of beneficial interest
outstanding 9,958,275
==============
Net asset value per share
outstanding $ 4.70
Maximum sales charge (5.50% of
offering price) 0.27
--------------
Maximum offering price per share
outstanding $ 4.97
==============
CLASS A
Net assets applicable to
outstanding shares $ 495,183,849
==============
Shares of beneficial interest
outstanding 105,442,134
==============
Net asset value per share
outstanding $ 4.70
Maximum sales charge (5.50% of
offering price) 0.27
--------------
Maximum offering price per share
outstanding $ 4.97
==============
CLASS B
Net assets applicable to
outstanding shares $ 65,996,409
==============
Shares of beneficial interest
outstanding 14,439,977
==============
Net asset value and offering price
per share outstanding $ 4.57
==============
CLASS C
Net assets applicable to
outstanding shares $ 93,248,579
==============
Shares of beneficial interest
outstanding 20,417,593
==============
Net asset value and offering price
per share outstanding $ 4.57
==============
CLASS I
Net assets applicable to
outstanding shares $ 761,457,932
==============
Shares of beneficial interest
outstanding 158,977,907
==============
Net asset value and offering price
per share outstanding $ 4.79
==============
CLASS R1
Net assets applicable to
outstanding shares $ 62,343,979
==============
Shares of beneficial interest
outstanding 13,094,965
==============
Net asset value and offering price
per share outstanding $ 4.76
==============
CLASS R2
Net assets applicable to
outstanding shares $ 35,409,939
==============
Shares of beneficial interest
outstanding 7,503,052
==============
Net asset value and offering price
per share outstanding $ 4.72
==============
CLASS R3
Net assets applicable to
outstanding shares $ 4,689,254
==============
Shares of beneficial interest
outstanding 1,000,354
==============
Net asset value and offering price
per share outstanding $ 4.69
==============
</Table>
14 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 9,156,445
Interest 914,737
Income from securities loaned-net 782,454
-------------
Total income 10,853,636
-------------
EXPENSES:
Manager (See Note 3) 11,206,731
Transfer agent--Investor Class
(See Note 3) 123,913
Transfer agent--Class A (See Note
3) 893,608
Transfer agent--Classes B and C
(See Note 3) 644,400
Transfer agent--Classes I, R1, R2
and R3
(See Note 3) 1,258,442
Distribution/Service--Investor
Class
(See Note 3) 89,156
Distribution/Service--Class A
(See Note 3) 1,035,027
Service--Class B (See Note 3) 266,923
Service--Class C (See Note 3) 225,661
Distribution/Service--Class R2
(See Note 3) 87,181
Distribution/Service--Class R3
(See Note 3) 6,042
Distribution--Class B (See Note
3) 800,770
Distribution--Class C (See Note
3) 676,983
Distribution--Class R3 (See Note
3) 6,042
Shareholder communication 275,455
Professional fees 193,648
Registration 143,491
Recordkeeping (b) 129,867
Shareholder service--Class R1
(See Note 3) 73,620
Shareholder service--Class R2
(See Note 3) 34,872
Shareholder service--Class R3
(See Note 3) 2,417
Trustees 61,252
Custodian 34,486
Miscellaneous 68,792
-------------
Total expenses before waiver 18,338,779
Expense waiver from Manager (See
Note 3) (1,454,942)
-------------
Net expenses 16,883,837
-------------
Net investment loss (6,030,201)
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) on:
Security transactions $(146,551,381)
Foreign currency transactions 515
-------------
Net realized loss on investments
and foreign currency transactions (146,550,866)
-------------
Net change in unrealized
appreciation on investments (579,518,985)
-------------
Net realized and unrealized loss on
investments and foreign currency
transactions (726,069,851)
-------------
Net decrease in net assets
resulting from operations $(732,100,052)
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$52,078.
(b) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
INCREASE IN NET ASSETS:
Operations:
Net investment loss $ (6,030,201) $ (3,820,779)
Net realized gain (loss)
on investments and
foreign currency
transactions (146,550,866) 33,279,064
Net change in unrealized
appreciation
on investments (579,518,985) 181,717,772
-------------------------------
Net increase (decrease)
in net assets resulting
from operations (732,100,052) 211,176,057
-------------------------------
Capital share transactions:
Net proceeds from sale of
shares 1,621,723,549 491,826,317
Cost of shares redeemed (476,246,239) (166,057,894)
-------------------------------
Increase in net assets
derived from capital
share transactions 1,145,477,310 325,768,423
-------------------------------
Net increase in net
assets 413,377,258 536,944,480
NET ASSETS:
Beginning of year 1,151,714,903 614,770,423
-------------------------------
End of year $1,565,092,161 $1,151,714,903
===============================
</Table>
16 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS CLASS A
-------------- -------------------------------------------------------------------------
FEBRUARY 28, JULY 1,
2008** 2005***
THROUGH YEAR ENDED THROUGH YEAR ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, JUNE 30,
-------------------------------------------------------------------------------------------
2008 2008 2007 2006 2005 2005 2004
Net asset value at
beginning of period $ 6.63 $ 7.37 $ 5.84 $ 5.31 $ 5.06 $ 4.69 $ 3.96
------- -------- -------- -------- ------- ------- ------
Net investment loss
(a) (0.03) (0.03) (0.04) (0.03) (0.01) (0.03) (0.03)
Net realized and
unrealized gain
(loss) on
investments (1.90) (2.64) 1.57 0.56 0.26 0.40 0.76
------- -------- -------- -------- ------- ------- ------
Total from investment
operations (1.93) (2.67) 1.53 0.53 0.25 0.37 0.73
------- -------- -------- -------- ------- ------- ------
Less distributions:
From net realized
gain on
investments -- -- -- (0.00)++ -- -- --
------- -------- -------- -------- ------- ------- ------
Net asset value at end
of period $ 4.70 $ 4.70 $ 7.37 $ 5.84 $ 5.31 $ 5.06 $ 4.69
======= ======== ======== ======== ======= ======= ======
Total investment
return (b)(d) (29.11%)(c) (36.36%) 26.20% 10.04% 4.94% (c) 7.89% 18.43%
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (0.73%)++ (0.52%) (0.61%) (0.53%) (0.77%)++ (0.29%) (0.77%)
Net expenses 1.38% ++ 1.23% 1.36% 1.40% 1.40% ++ 1.35% 1.30%
Expenses (before
waiver/reimburse-
ment) 1.39% ++ 1.26% 1.43% 1.63% 1.77% ++ 3.01% 2.78%
Portfolio turnover
rate 115% 115% 74% 92% 29% 27% 94%
Net assets at end of
period (in 000's) $46,762 $495,184 $374,978 $200,500 $71,859 $67,000 $4,926
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------
JULY 1, APRIL 1,
2005*** 2005**
YEAR ENDED THROUGH THROUGH
OCTOBER 31, OCTOBER 31, JUNE 30,
--------------------------------------------------------
2008 2007 2006 2005 2005
Net asset value at
beginning of period $ 7.23 $ 5.77 $ 5.29 $ 5.05 $ 4.83
------- ------- ------- ------ ------
Net investment income
(loss) (a) (0.09) (0.09) (0.07) (0.03) (0.01)
Net realized and
unrealized gain
(loss) on
investments (2.57) 1.55 0.55 0.27 0.23
------- ------- ------- ------ ------
Total from investment
operations (2.66) 1.46 0.48 0.24 0.22
------- ------- ------- ------ ------
Less distributions:
From net realized
gain on
investments -- -- (0.00)++ -- --
------- ------- ------- ------ ------
Net asset value at end
of period $ 4.57 $ 7.23 $ 5.77 $ 5.29 $ 5.05
======= ======= ======= ====== ======
Total investment
return (b)(d) (36.79%) 25.30% 9.13% 4.75% (c) 4.55% (c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment
income (loss) (1.41%) (1.37%) (1.29%) (1.52%)++ (1.41%)++
Net expenses 2.11% 2.11% 2.15% 2.15% ++ 2.15% ++
Expenses (before
waiver/reimburse-
ment) 2.12% 2.18% 2.38% 2.52% ++ 4.24% ++
Portfolio turnover
rate 115% 74% 92% 29% 27%
Net assets at end of
period (in 000's) $93,249 $58,119 $18,171 $8,024 $7,190
</Table>
<Table>
** Commencement of operations.
*** The Fund changed its fiscal year end from June 30 to October 31.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(c) Total return is not annualized.
(d) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
18 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
Class B
- ----------------------------------------------------------------
July 1, April 1,
2005*** 2005**
Year ended through through
October 31, October 31, June 30,
- ----------------------------------------------------------------
2008 2007 2006 2005 2005
$ 7.24 $ 5.77 $ 5.29 $ 5.06 $ 4.83
------- -------- -------- -------- --------
(0.09) (0.08) (0.07) (0.03) (0.00)++
(2.58) 1.55 0.55 0.26 0.23
------- -------- -------- -------- --------
(2.67) 1.47 0.48 0.23 0.23
------- -------- -------- -------- --------
-- -- (0.00)++ -- --
------- -------- -------- -------- --------
$ 4.57 $ 7.24 $ 5.77 $ 5.29 $ 5.06
======= ======== ======== ======== ========
(36.88%) 25.48% 9.13% 4.55% (c) 4.76% (c)
(1.34%) (1.34%) (1.29%) (1.52%)++ (1.41%)++
2.10% 2.11% 2.15% 2.15% ++ 2.15% ++
2.12% 2.18% 2.38% 2.52% ++ 4.24% ++
115% 74% 92% 29% 27%
$65,996 $132,402 $133,330 $169,703 $168,063
</Table>
<Table>
<Caption>
CLASS I
- -----------------------------------------------------------------
JULY 1, APRIL 1,
2005*** 2005**
YEAR ENDED THROUGH THROUGH
OCTOBER 31, OCTOBER 31, JUNE 30,
- -----------------------------------------------------------------
2008 2007 2006 2005 2005
$ 7.49 $ 5.89 $ 5.33 $ 5.07 $ 4.83
-------- -------- -------- ------- -------
(0.01) (0.00)++ 0.01 0.00++ (0.01)
(2.69) 1.60 0.55 0.26 0.25
-------- -------- -------- ------- -------
(2.70) 1.60 0.56 0.26 0.24
-------- -------- -------- ------- -------
-- -- (0.00)++ -- --
-------- -------- -------- ------- -------
$ 4.79 $ 7.49 $ 5.89 $ 5.33 $ 5.07
======== ======== ======== ======= =======
(36.05%) 27.16% 10.56% 5.13%(c) 4.97% (c)
(0.08%) (0.01%) 0.11% 0.06%++ (0.28%)++
0.79% 0.76% 0.75% 0.60%++ 1.02% ++
0.94% 0.91% 0.98% 0.97%++ 3.11% ++
115% 74% 92% 29% 27%
$761,458 $524,485 $259,588 $93,694 $14,349
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
--------------------------------------------------------
JULY 1, APRIL 1,
2005*** 2005**
YEAR ENDED THROUGH THROUGH
OCTOBER 31, OCTOBER 31, JUNE 30,
--------------------------------------------------------
2008 2007 2006 2005 2005
Net asset value at
beginning of period $ 7.45 $ 5.87 $ 5.31 $5.06 $ 4.83
------- ------- ------ ----- ------
Net investment income
(loss) (a) (0.01) (0.01) 0.00 ++ 0.00 ++ (0.03)
Net realized and
unrealized gain
(loss) on
investments (2.68) 1.59 0.56 0.25 0.26
------- ------- ------ ----- ------
Total from investment
operations (2.69) 1.58 0.56 0.25 0.23
------- ------- ------ ----- ------
Less distributions:
From net realized
gain on
investments -- -- (0.00)++ -- --
------- ------- ------ ----- ------
Net asset value at end
of period $ 4.76 $ 7.45 $ 5.87 $5.31 $ 5.06
======= ======= ====== ===== ======
Total investment
return (b)(d) (36.11%) 26.92% 10.60% 4.94%(c) 4.76% (c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment
income (loss) (0.16%) (0.19%) 0.03% 0.10%++ (0.38%)++
Net expenses 0.88% 0.85% 0.85% 0.70%++ 1.12% ++
Expenses (before
waiver/reimburse-
ment) 1.03% 1.01% 1.08% 1.07%++ 3.21% ++
Portfolio turnover
rate 115% 74% 92% 29% 27%
Net assets at end of
period (in 000's) $62,344 $57,460 $3,163 $ 2 $ 2
</Table>
<Table>
<Caption>
CLASS R3
---------------------------------
APRIL 28,
2006**
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
---------------------------------
2008 2007 2006
Net asset value at
beginning of period $ 7.37 $ 5.83 $ 5.74
------- ------ ------
Net investment loss
(a) (0.05) (0.04) (0.01)
Net realized and
unrealized gain
(loss) on
investments (2.63) 1.58 0.10
------- ------ ------
Total from investment
operations (2.68) 1.54 0.09
------- ------ ------
Net asset value at end
of period $ 4.69 $ 7.37 $ 5.83
======= ====== ======
Total investment
return (b)(d) (36.36%) 26.42% 1.57% (c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (0.77%) (0.66%) (0.47%)++
Net expenses 1.40% 1.35% 1.37% ++
Expenses (before
waiver/reimburse-
ment) 1.56% 1.51% 1.63% ++
Portfolio turnover
rate 115% 74% 92%
Net assets at end of
period (in 000's) $ 4,689 $ 117 $ 10
</Table>
<Table>
** Commencement of operations.
*** The Fund changed its fiscal year end from June 30 to October 31.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(c) Total return is not annualized.
(d) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
20 MainStay Large Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
Class R2
- -------------------------------------------------------------
July 1, April 1,
2005*** 2005**
Year ended through through
October 31, October 31, June 30,
- -------------------------------------------------------------
2008 2007 2006 2005 2005
$ 7.40 $ 5.84 $ 5.30 $ 5.05 $ 4.83
------- ------ ------ ------ ------
(0.03) (0.02) (0.01) (0.01) (0.03)
(2.65) 1.58 0.55 0.26 0.25
------- ------ ------ ------ ------
(2.68) 1.56 0.54 0.25 0.22
------- ------ ------ ------ ------
-- -- (0.00)++ -- --
------- ------ ------ ------ ------
$ 4.72 $ 7.40 $ 5.84 $ 5.30 $ 5.05
======= ====== ====== ====== ======
(36.22%) 26.71% 10.25% 4.95% (c) 4.55% (c)
(0.46%) (0.37%) (0.24%) (0.51%)++ (0.63%)++
1.14% 1.11% 1.10% 0.95% ++ 1.37% ++
1.29% 1.27% 1.33% 1.32% ++ 3.46% ++
115% 74% 92% 29% 27%
$35,410 $4,154 $ 9 $ 2 $ 2
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Large Cap Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers eight classes of shares. Class A shares, Class B
shares, Class C shares, Class I shares, Class R1 shares and Class R2 shares
commenced on March 31, 2005. Class R3 shares commenced on April 28, 2006.
Investor Class shares commenced on February 28, 2008. Investor Class and Class A
shares are offered at net asset value per share plus an initial sales charge. No
sales charge applies on investments of $1 million or more (and certain other
qualified purchases) in Investor Class and Class A shares, but a contingent
deferred sales charge is imposed on certain redemptions of such shares within
one year of the date of purchase. Class B shares and Class C shares are offered
without an initial sales charge, although a declining contingent deferred sales
charge may be imposed on redemptions made within six years of purchase of Class
B shares and a 1% contingent deferred sales charge may be imposed on redemptions
made within one year of purchase of Class C shares. Class I, Class R1, Class R2
and Class R3 shares are not subject to a sales charge. Depending upon
eligibility, Class B shares convert to either Investor Class or Class A shares
eight years after the date they were purchased. Additionally, depending upon
eligibility, Investor Class shares may convert to Class A shares and Class A
shares may convert to Investor Class shares. The eight classes of shares have
the same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and bear the same conditions except that Class B
and Class C shares are subject to higher distribution fee rates than Investor
Class, Class A, Class R2 and Class R3 shares under a distribution plan pursuant
to Rule 12b-1 under the 1940 Act. Class I and Class R1 shares are not subject to
a distribution or service fee. Class R1, Class R2 and Class R3 shares are
authorized to pay to the Manager, as defined in Note 3, its affiliates, or
third-party service providers, as compensation for services rendered to
shareholders of Class R1, Class R2 or Class R3 shares, a shareholder service
fee.
The Fund's investment objective is to seek long-term growth of capital.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Investments
in other mutual funds are valued at their net asset values as of the close of
the New York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor ,as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund did not hold
securities that were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in
22 MainStay Large Cap Growth Fund
filing tax returns (including whether an entity is taxable in a particular
jurisdiction), and requires certain expanded tax disclosures. The Interpretation
became effective for the Fund's 2008 fiscal year, and was applied to all open
tax years as of the date of effectiveness. The Manager, as defined in Note 3(A),
determined that the adoption of the Interpretation did not have an impact on the
Fund's financial statements upon adoption. The Manager continually reviews the
Fund's tax positions and such conclusions under the Interpretation based on
factors, including, but not limited to, ongoing analyses of tax laws and
regulations and interpretations thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(I) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
service providers that contain a variety of representations and warranties and
which provide general indemnifications. The Fund's maximum exposure under these
arrangements is unknown, as this would involve future claims that may be made
against the Fund that have not yet occurred. Based on experience, management is
of the view that the risk of loss in connection with these potential
indemnification obligations is remote. However, there can be no assurance that
material liabilities related to such obligations will not arise in the future,
which could adversely impact the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. Winslow
Capital Management, Inc. (the "Subadvisor"), a registered investment adviser, is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory
Agreement"), between NYLIM and the Subadvisor, NYLIM pays for the services of
the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.80% on assets up to $250 million, 0.75% on assets from
$250 million up to $500 million, 0.725% on assets from $500 million up to $750
million, 0.70% on assets from $750 million up to $2.0 billion, 0.65% on assets
from $2.0 billion up to $3.0 billion and 0.60% on assets in excess of $3.0
billion. The Manager has also contractually agreed to waive its management fee
to 0.75% on assets up to $500 million, 0.725% on assets from $500 million to
$750 million, 0.70% on assets from $750 million to $2 billion, 0.65% on assets
from $2 billion to $3 billion and 0.60% on assets in excess of $3 billion, which
is not subject to recoupment.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM has
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage and other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.50%; Class A, 1.18%; Class B,
2.25%; Class C, 2.25%; Class I, 0.80%; Class R1, 0.90%; Class R2, 1.15% and
Class R3, 1.40%. This expense limitation may be modified or terminated only with
the approval of the Board of Trustees. NYLIM may recoup the amount of certain
management fee waivers or expense reimbursements from the Fund pursuant to the
agreement if such action does not cause the Fund to exceed the existing expense
limitation and the recoupment is made within three years after the year in which
NYLIM incurred the expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $11,206,731 and waived expenses in the amount of $1,454,942, of which
$1,329,942 is subject to recoupment.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2010 2011 TOTAL
$928,988 $713,664 $1,329,942 $2,972,594
-----------------------------------------------
</Table>
The Fund had $278,094 of waived fees for which the recoupment period expired
during the year ended October 31, 2008.
Between August 1, 2007 to April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 1.40%; Class B,
2.15%; Class C, 2.15%; Class I, 0.75%; Class R1, 0.85%; Class R2, 1.10% and
Class R3, 1.35%. Prior to August 1, 2007, NYLIM had a different expense
limitation agreement in place with respect to the Fund.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of
24 MainStay Large Cap Growth Fund
1% of the next $80 million of average monthly net assets and 1/100 of 1% of any
amount in excess of $100 million of average monthly net assets. Fees for these
services provided to the Fund by the Manager amounted to $129,867 for the period
November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to Investor Class, Class A, Class B, Class C, Class R2 and Class R3
shares, has adopted distribution plans (the "Plans") in accordance with the
provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor
receives a monthly distribution fee from the Fund at an annual rate of 0.25% of
the average daily net assets of the Fund's Investor Class, Class A and Class R2
shares, which is an expense of the Investor Class, Class A and Class R2 shares
of the Fund, for distribution or service activities as designated by the
Distributor. Pursuant to the Class B and Class C Plans, the Fund pays the
Distributor a monthly distribution fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Plans provide that the
Class B and Class C shares of the Fund also incur a service fee at the annual
rate of 0.25% of the average daily net asset value of the Class B and Class C
shares of the Fund. Pursuant to the Class R3 Plan, the Distributor receives a
monthly distribution fee from the Fund at the annual rate of 0.50% of the
average daily net assets of the Fund's Class R3 shares, which is an expense of
the Class R3 shares of the Fund for distribution or service activities as
designated by the Distributor. Class I and Class R1 shares are not subject to a
distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R1, Class R2 and
Class R3 shares, the Manager has agreed to provide, through its affiliates or
independent third parties, various shareholder and administrative support
services to shareholders of the Class R1, Class R2 and Class R3 shares. For its
services, the Manager is entitled to a Shareholder Service Fee accrued daily and
paid monthly at an annual rate of 0.10% of the average daily net assets
attributable to the Class R1, Class R2 and Class R3 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were
$17,491 and $157,724, respectively, for the year ended October 31, 2008. The
Fund was also advised that the Distributor retained contingent deferred sales
charges on redemptions of Investor Class, Class A, Class B and Class C shares of
$209, $8,292, $155,187 and $42,407, respectively, for the year ended October 31,
2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $2,920,363.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 179 0.0%++
- -------------------------------------------------
Class B 1,893 0.0++
- -------------------------------------------------
Class C 1,988 0.0++
- -------------------------------------------------
Class I 1,984 0.0++
- -------------------------------------------------
Class R1 1,972 0.0++
- -------------------------------------------------
Class R2 1,955 0.0++
- -------------------------------------------------
Class R3 8,171 0.2
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $56,825.
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(258,066,520) $-- $(350,972,507) $(609,039,027)
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$6,030,201 $(516) $(6,029,685)
----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gains
and losses and net operating losses.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $258,066,520 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2008 $ 72,112
2009 53,277
2010 5,418
2013 1,157
2016 126,102
$258,066
- -----------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $2,868,332 and $1,697,225, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 3,002,468 $ 20,261,840
Shares redeemed (1,348,994) (8,401,600)
---------------------------------------
Net increase in shares
outstanding before
conversion 1,653,474 11,860,240
Shares converted into
Investor Class (See Note
1) 8,967,275 57,338,024
Shares converted from
Investor Class (See Note
1) (662,474) (4,077,142)
---------------------------------------
Net increase 9,958,275 $65,121,122
=======================================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
26 MainStay Large Cap Growth Fund
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 85,405,037 $ 531,611,091
Shares redeemed (25,924,299) (155,561,459)
---------------------------------------
Net increase in shares
outstanding before
conversion 59,480,738 376,049,632
Shares converted into Class
A (See Note 1) 2,654,030 17,614,744
Shares converted from Class
A (See Note 1) (7,543,627) (47,971,883)
---------------------------------------
Net increase 54,591,141 $ 345,692,493
=======================================
Year ended October 31,
2007:
Shares sold 23,380,310 $ 149,896,228
Shares redeemed (9,477,748) (59,718,759)
---------------------------------------
Net increase in shares
outstanding before
conversion 13,902,562 90,177,469
Shares converted from Class
B (See Note 1) 2,589,819 16,570,298
---------------------------------------
Net increase 16,492,381 $ 106,747,767
=======================================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 3,326,519 $ 21,444,506
Shares redeemed (3,683,623) (22,965,912)
---------------------------------------
Net decrease in shares
outstanding before
conversion (357,104) (1,521,406)
Shares converted from Class
B (See Note 1) (3,492,442) (22,903,743)
---------------------------------------
Net decrease (3,849,546) $(24,425,149)
=======================================
Year ended October 31,
2007:
Shares sold 2,567,000 $ 16,181,934
Shares redeemed (4,748,871) (29,149,130)
---------------------------------------
Net decrease in shares
outstanding before
conversion (2,181,871) (12,967,196)
Shares reacquired upon
conversion into Class A
(See Note 1) (2,629,812) (16,570,298)
---------------------------------------
Net decrease (4,811,683) $(29,537,494)
=======================================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 14,881,921 $ 94,422,906
Shares redeemed (2,498,353) (14,634,277)
---------------------------------------
Net increase 12,383,568 $ 79,788,629
=======================================
Year ended October 31,
2007:
Shares sold 5,750,405 $ 36,767,768
Shares redeemed (866,951) (5,389,761)
---------------------------------------
Net increase 4,883,454 $ 31,378,007
=======================================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 126,761,613 $ 835,684,808
Shares redeemed (37,786,596) (246,885,115)
---------------------------------------
Net increase 88,975,017 $ 588,799,693
=======================================
Year ended October 31,
2007:
Shares sold 36,257,681 $ 234,720,899
Shares redeemed (10,299,209) (68,850,180)
---------------------------------------
Net increase 25,958,472 $ 165,870,719
=======================================
</Table>
<Table>
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 8,358,789 $ 56,203,766
Shares redeemed (2,977,005) (19,379,358)
---------------------------------------
Net increase 5,381,784 $ 36,824,408
=======================================
Year ended October 31,
2007:
Shares sold 7,576,842 $ 50,226,675
Shares redeemed (402,768) (2,624,741)
---------------------------------------
Net increase 7,174,074 $ 47,601,934
=======================================
</Table>
<Table>
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 8,173,216 $ 55,268,071
Shares redeemed (1,231,106) (7,803,703)
---------------------------------------
Net increase 6,942,110 $47,464,368
=======================================
Year ended October 31,
2007:
Shares sold 607,848 $ 3,937,452
Shares redeemed (48,402) (325,311)
---------------------------------------
Net increase 559,446 $ 3,612,141
=======================================
</Table>
<Table>
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 1,082,715 $ 6,826,561
Shares redeemed (98,234) (614,815)
---------------------------------------
Net increase 984,481 $6,211,746
=======================================
Year ended October 31,
2007:
Shares sold 14,133 $ 95,361
Shares redeemed (2) (12)
---------------------------------------
Net increase 14,131 $ 95,349
=======================================
</Table>
NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
principles from the application of this Statement relate to the definition of
fair value, the methods used to measure fair value, and the expanded disclosures
about fair value measurements. As of October 31, 2008, Management does not
believe the adoption of SFAS No. 157, effective for the Fund for the fiscal year
beginning November 1, 2008, will impact the amounts reported in the Fund's
financial statements. However, additional disclosures may be required about the
inputs used to develop the measurements and the effect of certain measurements
reported in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
NOTE 10--SUBSEQUENT EVENT:
Effective on or about December 26, 2008, Nuveen Investments, Inc. acquired
Winslow Capital Management, Inc. ("Winslow"), the Fund's subadvisor. This
resulted in a change of control of Winslow and an automatic termination of the
previous subadvisory agreement with Winslow under the Investment Company Act of
1940, as amended. At a meeting held on December 11-12, 2008, the Fund's Board of
Trustees approved the continued retention of Winslow as the Fund's subadvisor
and approved a new subadvisory agreement. Shareholder approval of the continued
retention of Winslow as subadvisor and the new subadvisory agreement is not
required because the Fund has obtained an exemptive order from the Securities
and Exchange Commission allowing NYLIM to retain unaffiliated subadvisors for
the Fund without shareholder approval.
28 MainStay Large Cap Growth Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Large Cap Growth Fund (the
"Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the three-year
period then ended, the four-month period ended October 31, 2005, and the year-
ended June 30, 2005. 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 June 30, 2004, were audited
by other auditors, whose report dated August 4, 2004, expressed an unqualified
opinion.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers where not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Large Cap Growth Fund of The MainStay Funds as of October 31, 2008, and
the results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and the
financial highlights for the three-year period then ended, the four-month period
ended October 31, 2005, and the year-ended June 30, 2005, in conformity with
U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
mainstayinvestments.com 29
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Large Cap Growth Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management and
Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM, its affiliates
and Winslow Capital Management, Inc. ("Winslow"), subadviser to the Fund,
discussed in greater detail below, and responses to a comprehensive list of
questions encompassing a variety of topics prepared on behalf of the Board by
independent legal counsel to the Board.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and Winslow; (ii)
the investment performance of the Fund; (iii) the costs of the services to be
provided, and profits to be realized, by NYLIM, its affiliates and Winslow from
their relationship with the Fund; (iv) the extent to which economies of scale
may be realized as the Fund grows, and the extent to which economies of scale
may benefit Fund investors; and (v) the reasonableness of the Fund's management
fee and subadvisory fee levels and overall total ordinary operating expenses,
particularly as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND WINSLOW
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing Winslow and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing Winslow's compliance with the Fund's
policies and investment objectives, and for implementing Board directives as
they relate to the Fund. The Board considered the scope and quality of NYLIM's
services provided to the Fund's shareholders (including services provided
through its affiliate, NYLIM Service Company LLC), such as the more extensive
servicing needs of New York Life agents and reputation as a high-quality
provider of shareholder services, which has been recognized by independent
third-parties on numerous occasions. The Board noted the role that the MainStay
Family of Funds historically has played in serving the investment needs of New
York Life Insurance Company policyholders, who often maintain smaller
30 MainStay Large Cap Growth Fund
account balances than other retail investors. The Board acknowledged that it had
approved NYLIM's recommendation to create a new "Investor Class" of shares
designed principally to address the higher shareholder-servicing costs typically
associated with smaller shareholder accounts. The Board considered the
experience of senior personnel at NYLIM providing management and administrative
services to the Fund, as well as NYLIM's reputation and financial condition. The
Board also reviewed NYLIM's willingness to invest in personnel designed to
benefit the Fund, and that NYLIM also is responsible for paying all of the
salaries and expenses for the Fund's officers. In addition, the Board considered
the benefits to shareholders of being part of the MainStay Family of Funds,
including the privilege of exchanging investments between the same class of
shares without the imposition of a sales charge, as described more fully in the
Fund's prospectus. Based on these considerations, the Board concluded, within
the context of its overall determinations regarding the Agreements, that the
Fund is likely to continue to benefit from the nature, extent and quality of
these services as a result of NYLIM's experience, personnel, operations and
resources.
The Board also examined the nature, extent and quality of the services that
Winslow provides to the Fund. The Board evaluated Winslow's experience in
serving as subadviser to the Fund, noting that Winslow serves a variety of other
investment advisory clients, including other pooled investment vehicles. It
examined Winslow's track record and experience in providing investment advisory
services to the Fund, the experience of senior management and administrative
personnel at Winslow, and Winslow's overall legal and compliance environment.
The Board also reviewed Winslow's willingness to invest in personnel designed to
benefit the Fund. In this regard, the Board considered the experience of the
Fund's portfolio managers, the number of accounts managed by the portfolio
managers and Winslow's method for compensating portfolio managers. Based on
these considerations, the Board concluded, within the context of its overall
determinations regarding the Agreement, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of Winslow's
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and Winslow concerning Fund
investment performance, as well as discussions between the Fund's portfolio
managers and the Board that occurred at meetings from time to time throughout
the year and in previous years. In considering the Fund's investment
performance, the Board focused principally on the Fund's long-term performance
track record, as opposed to the Fund's short-term investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM, ITS
AFFILIATES AND WINSLOW
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because Winslow's
subadvisory fee for advising the Fund is paid directly by NYLIM, the Board
considered the cost and profitability information for NYLIM and Winslow in the
aggregate.
In evaluating the costs and profits of NYLIM, its affiliates and Winslow due to
their relationship with the Fund, the Board considered, among other things,
NYLIM's investments in personnel, systems, equipment and other resources
necessary to manage the Fund, and the fact that NYLIM is responsible for paying
Winslow's subadvisory fee. The Board acknowledged that NYLIM and Winslow must be
in a position to pay and retain experienced professional personnel to provide
services to the Fund, and that NYLIM's ability to maintain a strong financial
position is important in order for NYLIM to continue to provide high-quality
ongoing services to the Fund and its shareholders. The Board noted, for example,
increased costs borne by NYLIM, its affiliates and Winslow due to new and
ongoing regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM, its affiliates and Winslow due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable
mainstayinvestments.com 31
comparative data about mutual fund managers' profitability, since such
information generally is not publicly available and may be impacted by numerous
factors, including the structure of a fund manager's organization, the types of
funds it manages, and the manager's capital structure and costs of capital. With
respect to Winslow, the Board considered representations from Winslow and NYLIM
that the subadvisory fee paid by NYLIM to Winslow was the result of arm's-length
negotiations. For Winslow, which is a subadviser not affiliated with NYLIM, the
Board focused primarily on the profitability of the relationship among NYLIM,
its affiliates and the Funds. While recognizing the difficulty in evaluating a
manager's profitability with respect to the Fund, and noting that other
profitability methodologies may also be reasonable, the Board concluded that the
profitability methodology presented by NYLIM to the Board with respect to the
Fund was reasonable in all material respects. With respect to Winslow, the Board
concluded that any profits realized by Winslow due to its relationship with the
Funds are the result of arm's-length negotiations between NYLIM and Winslow, and
are based on subadvisory fees paid to Winslow by NYLIM, not the Funds.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM, its
affiliates and Winslow due to their relationship with the Fund. The Board
recognized, for example, the benefits to NYLIM and Winslow from legally
permitted "soft-dollar" arrangements by which brokers provide research and other
services to NYLIM and Winslow in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM, its
affiliates and Winslow as part of the annual contract review process, when
considering the reasonableness of the fees to be paid to NYLIM, its affiliates
and Winslow under the Agreements, the Board considered the profitability of
NYLIM's relationship with the Fund on a pre-tax basis, and without regard to
distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM, its affiliates and Winslow due to their
relationship with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because Winslow's subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board primarily considered the reasonableness of the
overall management fee paid by the Fund to NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and Winslow on the fees that
NYLIM and Winslow charge to other investment advisory clients, including
institutional separate accounts and other funds with similar investment
objectives as the Fund. In this regard, the Board took into account the relative
scope of services provided to the Fund as opposed to NYLIM's and Winslow's other
investment advisory clients. The Board also considered comparative data provided
by Strategic Insight on the fees and expense ratios charged by similar mutual
funds managed by other investment advisers. This comparative information
assisted the Board in evaluating the reasonableness of the Fund's management fee
when compared to similar fees charged by NYLIM and Winslow to other investment
advisory clients, and fees charged by other investment advisers to mutual funds
in the Fund's peer group.
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation
32 MainStay Large Cap Growth Fund
arrangements that may be modified only with the prior approval of the Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
mainstayinvestments.com 33
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
34 MainStay Large Cap Growth Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
mainstayinvestments.com 35
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
36 MainStay Large Cap Growth Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 37
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
38 MainStay Large Cap Growth Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A014530 (RECYCLE LOGO) MS308-08 MSLG11-12/08
31
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP VALUE FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
MID CAP VALUE FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 14
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 22
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 30
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 31
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 35
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 35
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 35
- ---------------------------------------------
TRUSTEES AND OFFICERS 36
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------------
With sales charges (40.47%) (0.85%) 5.07%
Excluding sales charges (37.00) 0.28 5.67
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP
FUND VALUE INDEX
------------ --------------
10/31/98 9450 10000
12010 10570
14839 11822
14500 11660
13213 11313
16172 15100
18820 18081
20713 21607
23966 26040
26029 28573
10/31/08 16398 17479
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------------
With sales charges (40.40%) (0.83%) 5.08%
Excluding sales charges (36.93) 0.30 5.68
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP
FUND VALUE INDEX
------------ --------------
10/31/98 23625 25000
30025 26425
37098 29556
36250 29149
33034 28283
40431 37751
47049 45203
51782 54018
59914 65099
65073 71432
10/31/08 41040 43697
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------------
With sales charges (40.07%) (0.72%) 4.88%
Excluding sales charges (37.45) (0.46) 4.88
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP
FUND VALUE INDEX
------------ --------------
10/31/98 10000 10000
12604 10570
15452 11822
15001 11660
13558 11313
16476 15100
19033 18081
20797 21607
23879 26040
25746 28573
10/31/08 16104 17479
</Table>
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
changes in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class
C shares are sold with no initial sales charge, are subject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 1.00%. Class I shares are sold with no initial sales charge or CDSC, have
no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Class R1 shares are sold with no initial sales
charge or CDSC and have no annual 12b-1 fee. Class R2 shares are sold with no
initial sales charge or CDSC and have an annual 12b-1 fee of 0.25%. Class R1
and R2 shares are available only through corporate-sponsored retirement
programs, which include certain minimum program requirements. Performance
figures reflect certain fee waivers and/or expense limitations, without which
total returns may have been lower. These fee waivers and/or expense
limitations are contractual and may be modified or terminated only with the
approval of the Board of Trustees. The
THE FOOTNOTES ON THE NEXT TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------------
With sales charges (37.94%) (0.46%) 4.88%
Excluding sales charges (37.41) (0.46) 4.88
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP
FUND VALUE INDEX
------------ --------------
10/31/98 10000 10000
12604 10570
15452 11822
15001 11660
13558 11313
16476 15100
19033 18081
20797 21607
23879 26040
25731 28573
10/31/08 16104 17479
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE
ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------
(36.65%) 0.73% 6.04%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP
FUND VALUE INDEX
------------ --------------
10/31/98 10000 10000
12743 10570
15789 11822
15466 11660
14128 11313
17334 15100
20251 18081
22373 21607
25971 26040
28370 28573
10/31/08 17973 17479
</Table>
CLASS R1 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE
ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------
(36.64%) 0.66% 5.95%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP
FUND VALUE INDEX
------------ --------------
10/31/98 10000 10000
12729 10570
15753 11822
15416 11660
14069 11313
17249 15100
20137 18081
22221 21607
25800 26040
28137 28573
10/31/08 17828 17479
</Table>
Manager may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the contract if such action does not
cause the Fund to exceed existing expense limitations and the recoupment is
made within three years after the year in which the Manager incurred the
expense.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A shares through February
27, 2008, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for the Investor Class shares might have
been lower.
THE FOOTNOTES ON THE PREVIOUS PAGE AND ON THE FOLLOWING PAGE ARE AN INTEGRAL
PART OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH
THEM.
6 MainStay Mid Cap Value Fund
CLASS R2 SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- --------------------------------------------
(36.82%) 0.39% 5.67%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MID
CAP VALUE RUSSELL MIDCAP
FUND VALUE INDEX
------------ --------------
10/31/98 10000 10000
12695 10570
15667 11822
15294 11660
13924 11313
17017 15100
19803 18081
21795 21607
25231 26040
27463 28573
10/31/08 17352 17479
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ----------------------------------------------------------------------
Russell Midcap(R) Value Index(4) (38.83%) 2.97% 5.74%
Average Lipper mid cap value fund(5) (39.25) 1.33 6.06
</Table>
3. Performance figures for Class I, R1 and R2 shares, each of which was first
offered to the public on January 2, 2004, include the historical performance
of Class A shares through December 31, 2003, adjusted for differences in
certain contractual expenses and fees. Unadjusted, the performance shown for
the Class I, R1 and R2 shares might have been lower.
4. The Russell Midcap(R) Value Index is an unmanaged index that measures the
performance of those Russell Midcap(R) companies with lower price-to-book
ratios and lower forecasted growth values. The Russell Midcap(R) Index is an
unmanaged index that measures the performance of the 800 smallest companies
in the Russell 1000(R) Index, which, in turn, is an unmanaged index that
measures the performance of the 1,000 largest U.S. companies based on total
market capitalization. Results assume reinvestment of all income and capital
gains. The Russell Midcap(R) Value Index is considered to be the Fund's
broad-based securities-market index for comparison purposes. An investment
cannot be made directly in an index.
5. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTES ON THE PREVIOUS TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MID CAP VALUE FUND
- --------THE EXAMPLE BELOW IS INTENDED TO DESCRIBE THE FEES AND EXPENSES BORNE BY
SHAREHOLDERS DURING THE SIX-MONTH PERIOD FROM MAY 1, 2008, TO OCTOBER 31, 2008,
AND THE IMPACT OF THOSE COSTS ON YOUR INVESTMENT.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $677.80 $5.90 $1,018.10 $ 7.10
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $678.50 $5.36 $1,018.80 $ 6.44
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $675.30 $9.05 $1,014.30 $10.89
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $675.30 $9.05 $1,014.30 $10.89
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $679.50 $3.29 $1,021.20 $ 3.96
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $679.70 $3.88 $1,020.50 $ 4.67
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $678.90 $4.77 $1,019.50 $ 5.74
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.40% for Investor Class, 1.27% for Class A, 2.15% for Class B and Class C,
0.78% for Class I, 0.92% for Class R1 and 1.13% for Class R2) multiplied by
the average account value over the period, divided by 366 and multiplied by
184 (to reflect the one-half year period). The table above represents actual
expenses incurred during the one-half year period and does not take into
account the Fund's written expense limitation agreement.
8 MainStay Mid Cap Value Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2008
<Table>
<Caption>
Insurance 7.6%
Specialty Retail 6.7
Food Products 5.6
Health Care Providers & Services 5.2
Pharmaceuticals 5.2
Oil, Gas & Consumable Fuels 5.0
Electric Utilities 4.7
Multi-Utilities 4.1
Commercial Banks 3.9
Metals & Mining 3.6
Electronic Equipment & Instruments 3.4
IT Services 3.4
Energy Equipment & Services 3.3
Commercial Services & Supplies 2.9
Food & Staples Retailing 2.8
Real Estate Investment Trusts 2.6
Thrifts & Mortgage Finance 2.4
Aerospace & Defense 2.2
Media 2.0
Capital Markets 1.8
Diversified Telecommunication
Services 1.7
Electrical Equipment 1.6
Machinery 1.6
Communications Equipment 1.5
Beverages 1.4
Chemicals 1.4
Containers & Packaging 1.3
Gas Utilities 1.2
Trading Companies & Distributors 0.9
Airlines 0.7
Road & Rail 0.5
Exchange Traded Fund 1.2
Short-Term Investment 6.4
Cash and Other Assets, Less
Liabilities 0.2
-----
100.0%
=====
</Table>
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Teva Pharmaceutical Industries, Ltd.
2. Kroger Co. (The)
3. PartnerRe, Ltd.
4. Quest Diagnostics, Inc.
5. Aspen Insurance Holdings, Ltd.
6. NewAlliance Bancshares, Inc.
7. Raytheon Co.
8. Spectra Energy Corp.
9. Pepco Holdings, Inc.
10. Cablevision Systems Corp. Class A
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS MARK T. SPELLMAN AND RICHARD A. ROSEN,
CFA,
OF MACKAY SHIELDS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY MID CAP VALUE FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK FOR THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Mid Cap Value Fund returned -37.00% for
Investor Class shares,(1) -36.93% for Class A shares, -37.45% for Class B shares
and -37.41% for Class C shares for the 12 months ended October 31, 2008. Over
the same period, the Fund's Class I shares returned -36.65%, Class R1 shares
returned -36.64% and Class R2 shares returned -36.82%. All share classes
outperformed the -39.25% return of the average Lipper(2) mid-cap value fund and
the -38.83% return of the Russell Midcap(R) Value Index(3) for the 12 months
ended October 31, 2008. The Russell Midcap(R) Value Index is the Fund's broad-
based securities-market index. See pages 5 and 6 for Fund returns with sales
charges.
WHICH SECTORS MADE THE STRONGEST CONTRIBUTIONS TO THE FUND'S RELATIVE
PERFORMANCE DURING THE REPORTING PERIOD AND WHICH SECTORS WERE THE WEAKEST?
Even though all sectors declined on an absolute basis during the reporting
period, some sectors and securities performed better than others. Holdings in
the consumer discretionary and consumer staples sectors were the strongest
contributors to the Fund's performance relative to the Russell Midcap(R) Value
Index, during the reporting period. Positions in the financials and materials
sectors were the greatest detractors from the Fund's relative performance.
DURING THE REPORTING PERIOD, WHAT WERE SOME OF THE FUND'S BEST-PERFORMING
INDIVIDUAL STOCKS?
Positive contributors on an absolute basis were hard to come by during the
reporting period, but a few holdings did manage to gain solid ground and
contribute positively to the Fund's performance.
Generic drug manufacturer Barr Pharmaceuticals agreed to be acquired by rival
Teva Pharmaceutical. As a result, Barr's shares saw a double-digit increase from
the beginning of the reporting period through the time we sold the entire
position in early August.
We initiated a position in home and farm supply retailer Tractor Supply in June
2008, and the shares rose substantially from the time of purchase through
October 31, making a positive contribution to the Fund's performance.
Shares of railroad operator CSX also advanced from the beginning of the
reporting period until April, when they hit our price target and we sold the
position.
WHICH STOCKS DETRACTED FROM THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
Life and property & casualty insurer Hartford Financial detracted from the
Fund's performance during the reporting period. We established the Fund's
position in January, but during the fall, Hartford Financial faced liquidity
difficulties that plagued many insurers. The value of the company's shares
plummeted before we sold them in late October, on continuing concerns about
Hartford Financial's capital adequacy and its ability to address this concern.
Life and mortgage insurer Genworth Financial also fell dramatically during the
reporting period, as its mortgage insurance unit continued to raise concerns
about increasing losses and potential capital requirements. We reduced the
Fund's position in Genworth Financial a number of times throughout the reporting
period. This action helped reduce the impact the shares had on the Fund.
Shares of health care insurer Coventry Health Care also declined dramatically
during the reporting period. Most of the decline occurred after the company
announced disappointing results in October. We continued to hold the shares,
however, because we believe that the decline in Coventry Health Care's share
price was excessive.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
In addition to the transactions we've already mentioned, we initiated a number
of other new positions in the Fund during the reporting period. Among these
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. The principal risk of
investing in value stocks is that they may never reach what the portfolio
manager believes is their full value or that they may even go down in value.
Mid-capitalization companies are generally less established and their stocks may
be more volatile and less liquid than the securities of large companies.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 7 for more information about Lipper Inc.
3. See footnote on page 7 for more information on the Russell Midcap(R) Value
Index.
10 MainStay Mid Cap Value Fund
were generic drug manufacturer Watson Pharma-ceuticals and drug and health care
supply distributor Cardinal Health.
Among the positions we eliminated from the Fund after they reached our price
targets were mining equipment manufacturer Joy Global and banking company PNC.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2008, the Fund was overweight relative to the Russell
Midcap(R) Value Index in health care, energy and industrials. As of the same
date, the Fund was underweight in the financials, utilities and consumer
discretionary sectors.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 92.2%+
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 2.2%
V Raytheon Co. 63,942 $ 3,268,076
-------------
AIRLINES 0.7%
Delta Air Lines, Inc. (a) 101,875 1,118,587
-------------
BEVERAGES 1.4%
Constellation Brands, Inc.
Class A (a) 170,600 2,139,324
-------------
CAPITAL MARKETS 1.8%
Investment Technology Group,
Inc. (a) 133,500 2,724,735
-------------
CHEMICALS 1.4%
Arch Chemicals, Inc. 31,682 898,818
Olin Corp. 70,625 1,282,550
-------------
2,181,368
-------------
COMMERCIAL BANKS 3.9%
Fifth Third Bancorp 94,000 1,019,900
KeyCorp 205,100 2,508,373
Marshall & Ilsley Corp. 134,043 2,416,795
-------------
5,945,068
-------------
COMMERCIAL SERVICES & SUPPLIES 2.9%
Avery Dennison Corp. 44,400 1,554,888
Pitney Bowes, Inc. 116,511 2,887,143
-------------
4,442,031
-------------
COMMUNICATIONS EQUIPMENT 1.5%
Emulex Corp. (a) 237,900 2,260,050
-------------
CONTAINERS & PACKAGING 1.3%
Ball Corp. 57,400 1,963,080
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 1.7%
Embarq Corp. 87,100 2,613,000
-------------
ELECTRIC UTILITIES 4.7%
American Electric Power Co.,
Inc. 44,100 1,438,983
Edison International 69,800 2,484,182
V Pepco Holdings, Inc. 152,100 3,140,865
-------------
7,064,030
-------------
ELECTRICAL EQUIPMENT 1.6%
Rockwell Automation, Inc. 84,900 2,349,183
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 3.4%
Avnet, Inc. (a) 109,700 1,836,378
Ingram Micro, Inc. Class A
(a) 127,800 1,703,574
Molex, Inc. Class A 124,800 1,602,432
-------------
5,142,384
-------------
ENERGY EQUIPMENT & SERVICES 3.3%
Baker Hughes, Inc. 19,000 664,050
Diamond Offshore Drilling,
Inc. 17,200 1,527,360
Tidewater, Inc. 63,800 2,782,318
-------------
4,973,728
-------------
FOOD & STAPLES RETAILING 2.8%
V Kroger Co. (The) 152,100 4,176,666
-------------
FOOD PRODUCTS 5.6%
ConAgra Foods, Inc. 140,400 2,445,768
Corn Products International,
Inc. 121,000 2,942,720
General Mills, Inc. 17,000 1,151,580
J.M. Smucker Co. (The) 42,000 1,871,520
-------------
8,411,588
-------------
GAS UTILITIES 1.2%
AGL Resources, Inc. 62,100 1,887,840
-------------
HEALTH CARE PROVIDERS & SERVICES 5.2%
Cardinal Health, Inc. 50,700 1,936,740
Coventry Health Care, Inc.
(a) 93,300 1,230,627
Humana, Inc. (a) 28,900 855,151
V Quest Diagnostics, Inc. 81,200 3,800,160
-------------
7,822,678
-------------
INSURANCE 7.6%
V Aspen Insurance Holdings,
Ltd. 163,700 3,758,552
Genworth Financial, Inc.
Class A 103,800 502,392
HCC Insurance Holdings, Inc. 111,600 2,461,896
Lincoln National Corp. 51,000 879,240
V PartnerRe, Ltd. 57,400 3,885,406
-------------
11,487,486
-------------
IT SERVICES 3.4%
Affiliated Computer Services,
Inc. Class A (a) 66,900 2,742,900
Computer Sciences Corp. (a) 79,752 2,405,320
-------------
5,148,220
-------------
MACHINERY 1.6%
Pentair, Inc. 62,100 1,716,444
Timken Co. (The) 42,700 678,076
-------------
2,394,520
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
Among the Fund's 10 largest holdings, as of October 31, 2008, excluding short-
term investment. May be subject to change daily.
12 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
MEDIA 2.0%
V Cablevision Systems Corp.
Class A 172,100 $ 3,051,333
-------------
METALS & MINING 3.6%
Freeport-McMoRan Copper &
Gold, Inc. Class B 47,300 1,376,430
Nucor Corp. 72,200 2,924,822
Yamana Gold, Inc. 263,200 1,218,616
-------------
5,519,868
-------------
MULTI-UTILITIES 4.1%
Ameren Corp. 68,500 2,222,825
CenterPoint Energy, Inc. 146,600 1,688,832
PG&E Corp. 61,325 2,248,788
-------------
6,160,445
-------------
OIL, GAS & CONSUMABLE FUELS 5.0%
Frontier Oil Corp. 150,100 1,982,821
Hess Corp. 41,700 2,510,757
V Spectra Energy Corp. 163,200 3,154,656
-------------
7,648,234
-------------
PHARMACEUTICALS 5.2%
Forest Laboratories, Inc. (a) 107,200 2,490,256
V Teva Pharmaceutical
Industries, Ltd., Sponsored
ADR (b) 102,600 4,399,488
Watson Pharmaceuticals, Inc.
(a) 36,200 947,354
-------------
7,837,098
-------------
REAL ESTATE INVESTMENT TRUSTS 2.6%
Boston Properties, Inc. 5,700 404,016
Equity Residential 11,900 415,667
Highwoods Properties, Inc. 90,263 2,240,328
Public Storage 4,900 399,350
Vornado Realty Trust 5,800 409,190
-------------
3,868,551
-------------
ROAD & RAIL 0.5%
Werner Enterprises, Inc. 39,300 771,066
-------------
SPECIALTY RETAIL 6.7%
Abercrombie & Fitch Co. Class
A 63,000 1,824,480
American Eagle Outfitters,
Inc. 140,900 1,566,808
Bed Bath & Beyond, Inc. (a) 59,900 1,543,623
Gap, Inc. (The) 204,100 2,641,054
TJX Cos., Inc. 27,700 741,252
Tractor Supply Co. (a) 44,900 1,866,044
-------------
10,183,261
-------------
THRIFTS & MORTGAGE FINANCE 2.4%
V NewAlliance Bancshares,
Inc. 268,200 3,701,160
-------------
TRADING COMPANIES & DISTRIBUTORS 0.9%
WESCO International, Inc. (a) 66,600 1,324,008
-------------
Total Common Stocks
(Cost $185,738,666) 139,578,666
-------------
EXCHANGE TRADED FUND 1.2% (C)
- ----------------------------------------------------------------
KBW Regional Banking ETF 54,300 1,786,470
-------------
Total Exchange Traded Fund
(Cost $2,020,679) 1,786,470
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 6.4%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 6.4%
State Street Bank Trust Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$9,786,232 (Collateralized
by a Federal Home Loan Bank
Security with a rate of
3.63% and a maturity date
of 7/1/11, with a
Principal amount of
$9,825,000 and a Market
Value of $9,984,558) $9,786,150 9,786,150
-------------
Total Short-Term Investment
(Cost $9,786,150) 9,786,150
-------------
Total Investments
(Cost $197,545,495) (d) 99.8% 151,151,286
Cash and Other Assets, Less
Liabilities 0.2 271,181
----- ------------
Net Assets 100.0% $ 151,422,467
===== ============
</Table>
<Table>
(a) Non-income producing security.
(b) ADR--American Depositary Receipt.
(c) Exchange Traded Fund--represents a basket
of securities that are traded on an
exchange.
(d) At October 31, 2008, cost is $198,222,782
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 6,533,435
Gross unrealized depreciation (53,604,931)
------------
Net unrealized depreciation $(47,071,496)
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $197,545,495) $151,151,286
Receivables:
Investment securities sold 997,351
Dividends and interest 183,011
Fund shares sold 59,549
Other assets 45,196
------------
Total assets 152,436,393
------------
LIABILITIES:
Payables:
Investment securities purchased 453,112
Transfer agent (See Note 3) 150,103
Fund shares redeemed 138,089
NYLIFE Distributors (See Note 3) 81,101
Shareholder communication 71,743
Manager (See Note 3) 71,109
Professional fees 32,246
Custodian 10,327
Trustees 654
Accrued expenses 5,442
------------
Total liabilities 1,013,926
------------
Net assets $151,422,467
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 169,866
Additional paid-in capital 215,778,810
------------
215,948,676
Accumulated undistributed net
investment income 1,766,262
Accumulated net realized loss on
investments and written option
transactions (19,898,262)
Net unrealized depreciation on
investments (46,394,209)
------------
Net assets $151,422,467
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 28,174,040
============
Shares of beneficial interest
outstanding 3,071,983
============
Net asset value per share
outstanding $ 9.17
Maximum sales charge (5.50% of
offering price) 0.53
------------
Maximum offering price per share
outstanding $ 9.70
============
CLASS A
Net assets applicable to
outstanding shares $ 49,730,176
============
Shares of beneficial interest
outstanding 5,418,048
============
Net asset value per share
outstanding $ 9.18
Maximum sales charge (5.50% of
offering price) 0.53
------------
Maximum offering price per share
outstanding $ 9.71
============
CLASS B
Net assets applicable to
outstanding shares $ 58,429,390
============
Shares of beneficial interest
outstanding 6,756,208
============
Net asset value and offering price
per share outstanding $ 8.65
============
CLASS C
Net assets applicable to
outstanding shares $ 14,509,311
============
Shares of beneficial interest
outstanding 1,677,955
============
Net asset value and offering price
per share outstanding $ 8.65
============
CLASS I
Net assets applicable to
outstanding shares $ 215,918
============
Shares of beneficial interest
outstanding 23,085
============
Net asset value and offering price
per share outstanding $ 9.35
============
CLASS R1
Net assets applicable to
outstanding shares $ 2,224
============
Shares of beneficial interest
outstanding 237
============
Net asset value and offering price
per share outstanding $ 9.37
============
CLASS R2
Net assets applicable to
outstanding shares $ 361,408
============
Shares of beneficial interest
outstanding 39,131
============
Net asset value and offering price
per share outstanding $ 9.24
============
</Table>
14 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends (a) $ 5,706,049
Interest 202,349
Income from securities
loaned--net 184,292
-------------
Total income 6,092,690
-------------
EXPENSES:
Manager (See Note 3) 1,752,399
Distribution--Class B (See Note
3) 743,138
Distribution--Class C (See Note
3) 185,992
Transfer agent--Investor Class
(See Note 3) 98,611
Transfer agent--Class A (See Note
3) 311,443
Transfer agent--Class B and C
(See Note 3) 488,202
Transfer agent--Classes I, R1 and
R2 (See Note 3) 849
Distribution/Service--Investor
Class (See Note 3) 57,795
Distribution/Service--Class A
(See Note 3) 252,238
Service--Class B (See Note 3) 247,713
Service--Class C (See Note 3) 61,997
Distribution/Service--Class R2
(See Note 3) 208
Shareholder communication 108,497
Registration 83,281
Professional fees 63,111
Recordkeeping (b) 39,825
Custodian 12,590
Trustees 7,964
Shareholder service--Class R1
(See Note 3) 2
Shareholder service--Class R2
(See Note 3) 83
Miscellaneous 20,881
-------------
Total expenses before waiver 4,536,819
Expense waiver from Manager (See
Note 3) (301,847)
-------------
Net expenses 4,234,972
-------------
Net investment income 1,857,718
-------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND
WRITTEN OPTION TRANSACTIONS:
Net realized loss on:
Security transactions (19,640,703)
Written option transactions (545,800)
-------------
Net realized loss on investments
and written option transactions (20,186,503)
-------------
Net change in unrealized
appreciation on investments (82,861,778)
-------------
Net realized and unrealized loss on
investments and written option
transactions (103,048,281)
-------------
Net decrease in net assets
resulting from operations $(101,190,563)
=============
</Table>
(a) Dividends recorded net of foreign withholding taxes in the amount of
$119,254.
(b) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 1,857,718 $ 938,162
Net realized gain (loss) on
investments, written option
transactions and foreign
currency transactions (20,186,503) 51,180,750
Net change in unrealized
appreciation on investments
and written option
transactions (82,861,778) (22,217,931)
----------------------------
Net increase (decrease) in
net assets resulting from
operations (101,190,563) 29,900,981
----------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (664,756) (513,270)
Class I (12,595) (3,299)
Class R1 (19) --
Class R2 (155) --
----------------------------
(677,525) (516,569)
----------------------------
From net realized gain on
investments:
Class A (23,805,494) (23,510,126)
Class B (21,191,594) (22,155,758)
Class C (5,308,932) (5,692,564)
Class I (191,114) (93,695)
Class R1 (326) (204)
Class R2 (3,674) (1,791)
----------------------------
(50,501,134) (51,454,138)
----------------------------
Total dividends and
distributions to
shareholders (51,178,659) (51,970,707)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares 31,529,820 36,110,258
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 47,102,319 46,823,486
Cost of shares redeemed (109,650,790) (94,599,869)
----------------------------
Decrease in net assets
derived from capital
share transactions (31,018,651) (11,666,125)
----------------------------
Net decrease in net
assets (183,387,873) (33,735,851)
NET ASSETS:
Beginning of year 334,810,340 368,546,191
----------------------------
End of year $ 151,422,467 $334,810,340
============================
Accumulated undistributed net
investment income at end of
year $ 1,766,262 $ 671,988
============================
</Table>
16 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------
FEBRUARY 28,
2008** CLASS A
THROUGH ------------------------------------------------------
OCTOBER 31, YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 13.27 $ 17.31 $ 18.43 $ 17.04 $ 15.71 $ 13.50
------- ------- -------- -------- -------- --------
Net investment income
(loss) 0.09 (a) 0.15 (a) 0.11 (a) 0.09 (a) 0.03 0.03
Net realized and
unrealized gain (loss)
on investments (4.19) (5.60) 1.37 2.47 1.54 2.18
------- ------- -------- -------- -------- --------
Total from investment
operations (4.10) (5.45) 1.48 2.56 1.57 2.21
------- ------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income -- (0.06) (0.05) -- -- --
From net realized gain
on investments -- (2.62) (2.55) (1.17) (0.24) --
------- ------- -------- -------- -------- --------
Total dividends and
distributions -- (2.68) (2.60) (1.17) (0.24) --
------- ------- -------- -------- -------- --------
Net asset value at end of
period $ 9.17 $ 9.18 $ 17.31 $ 18.43 $ 17.04 $ 15.71
======= ======= ======== ======== ======== ========
Total investment return
(b)(d) (30.90%)(c) (36.93%) 8.61% 15.70% 10.06% 16.37%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 1.08% ++ 1.16% 0.64% 0.54% 0.17% 0.27%
Net expenses 1.40% ++ 1.29% 1.30% 1.34% 1.35% 1.43%
Expenses (before
waiver/reimbursement) 1.54% ++ 1.40% 1.35% 1.43% 1.42% 1.43%
Portfolio turnover rate 50% 50% 54% 44% 49% 33%
Net assets at end of
period (in 000's) $28,174 $49,730 $162,745 $171,908 $127,680 $116,396
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 16.52 $ 17.77 $ 16.59 $ 15.41 $ 13.34
------- ------- ------- ------- -------
Net investment income
(loss) 0.04 (a) (0.02)(a) (0.03)(a) (0.10) (0.07)
Net realized and
unrealized gain (loss)
on investments (5.29) 1.32 2.38 1.52 2.14
------- ------- ------- ------- -------
Total from investment
operations (5.25) 1.30 2.35 1.42 2.07
------- ------- ------- ------- -------
Less dividends and
distributions:
From net investment
income -- -- -- -- --
From net realized gain
on investments (2.62) (2.55) (1.17) (0.24) --
------- ------- ------- ------- -------
Total dividends and
distributions (2.62) (2.55) (1.17) (0.24) --
------- ------- ------- ------- -------
Net asset value at end of
period $ 8.65 $ 16.52 $ 17.77 $ 16.59 $ 15.41
======= ======= ======= ======= =======
Total investment return
(b)(d) (37.41%) 7.75% 14.82% 9.27% 15.52%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 0.35% (0.10%) (0.19%) (0.58%) (0.48%)
Net expenses 2.10% 2.05% 2.09% 2.10% 2.18%
Expenses (before
waiver/reimbursement) 2.23% 2.10% 2.18% 2.17% 2.18%
Portfolio turnover rate 50% 54% 44% 49% 33%
Net assets at end of
period (in 000's) $14,509 $34,799 $39,899 $42,654 $39,884
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestments of dividends and distributions. Class I, Class R1 and Class R2
shares are not subject to sales charges.
(c) Total return is not annualized.
(d) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
18 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
-------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 16.53 $ 17.77 $ 16.59 $ 15.41 $ 13.34
------- -------- -------- -------- --------
0.04 (a) (0.02)(a) (0.03)(a) (0.10) (0.07)
(5.30) 1.33 2.38 1.52 2.14
------- -------- -------- -------- --------
(5.26) 1.31 2.35 1.42 2.07
------- -------- -------- -------- --------
-- -- -- -- --
(2.62) (2.55) (1.17) (0.24) --
------- -------- -------- -------- --------
(2.62) (2.55) (1.17) (0.24) --
------- -------- -------- -------- --------
$ 8.65 $ 16.53 $ 17.77 $ 16.59 $ 15.41
======= ======== ======== ======== ========
(37.45%) 7.82% 14.82% 9.27% 15.52%
0.35% (0.10%) (0.17%) (0.58%) (0.48%)
2.10% 2.05% 2.09% 2.10% 2.18%
2.23% 2.10% 2.18% 2.17% 2.18%
50% 54% 44% 49% 33%
$58,429 $135,958 $156,043 $207,348 $191,390
</Table>
<Table>
<Caption>
Class I
-------------------------------------------------------------------
January 2,
2004**
through
Year ended October 31, October 31,
- ------------------
2008 2007 2006 2005 2004
$ 17.60 $18.63 $17.16 $15.76 $14.81
------- ------ ------ ------ ------
0.22 (a) 0.21 (a) 0.16 (a) 0.04 0.07
(5.70) 1.39 2.48 1.60 0.88
------- ------ ------ ------ ------
(5.48) 1.60 2.64 1.64 0.95
------- ------ ------ ------ ------
(0.15) (0.08) -- -- --
(2.62) (2.55) (1.17) (0.24) --
------- ------ ------ ------ ------
(2.77) (2.63) (1.17) (0.24) --
------- ------ ------ ------ ------
$ 9.35 $17.60 $18.63 $17.16 $15.76
======= ====== ====== ====== ======
(36.65%) 9.24% 16.08% 10.48% 6.41%(c)
1.62% 1.16% 0.09% 0.37% 0.70%++
0.78% 0.77% 0.99% 0.99% 1.00%++
0.93% 0.81% 1.09% 1.06% 1.00%++
50% 54% 44% 49% 33%
$ 216 $1,283 $ 682 $ 584 $ 1
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
----------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
----------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 17.64 $18.61 $17.14 $15.76 $14.81
------- ------ ------ ------ ------
Net investment income
(loss) 0.21 (a) 0.19 (a) 0.19 (a) 0.07 (0.01)
Net realized and
unrealized gain (loss)
on investments (5.73) 1.39 2.45 1.55 0.96
------- ------ ------ ------ ------
Total from investment
operations (5.52) 1.58 2.64 1.62 0.95
------- ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income (0.13) -- -- -- --
From net realized gain
on investments (2.62) (2.55) (1.17) (0.24) --
------- ------ ------ ------ ------
Total dividends and
distributions (2.75) (2.55) (1.17) (0.24) --
------- ------ ------ ------ ------
Net asset value at end of
period $ 9.37 $17.64 $18.61 $17.14 $15.76
======= ====== ====== ====== ======
Total investment return
(b)(d) (36.64%) 9.06% 16.11% 10.35% 6.41%(c)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 1.60% 1.06% 1.11% 0.43% 0.56%++
Net expenses 0.88% 0.87% 0.95% 1.09% 1.14%++
Expenses (before
waiver/reimbursement) 1.10% 0.92% 1.01% 1.16% 1.14%++
Portfolio turnover rate 50% 54% 44% 49% 33%
Net assets at end of
period (in 000's) $ 2 $ 2 $ 1 $1,170 $1,075
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestments of dividends and distributions. Class I, Class R1 and Class R2
shares are not subject to sales charges.
(c) Total return is not annualized.
(d) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
20 MainStay Mid Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
Class R2
----------------------------------------------------------------------------
January 2,
2004**
through
Year ended October 31, October 31,
- ---------------------
2008 2007 2006 2005 2004
$ 17.42 $18.44 $17.04 $15.71 $14.81
------- ------ ------ ------ ------
0.20 (a) 0.15 (a) 0.13 (a) 0.01 (0.02)
(5.67) 1.38 2.44 1.56 0.92
------- ------ ------ ------ ------
(5.47) 1.53 2.57 1.57 0.90
------- ------ ------ ------ ------
(0.09) -- -- -- --
(2.62) (2.55) (1.17) (0.24) --
------- ------ ------ ------ ------
(2.71) (2.55) (1.17) (0.24) --
------- ------ ------ ------ ------
$ 9.24 $17.42 $18.44 $17.04 $15.71
======= ====== ====== ====== ======
(36.82%) 8.84% 15.77% 10.06% 6.08%(c)
1.79% 0.84% 0.77% 0.09% 0.26%++
1.13% 1.12% 1.23% 1.34% 1.44%++
1.43% 1.16% 1.28% 1.41% 1.44%++
50% 54% 44% 49% 33%
$ 361 $ 24 $ 13 $3,564 $ 837
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Mid Cap Value Fund (the "Fund"), a diversified fund.
The Fund currently offers seven classes of shares. Class A shares and Class B
shares commenced on June 1, 1998. Class C shares commenced on September 1, 1998.
Class I shares, Class R1 shares and Class R2 shares commenced on January 2,
2004. Investor Class shares commenced on February 28, 2008. Investor Class and
Class A shares are offered at net asset value per share plus an initial sales
charge. No sales charge applies on investments of $1 million or more (and
certain other qualified purchases) in Investor Class and Class A shares, but a
contingent deferred sales charge is imposed on certain redemptions of such
shares within one year of the date of purchase. Class B shares and Class C
shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and a 1% contingent deferred sales charge
may be imposed on redemptions made within one year of purchase of Class C
shares. Class I, Class R1 and Class R2 are not subject to a sales charge.
Depending upon eligibility, Class B shares convert to either Investor Class or
Class A shares eight years after the date they were purchased. Additionally,
depending upon eligibility, Investor Class shares may convert to Class A shares
and Class A shares may convert to Investor Class shares. The seven classes of
shares have the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and bear the same conditions except that
Class B and Class C shares are subject to higher distribution fee rates than
Investor Class, Class A and Class R2 shares under a distribution plan pursuant
to Rule 12b-1 under the 1940 Act. Class I and Class R1 shares are not subject to
a distribution or service fee. Class R1 and Class R2 shares are authorized to
pay to the Manager, as defined in Note 3, its affiliates, or third-party service
providers, as compensation for services rendered to shareholders of Class R1 or
Class R2 shares, a shareholder service fee.
The Fund's investment objective is to realize maximum long-term total return
from a combination of capital appreciation and income.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Options
contracts are valued at the last posted settlement price on the market where
such options are principally traded. Investments in other mutual funds are
valued at their net asset values as of the close of the New York Stock Exchange
on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor ,as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund did not hold
securities that were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
22 MainStay Mid Cap Value Fund
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3(B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put
options on its portfolio securities or foreign currencies. Premiums are received
and are recorded as liabilities. The liabilities are subsequently adjusted and
unrealized appreciation or depreciation is recorded to reflect the current value
of the options written. Premiums received from writing options that expire are
treated as realized gains. Premiums received from writing options that are
exercised or are canceled in closing purchase transactions are added to the
proceeds or netted against the amount paid on the transaction to determine the
realized gain or loss. By writing a covered call option, in exchange for the
premium, the Fund foregoes the opportunity for capital appreciation above the
exercise price should the price of the underlying security or foreign currency
increase. By writing a covered put option, the Fund, in exchange for the
premium, accepts the risk of a decline in the market value of the underlying
security or foreign currency below the exercise price. A call option may be
covered by the call writer's owning the underlying security throughout the
option period. A call option may also be covered by the call writer's
maintaining liquid assets valued at greater than the exercise price of the call
written. When writing a covered call option, the Fund, in return for the premium
on the option, gives up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as the obligation
as the writer continues, has retained the risk of loss should the price of the
underlying security decline. After writing a put option, the Fund may incur a
loss equal to the difference between the exercise price of the option and the
sum of the market value of the underlying security plus the premium received
from the sale of the option.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security or foreign currency it anticipates purchasing. The Fund may purchase
put options on its securities or foreign currencies to protect against a decline
in the value of the security or foreign currency or to close out covered written
put positions. The Fund may also purchase options to seek to
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
enhance returns. Risks may arise from an imperfect correlation between the
change in market value of the securities or foreign currencies held by the Fund
and the prices of options relating to the securities or foreign currencies
purchased or sold by the Fund and from the possible lack of a liquid secondary
market for an option. The maximum exposure to loss for any purchased option is
limited to the premium initially paid for the option. (See Note 5.)
(H) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(I) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date, and
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities that are denominated in foreign currency amounts are
presented at the exchange rates and market values at the close of the period.
The realized and unrealized changes in net assets arising from fluctuations in
exchange rates and market prices of securities are not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(J) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(K) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant
24 MainStay Mid Cap Value Fund
to an Amended and Restated Management Agreement ("Management Agreement"). The
Manager provides offices and conducts clerical, recordkeeping and bookkeeping
services, and is responsible for the financial and accounting records required
to be maintained by the Fund. The Manager also pays the salaries and expenses of
all personnel affiliated with the Fund and all the operational expenses that are
not the responsibility of the Fund. MacKay Shields LLC (the "Subadvisor"), a
registered investment adviser and an indirect wholly-owned subsidiary of New
York Life, serves as subadvisor to the Fund and is responsible for the day-to-
day portfolio management of the Fund. Pursuant to the terms of an Amended and
Restated Subadvisory Agreement ("Subadvisory Agreement") between NYLIM and the
Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.70% on assets up to $500 million and 0.65% on assets in
excess of $500 million.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage, other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.40%; Class A, 1.30%; Class B,
2.15%; Class C, 2.15%; Class I, 0.78%; Class R1, 0.88% and Class R2, 1.13%. This
expense limitation may be modified or terminated only with the approval of the
Board of Trustees. NYLIM may recoup the amount of certain management fee waivers
or expense reimbursements from the Fund pursuant to the agreement if such action
does not cause the Fund to exceed the existing expense limitation and the
recoupment is made within three years after the year in which NYLIM incurred the
expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $1,752,399 and waived its fees in the amount of $301,847.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2010 2011 TOTAL
$347,680 $169,320 $301,847 $818,847
- -------------------------------------------------
</Table>
The Fund had $130,177 of waived fees for which the recoupment period expired
during the year ended October 31, 2008.
Between August 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 1.30%; Class B,
2.05%; Class C, 2.05%; Class I, 0.78%; Class R1, 0.88% and Class R2, 1.13%.
Prior to August 1, 2007, NYLIM had a different expense limitation agreement in
place with respect to the Fund.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
these services provided to the Fund by the Manager amounted to $39,825 for the
period from November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to Investor Class, Class A, Class B, Class C, and Class R2 shares,
has adopted distribution plans (the "Plans") in accordance with the provisions
of Rule 12b-1 under the 1940 Act.
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor
receives a monthly distribution fee from the Fund at an annual rate of 0.25% of
the average daily net assets of the Fund's Investor Class, Class A and Class R2
shares, which is an expense of the Investor Class, Class A and Class R2 shares
of the Fund, for distribution or service activities as designated by the
Distributor. Pursuant to the Class B and Class C Plans, the Fund pays the
Distributor a monthly distribution fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Plans provide that the
Class B and Class C shares of the Fund also incur a service fee at the annual
rate of 0.25% of the average daily net asset value of the Class B and Class C
shares of the Fund. Class I and Class R1 shares are not subject to a
distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R1 and Class R2
shares, the Manager has agreed to provide, through its affiliates or independent
third parties, various shareholder and administrative support services to
shareholders of the Class R1 and Class R2 shares. For its services, the Manager
is entitled to a Shareholder Service Fee accrued daily and paid monthly at an
annual rate of 0.10% of the average daily net assets attributable to the Class
R1 and Class R2 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were $9,556
and $20,036, respectively, for the year ended October 31, 2008. The Fund was
also advised that the Distributor retained contingent deferred sales charges on
redemptions of Investor Class, Class A, Class B and Class C shares of $5, $827,
$124,897 and $1,262, respectively, for the year ended October 31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $899,105.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $275 0.0%++
- ----------------------------------------------
Class C 145 0.0++
- ----------------------------------------------
Class I 944 0.4
- ----------------------------------------------
Class R1 924 41.5
- ----------------------------------------------
Class R2 929 0.3
- ----------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $8,745.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL AND OTHER UNREALIZED TOTAL
ORDINARY OTHER GAIN TEMPORARY APPRECIATION ACCUMULATED
INCOME (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$1,766,262 $(19,220,975) $-- $(47,071,496) $(64,526,209)
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals, real estate investment trust adjustments
and straddle loss deferrals.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMU-
LATED
UNDIS-
TRIBUTED
NET
INVEST- ACCUMULATED
MENT NET REALIZED ADDITIONAL
INCOME GAIN (LOSS) ON PAID-IN
(LOSS) INVESTMENTS CAPITAL
$(85,919) $85,920 $(1)
----------------------------------------
</Table>
The reclassifications for the Fund are primarily due to distributions from real
estate investment trusts, distribution redesignations and prior year real estate
investment trust adjustments.
26 MainStay Mid Cap Value Fund
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $19,220,975 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE THROUGH AMOUNTS (000'S)
2016 $19,221
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Ordinary Income $ 564,124 $ 516,569
Long-Term Capital Gains 50,614,535 51,454,138
- -------------------------------------------------------
$51,178,659 $51,970,707
- -------------------------------------------------------
</Table>
NOTE 5--WRITTEN OPTIONS:
During the year ended October 31, 2008, the Fund had the following transactions
in written options:
<Table>
<Caption>
NUMBER OF
CONTRACTS PREMIUM
Options Outstanding at
October 31, 2007 (433) $(96,124)
- ---------------------------------------------------
Options--Written (433) (78,805)
- ---------------------------------------------------
Options--Expired -- --
- ---------------------------------------------------
Options--Canceled in closing
transactions 866 174,929
- ---------------------------------------------------
Options Outstanding at
October 31, 2008 -- $ --
- ---------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 8--PURCHASES AND SALES OF
SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $121,847 and $193,641, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 915,410 $12,339,950
Shares redeemed (586,520) (7,231,437)
---------------------------
Net increase in shares
outstanding before
conversion 328,890 5,108,513
Shares converted into
Investor Class (See Note
1) 2,998,476 38,193,047
Shares converted from
Investor Class (See Note
1) (255,383) (3,136,537)
---------------------------
Net increase 3,071,983 $40,165,023
===========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 795,052 $ 10,349,426
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,622,581 23,038,078
Shares redeemed (4,445,180) (58,510,767)
---------------------------
Net decrease in shares
outstanding before
conversion (2,027,547) (25,123,263)
Shares converted into Class
A
(See Note 1) 808,274 10,469,438
Shares converted from Class
A
(See Note 1) (2,761,879) (35,147,882)
---------------------------
Net decrease (3,981,152) $(49,801,707)
===========================
Year ended October 31, 2007:
Shares sold 1,186,782 $ 20,803,134
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,296,512 21,740,022
Shares redeemed (3,042,623) (53,126,857)
---------------------------
Net decrease in shares
outstanding before
conversion (559,329) (10,583,701)
Shares converted from Class
B
(See Note 1) 629,710 10,977,281
---------------------------
Net increase 70,381 $ 393,580
===========================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 505,782 $ 6,239,126
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,456,621 19,562,217
Shares redeemed (2,598,995) (31,706,864)
---------------------------
Net decrease in shares
outstanding before
conversion (636,592) (5,905,521)
Shares converted from Class
B
(See Note 1) (834,201) (10,378,066)
---------------------------
Net decrease (1,470,793) $(16,283,587)
===========================
Year ended October 31, 2007:
Shares sold 698,882 $ 11,723,497
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,268,323 20,369,288
Shares redeemed (1,863,378) (31,282,536)
---------------------------
Net increase in shares
outstanding before
conversion 103,827 810,249
Shares reacquired upon
conversion into Class A
(See Note 1) (657,598) (10,977,281)
---------------------------
Net decrease (553,771) $(10,167,032)
===========================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 161,511 $ 2,035,077
Shares issued to
shareholders in
reinvestment of dividends
and distributions 319,743 4,294,141
Shares redeemed (909,402) (11,277,201)
---------------------------
Net decrease (428,148) $ (4,947,983)
===========================
Year ended October 31, 2007:
Shares sold 179,558 $ 2,997,616
Shares issued to
shareholders in
reinvestment of dividends
and distributions 287,380 4,615,327
Shares redeemed (606,361) (10,138,912)
---------------------------
Net decrease (139,423) $ (2,525,969)
===========================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 5,115 $ 71,086
Shares issued to
shareholders in
reinvestment of dividends
and distributions 14,080 203,709
Shares redeemed (68,963) (917,537)
---------------------------
Net decrease (49,768) $(642,742)
===========================
Year ended October 31, 2007:
Shares sold 31,863 $ 544,901
Shares issued to
shareholders in
reinvestment of dividends
and distributions 5,699 96,854
Shares redeemed (1,310) (22,920)
---------------------------
Net increase 36,252 $ 618,835
===========================
</Table>
<Table>
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 95 $1,187
Shares issued to
shareholders in
reinvestment of dividends
and distributions 24 345
Shares redeemed (1) (10)
---------------------------
Net increase 118 $1,522
===========================
Year ended October 31, 2007:
Shares sold 37 $ 662
Shares issued to
shareholders in
reinvestment of dividends
and distributions 12 204
Shares redeemed (3) (55)
---------------------------
Net increase 46 $ 811
===========================
</Table>
28 MainStay Mid Cap Value Fund
<Table>
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 38,016 $493,968
Shares issued to
shareholders in
reinvestment of dividends
and distributions 268 3,829
Shares redeemed (512) (6,974)
---------------------------
Net increase 37,772 $490,823
===========================
Year ended October 31, 2007:
Shares sold 2,233 $ 40,448
Shares issued to
shareholders in
reinvestment of dividends
and distributions 106 1,791
Shares redeemed (1,675) (28,589)
---------------------------
Net increase 664 $ 13,650
===========================
</Table>
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
mainstayinvestments.com 29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Mid Cap Value Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2008, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year 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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by appropriate auditing procedures where replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Mid Cap Value Fund of The MainStay Funds as of October 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
30 MainStay Mid Cap Value Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Mid Cap Value Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management and
Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider
mainstayinvestments.com 31
of shareholder services, which has been recognized by independent third-parties
on numerous occasions. The Board noted the role that the MainStay Family of
Funds historically has played in serving the investment needs of New York Life
Insurance Company policyholders, who often maintain smaller account balances
than other retail investors. The Board acknowledged that it had approved NYLIM's
recommendation to create a new "Investor Class" of shares designed principally
to address the higher shareholder-servicing costs typically associated with
smaller shareholder accounts. The Board considered the experience of senior
personnel at NYLIM providing management and administrative services to the Fund,
as well as NYLIM's reputation and financial condition. The Board also reviewed
NYLIM's willingness to invest in personnel designed to benefit the Fund, and
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and MacKay
Shields' method for compensating portfolio managers. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio managers and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position
32 MainStay Mid Cap Value Fund
is important in order for NYLIM to continue to provide high-quality ongoing
services to the Fund and its shareholders. The Board noted, for example,
increased costs borne by NYLIM and its affiliates due to new and ongoing
regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
mainstayinvestments.com 33
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
34 MainStay Mid Cap Value Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $50,614,535.
For the fiscal year ended October 31, 2008, the Fund designates approximately
$4,335,385 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividends paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 10.9% to arrive at the amount eligible for qualified
interest income and 100.0% for the corporate dividends received deduction.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
mainstayinvestments.com 35
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
36 MainStay Mid Cap Value Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 37
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
38 MainStay Mid Cap Value Fund
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 39
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
This page intentionally left blank
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO14509 (RECYCLE LOGO) MS308-08 MSMV11-12/08
19
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
GLOBAL HIGH INCOME FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENT LOGO)
MAINSTAY
GLOBAL HIGH INCOME FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 15
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 20
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 29
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AND SUBADVISORY AGREEMENT 30
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 34
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 34
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 34
- ---------------------------------------------
TRUSTEES AND OFFICERS 35
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------------
With sales charges (29.64%) 1.58% 8.95%
Excluding sales charges (26.33) 2.52 9.45
</Table>
(PERFORMANCE GRAPH) (With sales charges)
(PERFORMANCE GRAPH)
CLASS A SHARES(3)--MAXIMUM 4.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------------
With sales charges (29.60%) 1.59% 8.96%
Excluding sales charges (26.29) 2.53 9.46
</Table>
(PERFORMANCE GRAPH) (With sales charges)
(PERFORMANCE GRAPH)
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------------
With sales charges (30.32%) 1.45% 8.62%
Excluding sales charges (26.92) 1.74 8.62
</Table>
(PERFORMANCE GRAPH) (With sales charges)
(PERFORMANCE GRAPH
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this
paragraph, change in share price, and reinvestment of dividend and capital-
gain distributions. The graphs assume an initial investment of $25,000 for
Class A shares and $10,000 for all other classes and reflect the deduction
of all sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 4.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to
a contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed
within the first six years of purchase, and have an annual 12b-1 fee of
1.00%. Class C shares are sold with no initial sales charge, are subject to
a CDSC of 1.00%, if redeemed within one year of purchase, and have an annual
12b-1 fee of 1.00%. Class I shares are sold with no initial sales charge or
CDSC, have no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Performance figures reflect certain fee waivers
and/or expense limitations, without which total returns may have been lower.
These fee waivers and/or expense limitations are contractual and may be
modified or terminated only with the approval of the Board of Trustees. The
Manager may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the contract if such action does
not cause the Fund to exceed existing expense limitations and the recoupment
is made within three years after the year in which the Manager incurred the
expense.
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------------
With sales charges (27.51%) 1.76% 8.63%
Excluding sales charges (26.83) 1.76 8.63
</Table>
(PERFORMANCE GRAPH) (With sales charges)
(PERFORMANCE GRAPH)
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------------
(26.11%) 2.79% 9.74%
</Table>
(PERFORMANCE GRAPH) (With sales charges)
(PERFORMANCE GRAPH
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ------------------------------------------------------------------------------
JPMorgan EMBI Global Diversified Index(4) (20.22%) 3.45% 9.49%
Average Lipper emerging markets debt fund(5) (24.08) 2.74 9.88
</Table>
2. Performance figures for Investor Class shares, which were first offered on
February 28, 2008, include the historical performance of Class A shares
through February 27, 2008, adjusted for differences in certain contractual
fees and expenses. Unadjusted, the performance shown for Investor Class
shares might have been lower.
3. Performance figures for Class I shares, first offered to the public on August
29, 2007, include the historical performance of Class A shares adjusted to
reflect the fees and expenses for Class I shares. Unadjusted, the performance
shown for Class I shares might have been lower.
4. The JPMorgan Emerging Markets Bond Index Global Diversified, which we refer
to as the JPMorgan EMBI Global Diversified Index, is an unmanaged, uniquely
weighted version of the JPMorgan Emerging Markets Bond Index Global. The
JPMorgan Emerging Markets Bond Index Global is an unmanaged index that tracks
total returns for U.S. dollar denominated debt instruments--Brady bonds,
loans and Eurobonds--issued by emerging-market sovereign and quasi-sovereign
entities. The JPMorgan EMBI Global Diversified Index limits the weights of
those index countries with larger debt stocks by only including specified
portions of these countries' eligible current face amounts of debt
outstanding. Results assume reinvestment of all income and capital gains. The
JPMorgan EMBI Global Diversified Index is considered to be the Fund's broad-
based securities-market index for comparison purposes. An investment cannot
be made directly in an index.
5. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND GRAPHS
AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Global High Income Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY GLOBAL HIGH INCOME FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $741.00 $6.56 $1,017.60 $ 7.61
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $741.30 $5.73 $1,018.60 $ 6.65
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $737.70 $9.87 $1,013.80 $11.44
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $738.00 $9.87 $1,013.80 $11.44
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $741.90 $5.04 $1,019.40 $ 5.84
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.50% for Investor Class, 1.31% for Class A, 2.26% for Class B and Class C
and 1.15% for Class I) multiplied by the average account value over the
period, divided by 366 and multiplied by 184 (to reflect the one-half year
period). The table above represents actual expenses incurred during the one-
half year period and does not take into account the Fund's written expense
limitation agreement.
mainstayinvestments.com 7
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2008
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Government & Federal Agencies 69.8
Corporate Bonds 17.2
Short-Term Investment 12.0
Cash and Other Assets, Less Liabilities 1.0
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN ISSUERS HELD AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Federal Republic of Brazil, 6.00%-11.00%, due
1/1/12-8/17/40
2. Republic of Turkey, zero coupon-11.75%, due
1/13/10-3/17/36
3. Republic of Philippines, 8.00%-9.875%, due
1/15/16-2/2/30
4. Russian Federation, 7.50%-11.00%, due
7/24/18-3/31/30
5. Republic of Venezuela, 6.00%-9.25%, due
10/8/14-5/7/28
6. Republic of Peru, 7.35%-8.75%,
due 7/21/25-11/21/33
7. Republic of Panama, 6.70%-9.375%, due
1/29/26-1/26/36
8. Republic of Colombia, 4.607%-11.75%, due
11/16/15-1/28/33
9. Republic of Uruguay, 8.00%-9.25%, due
5/17/17-11/18/22
10. Republic of Indonesia, 6.625%-7.25%, due
4/20/15-2/17/37
</Table>
8 MainStay Global High Income Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS JOSEPH PORTERA, GARY GOODENOUGH AND
JEFFREY H. SAXON OF MACKAY SHIELDS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY GLOBAL HIGH INCOME FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Global High Income Fund returned -26.33%
for Investor Class shares,(1) -26.29% for Class A shares, -26.92% for Class B
shares and -26.83% for Class C shares for the 12 months ended October 31, 2008.
Over the same period, the Fund's Class I shares returned -26.11%. All share
classes underperformed the -24.08% return of the average Lipper(2) emerging
markets debt fund and the -20.22% return of the JPMorgan EMBI Global Diversified
Index(3) for the 12 months ended October 31, 2008. The JPMorgan EMBI Global
Diversified Index is the Fund's broad-based securities-market index. See pages 5
and 6 for Fund returns with sales charges.
WHAT FACTORS INFLUENCED EMERGING-MARKET DEBT AS A WHOLE DURING THE REPORTING
PERIOD?
The last months of the reporting period were among the most difficult in recent
memory for emerging-market debt, with October's dramatic stock collapse
prompting comparison with 1998. Financial markets remained under tremendous
pressure. Despite several rounds of coordinated central-bank interest-rate cuts,
loans to the nation's largest banks and reinforced deposit guarantees, the
markets continued to buckle. Liquidity shortages spread, which lowered economic-
growth estimates around the globe. Recession fears swept the market, and all
types of financial firms suffered, from investment banks and commercial banks to
insurance companies and hedge funds. With large redemptions forcing sales of
otherwise viable assets, capital flowed out of the financial system. A crisis of
confidence and heightened counterparty risk led to the perception that even
money market funds were at risk and had to be guaranteed by the U.S. Treasury.
WHAT FACTORS AFFECTED THE MANAGEMENT AND PERFORMANCE OF THE FUND DURING THE
REPORTING PERIOD?
Despite better growth prospects and sizable reserve cushions, emerging-market
debt saw yield spreads(4) widen as investors sought lower-risk investments in a
massive flight to quality. Liquidity premiums rose dramatically as volatility
soared. Slowing domestic growth, falling commodity prices, declining terms of
trade and slowing export growth brought the new-issue market to a virtual stand
still, leaving issuers uncertain about their ability to refinance.
In this environment, the Fund benefited from having only modest exposure to
foreign exchange. Capital outflows initially pressured emerging-market
currencies and raised inflation risks. In response, several central banks raised
interest rates to fight inflation and support their currencies. As internal and
external growth began to drop precipitously, many policymakers were forced to
reverse course and lower rates again toward the end of the reporting period.
Fortunately, as they did so, emerging-market currencies were beginning to regain
ground.
The Fund also benefited from underweighted positions in high-beta(5) credits of
Ecuador and the Ukraine relative to the JPMorgan EMBI Global Diversified Index.
In times past, the Fund's holdings of emerging-market corporate bonds had added
value, but these bonds were severely punished during the credit
Foreign securities may be subject to greater risks than U.S. investments,
including currency fluctuations, less-liquid trading markets, greater price
volatility, political and economic instability, less publicly available
information, and changes in tax or currency laws or monetary policy. These risks
are likely to be greater in emerging markets than in developed markets. High-
yield securities ("junk bonds") are generally considered speculative because
they present a greater risk of loss than higher-quality debt securities and may
be subject to greater price volatility. The Fund may invest in derivatives,
which may increase the volatility of the Fund's net asset value and may result
in a loss to the Fund. The values of debt securities fluctuate depending on
various factors, including interest rates, issuer creditworthiness, market
conditions and maturities. The principal risk of mortgage-related and asset-
backed securities is that the underlying debt may be prepaid ahead of schedule
if interest rates fall, thereby reducing the value of the Fund's investments. If
interest rates rise, less of the debt may be prepaid and the Fund may lose
money. The Fund is nondiversified. By concentrating in a smaller number of
investments, the Fund's risk is increased because each investment has a greater
effect on the Fund's performance.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the perfor-mance shown for Investor Class shares
might have been lower.
2. See footnote on page 6 for more information on Lipper Inc.
3. See footnote on page 6 for more information on the JPMorgan EMBI Global
Diversified Index.
4. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The term may also refer to the difference in yield between two specific
securities or types of securities at a given time.
5. Beta is a measure of volatility in relation to the market as a whole. A beta
higher than 1 indicates that a security or portfolio will tend to exhibit
higher volatility than the market. A beta lower than 1 indicates that a
security or portfolio will tend to exhibit lower volatility than the market.
mainstayinvestments.com 9
crisis of the reporting period, as sizable U.S. dollar-denominated liabilities
will be difficult to refinance.
Exposure to securities in Russia and China detracted from the Fund's performance
during the reporting period. The Fund's exposure to commodity producers was also
a drag on performance, as energy, metals and grain prices tumbled.
WHAT CONDITIONS AFFECTED THE FUND'S WEAKER HOLDINGS DURING THE REPORTING PERIOD?
Eastern Europe showed vulnerability to reduced credit, as it became more
difficult to finance the region's current account deficits. Interestingly,
Hungary required International Monetary Fund assistance after the country
allowed its residents to stock up on seemingly cheaper Swiss franc-denominated
mortgages. As the Hungarian currency weakened, household liabilities ballooned,
prompting the nation's central bank to raise interest rates by 300 basis points
(or three percentage points) to support the currency.
Many Asian nations seemed better prepared to deal with financial turmoil because
of moderate current account balances, substantial reserves and extensive trade
with China. China itself was not immune to global troubles. The nation's
economic growth forecasts continued to fall, with many predicting less than 8.0%
growth in China for 2009. A recently announced fiscal stimulus package in the
form of infrastructure spending may put a floor under China's declining growth
for the near term. The Fund had owned securities of Chinese real estate
companies, which came under pressure when the credit crunch intensified. In the
spring of 2008, we started to reduce the Fund's exposure to Chinese real estate
companies, and by the end of the reporting period, we had eliminated the
positions entirely. While the Fund's Chinese holdings detracted from performance
during the reporting period, we believed that the Fund's remaining Asian
exposure at the end of October offered significant value and a margin of safety.
HOW DID THE FUND'S LATIN AMERICAN HOLDINGS PERFORM?
Like other emerging-market regions, Latin America saw its stability tested in
the final months of the reporting period. Latin American countries with
resource-based economies suffered because of declining commodity prices.
Fortunately, our decision to reduce the Fund's exposure to Latin American
resource companies early in the reporting period helped the Fund's annual
performance. We reduced the Fund's exposure to sugar and ethanol producer Cosan,
oil company YPF Sociedad Anonima and petrochemicals firm Braskem. The Fund's
Grupo Gigante debt was tendered(6) following the sale of the company's retail
stores in Mexico to a competitor. The company had gone through a successful
operational restructuring, and the bonds were tendered at a substantial premium.
DID THE FUND MAKE ANY SIGNIFICANT CHANGES IN POSITIONING DURING THE REPORTING
PERIOD?
We attempted to reduce the Fund's risk profile dramatically in the final months
of the reporting period, primarily by trimming holdings of emerging-market
corporate bonds and raising cash levels. In implementing these strategies, the
Fund's credit duration and portfolio beta(7) declined. We also sought to reduce
the Fund's exposure to commodity producers, as prices declined.
6. To tender a security is to offer it for sale to a party that is making a
formal offer to purchase it, as in a takeover bid or tender offer.
7. Beta is a measure of volatility in relation to the market as a whole. A beta
higher than 1 indicates that a security or portfolio will tend to exhibit
higher volatility than the market. A beta lower than 1 indicates that a
security or portfolio will tend to exhibit lower volatility than the market.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Global High Income Fund
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2008
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 87.0%+
CORPORATE BONDS 17.2%
- -------------------------------------------------------------------
BAHAMAS 0.3%
Ultrapetrol, Ltd.
9.00%, due 11/24/14 $ 450,000 $ 315,000
-------------
BERMUDA 1.7%
AES China Generating Co.,
Ltd.
8.25%, due 6/26/10 950,000 858,406
Asia Aluminum Holdings,
Ltd.
8.00%, due 12/23/11 (a) 500,000 150,000
8.00%, due 12/23/11 985,000 275,800
Citic Resources Finance,
Ltd.
6.75%, due 5/15/14 (a) 1,475,000 767,000
-------------
2,051,206
-------------
BRAZIL 0.5%
Companhia de Saneamento
Basico do Estado de Sao
Paulo
7.50%, due 11/3/16 (a) 630,000 459,900
Independencia
International, Ltd.
9.875%, due 1/31/17 400,000 160,000
-------------
619,900
-------------
CAYMAN ISLANDS 1.8%
Marfrig Overseas, Ltd.
Series Reg S
9.625%, due 11/16/16 1,375,000 660,000
Votorantim Overseas IV
7.75%, due 6/24/20 1,000,000 802,500
Xinao Gas Holdings, Ltd.
7.375%, due 8/5/12 1,045,000 724,806
-------------
2,187,306
-------------
COLOMBIA 0.4%
AES Chivor S.A. E.S.P.
9.75%, due 12/30/14 (a) 500,000 415,250
-------------
IRELAND 0.3%
TransCapitalInvest, Ltd.
for OJSC AK Transneft
8.70%, due 8/7/18 (a) 500,000 295,000
-------------
KAZAKHSTAN 0.5%
KazMunaiGaz Finance Sub
B.V.
8.375%, due 7/2/13 (a) 950,000 636,500
-------------
LUXEMBOURG 3.7%
ALROSA Finance S.A.
8.875%, due 11/17/14 150,000 83,250
Gazprom International S.A.
7.201%, due 2/1/20 (a) 1,968,246 1,377,772
RSHB Capital S.A. for OJSC
Russian Agricultural Bank
6.97%, due 9/21/16 (b) 300,000 172,500
Steel Capital S.A. for OAO
Severstal
9.75%, due 7/29/13 (a) 940,000 394,800
Tengizchevroil Finance Co.
S.A.R.L.
6.124%, due 11/15/14 (a) 297,164 190,185
TNK-BP Finance S.A.
7.50%, due 7/18/16 (a) 980,000 431,200
7.875%, due 3/13/18 (a) 2,600,000 1,144,000
UBS Luxembourg S.A. for
OJSC Vimpel
Communications
Series Reg S
8.25%, due 5/23/16 (a) 900,000 459,000
8.25%, due 5/23/16 500,000 255,000
-------------
4,507,707
-------------
MEXICO 0.7%
America Movil SAB de C.V.
5.50%, due 3/1/14 400,000 336,000
Grupo Televisa S.A.
6.00%, due 5/15/18 750,000 543,167
-------------
879,167
-------------
NETHERLANDS 2.0%
ATF Capital B.V.
9.25%, due 2/21/14 (a) 1,400,000 742,000
Intergas Finance B.V.
6.375%, due 5/14/17 (a) 500,000 235,000
6.875%, due 11/4/11 (a) 570,000 370,500
Majapahit Holding B.V.
7.25%, due 6/28/17 (a) 400,000 240,000
7.75%, due 10/17/16 (a) 100,000 65,000
Paiton Energy Funding B.V.
9.34%, due 2/15/14 (a) 500,000 270,000
9.34%, due 2/15/14 816,895 408,447
TuranAlem Finance B.V.
7.75%, due 4/25/13 (a) 300,000 108,000
-------------
2,438,947
-------------
PANAMA 0.2%
AES El Salvador Trust
6.75%, due 2/1/16 (a) 300,000 216,752
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
Among the Fund's 10 largest issuers held, as of October 31, 2008,
excluding short-term investment. May be subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
PHILIPPINES 0.2%
National Power Corp.
6.875%, due 11/2/16 (a) $ 300,000 $ 225,000
Philippine Long Distance
Telephone Co.
8.35%, due 3/6/17 70,000 57,400
-------------
282,400
-------------
RUSSIA 1.2%
NPC Irkut
8.25%, due 4/10/09 750,000 652,500
Raspadskaya Securities,
Ltd.
7.50%, due 5/22/12 1,670,000 814,192
-------------
1,466,692
-------------
UNITED STATES 2.8%
Pemex Project Funding
Master Trust
5.75%, due 3/1/18 800,000 624,000
7.375%, due 12/15/14 2,960,000 2,798,680
-------------
3,422,680
-------------
VENEZUELA 0.6%
Petroleos de Venezuela S.A.
5.25%, due 4/12/17 1,940,000 737,200
-------------
VIRGIN ISLANDS 0.3%
Galaxy Entertainment
Finance Co., Ltd.
Series Reg S
9.875%, due 12/15/12 1,000,000 350,000
-------------
Total Corporate Bonds
(Cost $34,094,860) 20,821,707
-------------
GOVERNMENT & FEDERAL AGENCIES 69.8%
- -------------------------------------------------------------------
ARGENTINA 1.4%
Republic of Argentina
(zero coupon), due
12/15/35 10,300,000 412,000
1.33%, due 12/31/38 7,360,000 1,287,999
8.28%, due 12/31/33 2 1
-------------
1,700,000
-------------
BRAZIL 12.9%
V Federal Republic of
Brazil
6.00%, due 1/17/17 1,850,000 1,669,625
8.25%, due 1/20/34 8,090,000 7,847,300
Series B
8.875%, due 4/15/24 1,475,000 1,489,750
8.875%, due 5/15/27 1,500,000 1,690,500
10.00%, due 1/1/12 R$ 4,400,000 1,752,140
11.00%, due 8/17/40 $ 975,000 1,133,925
-------------
15,583,240
-------------
COLOMBIA 4.1%
V Republic of Colombia
4.607%, due 11/16/15 (b) 500,000 411,250
7.375%, due 1/27/17 1,050,000 945,000
8.125%, due 5/21/24 2,830,000 2,575,300
10.375%, due 1/28/33 500,000 530,000
11.75%, due 2/25/20 430,000 490,200
-------------
4,951,750
-------------
DOMINICAN REPUBLIC 0.5%
Dominican Republic
9.04%, due 1/23/18 (a) 655,786 341,009
Series Reg S
9.04%, due 1/23/18 546,488 284,174
-------------
625,183
-------------
EL SALVADOR 0.3%
Republic of El Salvador
7.75%, due 1/24/23 (a) 100,000 72,000
Series Reg S
7.75%, due 1/24/23 100,000 72,000
8.25%, due 4/10/32 (a) 250,000 162,500
-------------
306,500
-------------
INDONESIA 3.3%
V Republic of Indonesia
6.625%, due 2/17/37 (a) 2,000,000 1,100,000
6.875%, due 1/17/18 2,000,000 1,309,426
Series Reg S
7.25%, due 4/20/15 (a) 550,000 423,500
7.25%, due 4/20/15 1,500,000 1,127,295
-------------
3,960,221
-------------
JAMAICA 0.4%
Jamaica Government
8.00%, due 6/24/19 650,000 487,500
-------------
LEBANON 1.0%
Republic of Lebanon
Series Reg S
8.25%, due 4/12/21 1,650,000 1,204,500
-------------
MEXICO 4.9%
United Mexican States
5.625%, due 1/15/17 3,575,000 3,181,750
9.00%, due 12/20/12 M$ 35,100,000 2,781,813
-------------
5,963,563
-------------
PANAMA 5.0%
V Republic of Panama
6.70%, due 1/26/36 $ 558,000 435,240
7.125%, due 1/29/26 925,000 763,125
8.875%, due 9/30/27 920,000 855,600
</Table>
12 MainStay Global High Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
PANAMA (CONTINUED)
Republic of Panama (continued)
9.375%, due 4/1/29 $ 4,157,000 $ 4,032,290
-------------
6,086,255
-------------
PERU 5.3%
V Republic of Peru
7.35%, due 7/21/25 5,635,000 4,761,575
8.75%, due 11/21/33 1,762,000 1,603,420
-------------
6,364,995
-------------
PHILIPPINES 6.1%
V Republic of Philippines
8.00%, due 1/15/16 650,000 604,500
9.375%, due 1/18/17 830,000 830,000
9.50%, due 2/2/30 4,660,000 4,753,200
9.875%, due 1/15/19 1,130,000 1,214,750
-------------
7,402,450
-------------
RUSSIA 6.0%
V Russian Federation
7.50%, due 3/31/30 5,634,755 4,927,706
11.00%, due 7/24/18 1,850,000 2,312,500
-------------
7,240,206
-------------
SOUTH AFRICA 0.9%
Republic of South Africa
6.50%, due 6/2/14 1,300,000 1,079,000
-------------
TURKEY 7.7%
V Republic of Turkey
(zero coupon), due
1/13/10 YTL 1,614,000 808,908
6.875%, due 3/17/36 $ 200,000 136,000
7.25%, due 3/15/15 1,510,000 1,238,200
7.375%, due 2/5/25 4,725,000 3,685,500
9.00%, due 6/30/11 1,000,000 990,000
9.50%, due 1/15/14 1,300,000 1,222,000
11.00%, due 1/14/13 550,000 554,125
11.75%, due 6/15/10 700,000 717,500
-------------
9,352,233
-------------
UKRAINE 0.7%
Ukraine Government
6.75%, due 11/14/17 (a) 1,200,000 582,000
6.875%, due 3/4/11 (a) 350,000 217,000
-------------
799,000
-------------
URUGUAY 3.6%
V Republic of Uruguay
8.00%, due 11/18/22 1,741,201 1,184,017
9.25%, due 5/17/17 3,835,000 3,221,400
-------------
4,405,417
-------------
VENEZUELA 5.7%
V Republic of Venezuela
6.00%, due 12/9/20 6,500,000 2,697,500
8.50%, due 10/8/14 3,670,000 2,055,200
Series Reg S
9.25%, due 5/7/28 4,600,000 2,116,000
-------------
6,868,700
-------------
Total Government & Federal
Agencies
(Cost $107,015,991) 84,380,713
-------------
Total Long-Term Bonds
(Cost $141,110,851) 105,202,420
-------------
SHORT-TERM INVESTMENT 12.0%
- -------------------------------------------------------------------
REPURCHASE AGREEMENT 12.0%
State Street Bank and Trust
Co. 0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$14,504,674
(Collateralized by a
Federal National Mortgage
Association Security with
a rate of 4.875% and a
maturity date of 4/15/09,
with a Principal Amount
of $14,635,000 and a
Market Value of
$14,799,497) 14,504,553 14,504,553
-------------
Total Short-Term Investment
(Cost $14,504,553) 14,504,553
-------------
Total Investments
(Cost $155,615,404) (c) 99.0% 119,706,973
Cash and Other Assets,
Less Liabilities 1.0 1,208,417
----- ------------
Net Assets 100.0% $ 120,915,390
===== ============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
+++ On a daily basis NYLIM confirms that the
value of the Fund's liquid assets (liquid
portfolio securities and cash) is
sufficient to cover its potential senior
securities (e.g., futures, swaps,
options).
(a) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(b) Floating rate. Rate shown is the rate in
effect at October 31, 2008.
(c) At October 31, 2008, cost is $156,383,559
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 774,119
Gross unrealized depreciation (37,450,705)
============
Net unrealized depreciation $ (36,676,586)
============
</Table>
The following abbreviations are used in the above portfolio:
R$ --Brazilian Real
M$--Mexican Peso
YTL--New Turkish Lira
14 MainStay Global High Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $141,110,851) $105,202,420
Repurchase agreement, at value
(identified cost $14,504,553) 14,504,553
Cash denominated in foreign
currency
(identified cost $57,929) 52,804
Receivables:
Dividends and interest 3,049,733
Investment securities sold 1,590,671
Fund shares sold 105,589
Other assets 36,927
Unrealized appreciation on foreign
currency forward contracts 1,847,199
------------
Total assets 126,389,896
------------
LIABILITIES:
Payables:
Investment securities purchased 3,382,738
Fund shares redeemed 319,263
Transfer agent (See Note 3) 85,791
Shareholder communication 68,553
NYLIFE Distributors (See Note 3) 62,434
Manager (See Note 3) 48,129
Professional fees 36,837
Custodian 29,240
Trustees 536
Accrued expenses 4,386
Dividend payable 246,052
Unrealized depreciation on foreign
currency forward contracts 1,190,547
------------
Total liabilities 5,474,506
------------
Net assets $120,915,390
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding
(par value of $.01 per share)
unlimited
number of shares authorized $ 151,219
Additional paid-in capital 161,497,598
------------
161,648,817
Distributions in excess of net
investment income (37,799)
Accumulated net realized loss on
investments, swap contracts,
written options and foreign
currency transactions (5,419,669)
Net unrealized depreciation on
investments (35,908,431)
Net unrealized appreciation on
translation of other assets and
liabilities in foreign currencies
and foreign currency forward
contracts 632,472
------------
Net assets $120,915,390
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 12,662,358
============
Shares of beneficial interest
outstanding 1,569,793
============
Net asset value per share
outstanding $ 8.07
Maximum sales charge (4.50% of
offering price) 0.38
------------
Maximum offering price per share
outstanding $ 8.45
============
CLASS A
Net assets applicable to
outstanding shares $ 59,842,929
============
Shares of beneficial interest
outstanding 7,459,040
============
Net asset value per share
outstanding $ 8.02
Maximum sales charge (4.50% of
offering price) 0.38
------------
Maximum offering price per share
outstanding $ 8.40
============
CLASS B
Net assets applicable to
outstanding shares $ 21,006,377
============
Shares of beneficial interest
outstanding 2,644,792
============
Net asset value and offering price
per share outstanding $ 7.94
============
CLASS C
Net assets applicable to
outstanding shares $ 27,377,056
============
Shares of beneficial interest
outstanding 3,444,947
============
Net asset value and offering price
per share outstanding $ 7.95
============
CLASS I
Net assets applicable to
outstanding shares $ 26,670
============
Shares of beneficial interest
outstanding 3,324
============
Net asset value and offering price
per share outstanding $ 8.02
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 14,331,145
Income from securities
loaned--net 30,217
Dividends 30,155
------------
Total income 14,391,517
------------
EXPENSES:
Manager (See Note 3) 1,370,405
Distribution--Class B (See Note
3) 242,779
Distribution--Class C (See Note
3) 311,081
Transfer agent--Investor Class
(See Note 3) 34,374
Transfer agent--Class A (See Note
3) 248,123
Transfer agent--Classes B and C
(See Note 3) 222,146
Transfer agent--Class I (See Note
3) 118
Distribution/Service--Investor
Class (See Note 3) 24,996
Distribution/Service--Class A
(See Note 3) 275,811
Service--Class B (See Note 3) 80,926
Service--Class C (See Note 3) 103,694
Shareholder communication 113,205
Registration 72,802
Professional fees 71,514
Custodian 51,464
Recordkeeping (a) 35,197
Trustees 6,525
Miscellaneous 16,937
------------
Total expenses before waiver 3,282,097
Expense waiver from Manager (See
Note 3) (38,366)
------------
Net expenses 3,243,731
------------
Net investment income 11,147,786
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, SWAP CONTRACTS AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gain (loss) on:
Security transactions (5,187,289)
Swap contracts 99,876
Foreign currency transactions (136,348)
------------
Net realized loss on investments,
swap contracts, written options
and foreign currency transactions (5,223,761)
------------
Net change in unrealized
appreciation on:
Security transactions (54,645,205)
Translation of other assets and
liabilities in foreign
currencies and foreign
currency forward contracts 438,261
------------
Net change in unrealized
appreciation on investments and
foreign currency transactions (54,206,944)
------------
Net realized and unrealized loss on
investments, swap contracts,
written options and foreign
currency transactions (59,430,705)
------------
Net decrease in net assets
resulting from operations $(48,282,919)
============
</Table>
(a) Effective August 1, 2008, the pricing and record keeping services fee is
included in the Manager fee.
16 MainStay Global High Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 11,147,786 $ 11,660,334
Net realized gain (loss) on
investments, swap contracts
and foreign currency
transactions (5,223,761) 4,328,853
Net change in unrealized
appreciation on investments
and foreign currency
transactions (54,206,944) (204,230)
---------------------------
Net increase (decrease) in
net assets resulting from
operations (48,282,919) 15,784,957
---------------------------
Dividends and distributions to
shareholders:
From net investment income:
Investor Class (565,045) --
Class A (6,620,885) (7,399,296)
Class B (1,687,843) (2,046,521)
Class C (2,172,047) (2,225,143)
Class I (2,888) (412)
---------------------------
(11,048,708) (11,671,372)
---------------------------
From net realized gain on investments:
Class A (2,676,994) (2,758,640)
Class B (753,826) (970,992)
Class C (915,247) (936,486)
Class I (1,091) --
---------------------------
(4,347,158) (4,666,118)
---------------------------
Total dividends and
distributions to
shareholders (15,395,866) (16,337,490)
---------------------------
Capital share transactions:
Net proceeds from sale of
shares 35,211,015 61,305,555
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 10,910,871 11,471,891
Cost of shares redeemed (80,604,996) (57,268,903)
---------------------------
Increase (decrease) in
net assets derived from
capital share
transactions (34,483,110) 15,508,543
---------------------------
Net increase (decrease)
in net assets (98,161,895) 14,956,010
NET ASSETS:
Beginning of year 219,077,285 204,121,275
---------------------------
End of year $120,915,390 $219,077,285
===========================
Distributions in excess of
net investment income at
end of year $ (37,799) $ (279,342)
===========================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------
FEBRUARY 28,
2008** CLASS A
THROUGH -----------------------------------------------------------------
OCTOBER 31, YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 11.27 $ 11.81 $ 11.82 $ 11.44 $ 11.17 $ 10.49
------- ------- -------- -------- ------- -------
Net investment income 0.42 (a) 0.67 (a) 0.67 (a) 0.69 (a) 0.73 0.76
Net realized and
unrealized gain (loss)
on investments (3.23) (3.59) 0.24 0.59 (b) 0.49 0.67
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.02 0.02 0.01 0.01 0.00 ++ 0.00 ++
------- ------- -------- -------- ------- -------
Total from investment
operations (2.79) (2.90) 0.92 1.29 1.22 1.43
------- ------- -------- -------- ------- -------
Less dividends and
distributions:
From net investment
income (0.41) (0.66) (0.67) (0.91) (0.76) (0.75)
From net realized gain
on investments -- (0.23) (0.26) -- (0.19) --
------- ------- -------- -------- ------- -------
Total dividends and
distributions (0.41) (0.89) (0.93) (0.91) (0.95) (0.75)
------- ------- -------- -------- ------- -------
Net asset value at end of
period $ 8.07 $ 8.02 $ 11.81 $ 11.82 $ 11.44 $ 11.17
======= ======= ======== ======== ======= =======
Total investment return
(c)(f) (25.54%)(d) (26.29%) 8.11% 11.75%(b)(e) 11.35% 14.26%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 5.79% ++ 6.08% 5.70% 5.97% 6.63% 7.29%
Net expenses 1.50% ++ 1.34% 1.40% 1.40% 1.43% 1.53%
Expenses (before
recoupment/
waiver/reimbursement) 1.53% ++ 1.37% 1.37% 1.43%(e) 1.46% 1.53%
Portfolio turnover rate 55% 55% 30% 33% 34% 24%
Net assets at end of
period (in 000's) $12,662 $59,843 $135,321 $121,810 $86,515 $44,434
</Table>
<Table>
<Caption>
CLASS C
---------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 11.70 $ 11.72 $ 11.36 $ 11.10 $ 10.44
------- ------- ------- ------- -------
Net investment income 0.57 (a) 0.58 (a) 0.60 (a) 0.65 0.69
Net realized and
unrealized gain (loss)
on investments (3.54) 0.23 0.58 (b) 0.48 0.65
Net realized and
unrealized gain (loss)
on foreign currency
transactions 0.02 0.01 0.01 (0.00)++ (0.00)++
------- ------- ------- ------- -------
Total from investment
operations (2.95) 0.82 1.19 1.13 1.34
------- ------- ------- ------- -------
Less dividends and
distributions:
From net investment
income (0.57) (0.58) (0.83) (0.68) (0.68)
From net realized gain
on investments (0.23) (0.26) -- (0.19) --
------- ------- ------- ------- -------
Total dividends and
distributions (0.80) (0.84) (0.83) (0.87) (0.68)
------- ------- ------- ------- -------
Net asset value at end of
period $ 7.95 $ 11.70 $ 11.72 $ 11.36 $ 11.10
======= ======= ======= ======= =======
Total investment return
(c)(f) (26.83%) 7.28% 10.87%(b)(e) 10.62% 13.36%
Ratios (to average net assets)/Supplemental Data:
Net investment income 5.22% 4.95% 5.22% 5.88% 6.54%
Net expenses 2.19% 2.15% 2.15% 2.18% 2.28%
Expenses (before
recoupment/
waiver/reimbursement) 2.20% 2.12% 2.18%(e) 2.21% 2.28%
Portfolio turnover rate 55% 30% 33% 34% 24%
Net assets at end of
period (in 000's) $27,377 $45,786 $39,176 $28,547 $16,455
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
$0.01 per share on net realized gains on investments and the effect on total
investment return was less than 0.01%, respectively.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(d) Total return is not annualized.
(e) Includes nonrecurring reimbursements from the Manager for professional fees
costs. The effect on total return was less than one-hundredth of a percent.
(f) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
18 MainStay Global High Income Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
---------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 11.70 $ 11.72 $ 11.36 $ 11.10 $ 10.44
------- ------- ------- ------- -------
0.56 (a) 0.58 (a) 0.60 (a) 0.65 0.69
(3.54) 0.23 0.58 (b) 0.48 0.65
0.02 0.01 0.01 (0.00)++ (0.00)++
------- ------- ------- ------- -------
(2.96) 0.82 1.19 1.13 1.34
------- ------- ------- ------- -------
(0.57) (0.58) (0.83) (0.68) (0.68)
(0.23) (0.26) -- (0.19) --
------- ------- ------- ------- -------
(0.80) (0.84) (0.83) (0.87) (0.68)
------- ------- ------- ------- -------
$ 7.94 $ 11.70 $ 11.72 $ 11.36 $ 11.10
======= ======= ======= ======= =======
(26.92%) 7.28% 10.87%(b)(e) 10.62% 13.36%
5.21% 4.95% 5.22% 5.88% 6.54%
2.20% 2.15% 2.15% 2.18%(e) 2.28%
2.19% 2.12% 2.18%(e) 2.21% 2.28%
55% 30% 33% 34% 24%
$21,006 $37,913 $43,136 $57,500 $31,459
</Table>
<Table>
<Caption>
CLASS I
-------------------------
AUGUST 31,
YEAR 2007**
ENDED THROUGH
OCTOBER 31, OCTOBER 31,
-------------------------
2008 2007
$ 11.81 $11.26
------- ------
0.69 (a) 0.11 (a)
(3.58) 0.52
0.02 0.04
------- ------
(2.87) 0.67
------- ------
(0.69) (0.12)
(0.23) --
------- ------
(0.92) (0.12)
------- ------
$ 8.02 $11.81
======= ======
(26.11%) 5.95%(d)
6.28% 6.12% ++
1.14% 1.15% ++
1.15% 0.99% ++
55% 30%
$ 27 $ 57
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Global High Income Fund (the "Fund").
The Fund currently offers five classes of shares. Class A shares and Class B
shares commenced on June 1, 1998. Class C shares commenced on September 1, 1998.
Class I shares commenced on August 31, 2007. Investor Class shares commenced on
February 28, 2008. Investor Class and Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Investor Class and Class A shares, but a contingent deferred sales charge is
imposed on certain redemptions of such shares within one year of the date of
purchase. Class B shares and Class C shares are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase of Class B shares and a 1%
contingent deferred sales charge may be imposed on redemptions made within one
year of purchase of Class C shares. Class I shares are not subject to a sales
charge. Depending upon eligibility, Class B shares convert to either Investor
Class or Class A shares eight years after the date they were purchased.
Additionally, depending upon eligibility, Investor Class shares may convert to
Class A shares and Class A shares may convert to Investor Class shares. The five
classes of shares have the same voting (except for issues that relate solely to
one class), dividend, liquidation and other rights and bear the same conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Investor Class and Class A shares under a distribution plan pursuant
to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a
distribution or service fee.
The Fund's investment objective is to seek to provide maximum current income by
investing primarily in high-yield debt securities of non-U.S. issuers. Capital
appreciation is a secondary objective. The Fund is "non-diversified," which
means that it may invest a greater percentage of its assets than diversified
funds in a particular issuer. This may make it more susceptible than diversified
funds to risks associated with an individual issuer, and to single economic,
political or regulatory occurrences.
The Fund's principal investments include high yield securities (sometimes called
"junk bonds"), which are generally considered speculative because they present a
greater risk of loss, including default, than higher quality debt securities.
These securities pay investors a premium--a high interest rate or yield--because
of the increased risk of loss. These securities can also be subject to greater
price volatility.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or broker selected by the Fund's Manager (as defined in Note 3(A))
in consultation with the Fund's Subadvisor, if any, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques, if
such prices are deemed by the Fund's Manager, in consultation with the Fund's
Subadvisor, if any, to be representative of market values, at the regular close
of trading of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("valuation date"). Investments in other
mutual funds are valued at their net asset values as of the close of the New
York Stock Exchange on the date of valuation. Foreign currency forward contracts
are valued at their fair market values determined on the basis of the mean
between the last current bid and ask prices based on dealer or exchange
quotations.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt
20 MainStay Global High Income Fund
security that has recently gone into default and for which there is not a
current market quotation; (iii) a security of an issuer that has entered into a
restructuring; (iv) a security that has been de-listed from a national exchange;
(v) a security the market price of which is not available from an independent
pricing source or, if so provided, does not, in the opinion of the Fund's
Manager or Subadvisor, as defined in Note 3(A), reflect the security's market
value; and (vi) a security where the trading on that security's principal market
is temporarily closed at a time when, under normal conditions, it would be open.
At October 31, 2008, the Fund did not hold securities that were valued in such a
manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3 (A), conclude that such events may
have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund's Board of Trustees, adjust the value of the local price to reflect the
impact on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain thresholds. In such cases, the securities are
fair valued by applying factors provided by a third party vendor in accordance
with the Fund's policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income monthly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at net asset value, unless the shareholder
elects otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued as earned using the effective interest rate method. Discounts and
premiums on securities purchased, other than short-term securities, for the Fund
are accreted and amortized, respectively, on the effective interest rate method
over the life of the respective securities or, in the case of a callable
security, over the period to the first date of call. Discounts and premiums on
short-term securities are accreted and amortized, respectively, on the straight-
line method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency forward contract is
an agreement to buy or sell currencies of different countries on a specified
future date at a specified rate. During the period the forward contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" such contract on a daily basis to reflect the
market value of the contract at the end of each day's trading. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into foreign currency forward
contracts primarily to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates or to try to enhance the Fund's returns.
The use of foreign currency forward contracts involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities. The contract amount reflects the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. While the
Fund may enter into forward contracts to reduce currency exchange risks, changes
in currency exchange rates may result in poorer overall performance for the Fund
than if it had not engaged in such transactions. Exchange rate movements can be
large, depending on the currency, and can last for extended periods of time,
affecting the value of the Funds assets. Moreover, there may be an imperfect
correlation between the Fund's holdings of securities denominated in a
particular currency and the forward contracts entered into by the Fund. Such
imperfect correlation may prevent the Fund from achieving the intended hedge or
expose the Fund to the risk of currency exchange loss. The unrealized
appreciation on forward contracts reflects the Fund's exposure at period end to
credit loss in the event of a counterparty's failure to perform its obligations.
(See Note 5.)
(I) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept
in U.S. dollars. Prices of securities denominated in foreign currency amounts
are translated into U.S. dollars at the mean between the buying and selling
rates last quoted by any major U.S. bank at the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date, and
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities that are denominated in foreign currency amounts are
presented at the exchange rates and market values at the close of the period.
The realized and unrealized changes in net assets arising from fluctuations in
exchange rates and market prices of securities are not separately presented.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on foreign currency forward contracts, net currency gains or losses
realized as a result of differences between the amounts of securities sale
proceeds or purchase cost, dividends, interest and withholding taxes as recorded
on the Fund's books, and the U.S. dollar equivalent amount actually received or
paid. Net currency gains or losses from valuing such foreign currency
denominated assets and liabilities, other than investments at valuation date
exchange rates, are reflected in unrealized foreign exchange gains or losses.
(J) SWAP AGREEMENTS. The Fund may enter into credit default, interest rate,
index and currency exchange rate swap agreements ("swaps") for purposes of
attempting to obtain a particular desired return at a lower cost to the Fund
than if the Fund had invested directly in an instrument that yielded the desired
return or for other portfolio management purposes. In standard swaps
transactions, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the parties
are calculated with respect to a notional amount. Credit default swaps are
contracts whereby one party makes periodic payments to a counterparty in
exchange for the right to receive a specified return in the event of a default
by a third party on its obligation. Credit default swaps may be used to provide
a measure of protection against defaults of sovereign or corporate issuers. In
connection with these agreements, cash or securities may be set aside as
collateral in accordance with the terms of the swap agreement.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an agreed-
upon level, while the seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an
22 MainStay Global High Income Fund
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
The Fund bears the risk of loss of the amount expected to be received under a
swap agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The Fund may be able to eliminate its exposure under a swap
agreement either by assignment or other disposition, or by entering into an
offsetting swap agreement with the same party or a similarly creditworthy party.
Swaps are marked to market daily based upon quotations from market makers and
vendors and the change in value, if any, is recorded as unrealized gain or loss.
Payments received or made on swap contracts are recorded as realized gain or
loss. Gains or losses are realized upon early termination of the swap
agreements. These financial instruments are not actively traded on financial
markets. Entering into these agreements involves elements of credit, market and
documentation risk in excess of the amounts recognized on the Statement of
Assets and Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the agreements may
default on its obligation to perform or disagree as to the meaning of the
contractual terms in the agreements and that there may be unfavorable changes in
interest rates or the price of the index or security underlying these
transactions.
(K) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(L) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement")
between NYLIM and the Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.70% on assets up to $500 million and 0.65% on assets in
excess of $500 million.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333%
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
for the next $80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage, other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.50%; Class A, 1.31%; Class B,
2.25%; Class C, 2.25%; and Class I, 1.15%.
Between August 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 1.40%; Class B,
2.15%; Class C, 2.15%; and Class I, 1.15%. Prior to August 1, 2007, NYLIM had a
different expense limitation agreement in place with respect to the Fund.
This expense limitation may be modified or terminated only with the approval of
the Board of Trustees. NYLIM may recoup the amount of certain management fee
waivers or expense reimbursements from the Fund pursuant to the agreement if
such action does not cause the Fund to exceed the existing expense limitation
and the recoupment is made within three years after the year in which NYLIM
incurred the expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $1,370,405 and waived its fees in the amount of $38,366.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2010 2011 TOTAL
$12,913 $38,366 $51,279
- -------------------------------
</Table>
Effective August 1, 2008, the fee for fund accounting and recordkeeping services
provided is included within the management fee paid by the Fund. Prior to August
1, 2008, the Fund paid the Manager a monthly fee for certain pricing and
recordkeeping services provided under an Accounting Agreement at the annual rate
of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30 of
1% of the next $80 million of average monthly net assets and 1/100 of 1% of any
amount in excess of $100 million of average monthly net assets. Fees for these
services provided to the Fund by the Manager amounted to $35,197 for the period
November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Investor Class and Class A Plans, the Distributor receives a
monthly distribution fee from the Fund at an annual rate of 0.25% of the average
daily net assets of the Fund's Investor Class and Class A shares, which is an
expense of the Investor Class and Class A shares of the Fund for distribution or
service activities as designated by the Distributor. Pursuant to the Class B and
Class C Plans, the Fund pays the Distributor a monthly distribution fee, which
is an expense of the Class B and Class C shares of the Fund, at the annual rate
of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Plans provide that the Class B and Class C shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B and Class C shares of the Fund. Class I shares are not
subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were $4,765
and $24,102, respectively, for the year ended October 31, 2008. The Fund was
also advised that the Distributor retained contingent deferred sales charges on
redemptions of Investor Class, Class A, Class B and Class C shares of $25,
$53,851, $73,765, and $11,453, respectively, for the year ended October 31,
2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing
24 MainStay Global High Income Fund
agent. NYLIM Service has entered into an agreement with Boston Financial Data
Services pursuant to which it performs certain services for which NYLIM Service
is responsible. Transfer agent expenses incurred by the Fund for the year ended
October 31, 2008 amounted to $504,761.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $4,783,630 8.0%
- ---------------------------------------------------
Class C 246 0.0++
- ---------------------------------------------------
Class I 19,432 72.9
- ---------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $7,029.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAINS (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$805,208 $(4,651,514) $(246,052) $(36,641,069) $(40,733,427)
- -------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals, distributions and mark to market on
forward contracts.
The other temporary differences are primarily due to dividends payable.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income and accumulated net
realized gain on investments arising from permanent differences; net assets at
October 31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$142,465 $(142,465) $--
---------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gain
(loss), paydown gain (loss), reclassification of distributions and foreign
currency transactions.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $4,651,514 were available as shown in the table below, to the extent provided
by the regulations to offset future realized gains of the Fund through the years
indicated. To the extent that these loss carryforwards are used to offset future
capital gains, it is probable that the capital gains so offset will not be
distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2016 $4,652
- -----------------------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007 shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Ordinary Income $11,048,734 $11,669,574
Long-Term Capital Gains 4,347,132 4,667,916
- -----------------------------------------------------
$15,395,866 $16,337,490
- -----------------------------------------------------
</Table>
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--FOREIGN CURRENCY FORWARD CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS:
As of October 31, 2008, the Fund held the following foreign currency forward
contracts:
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
PURCHASED SOLD (DEPRECIATION)
Foreign Currency Buy Contracts:
- ---------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, expiring 11/4/08 BRL 2,035,500 $1,011,680 $ (72,146)
- ---------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, expiring 11/10/08 BRL 6,960,512 3,184,667 20,224
- ---------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, expiring 12/2/08 BRL 3,300,000 1,910,828 (404,955)
- ---------------------------------------------------------------------------------------------------
Mexican Peso vs. U.S. Dollar, expiring 11/7/08 MXN 15,069,316 1,186,000 (15,945)
- ---------------------------------------------------------------------------------------------------
Mexican Peso vs. U.S. Dollar, expiring 11/10/08 MXN 23,680,276 1,800,508 36,483
- ---------------------------------------------------------------------------------------------------
Mexican Peso vs. U.S. Dollar, expiring 11/21/08 MXN 39,966,250 3,750,000 (659,870)
- ---------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
CONTRACT CONTRACT UNREALIZED
AMOUNT AMOUNT APPRECIATION/
SOLD PURCHASED (DEPRECIATION)
Foreign Currency Sale Contracts:
- ---------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, expiring 11/4/08 BRL 2,035,500 $1,000,000 $ 60,466
- ---------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, expiring 11/10/08 BRL 4,544,256 2,100,800 8,447
- ---------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, expiring 11/24/08 BRL 4,286,975 1,925,000 (37,631)
- ---------------------------------------------------------------------------------------------------
Brazilian Real vs. U.S. Dollar, expiring 12/2/08 BRL 3,300,000 1,986,157 480,284
- ---------------------------------------------------------------------------------------------------
Mexican Peso vs. U.S. Dollar, expiring 11/7/08 MXN 37,088,340 3,270,000 390,281
- ---------------------------------------------------------------------------------------------------
Mexican Peso vs. U.S. Dollar, expiring 11/10/08 MXN 24,420,750 2,100,800 206,368
- ---------------------------------------------------------------------------------------------------
Mexican Peso vs. U.S. Dollar, expiring 11/21/08 MXN 39,966,250 3,675,080 584,950
- ---------------------------------------------------------------------------------------------------
Turkish Lira vs. U.S. Dollar, expiring 11/10/08 YTL 1,300,500 900,000 59,696
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation on foreign currency
forward contracts $656,652
- ---------------------------------------------------------------------------------------------------
</Table>
As of October 31, 2008, the Fund held the following foreign currency:
<Table>
<Caption>
CURRENCY COST VALUE
Argentinian Peso ARS178,821 $57,929 $52,804
- -------------------------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 8--PURCHASES AND SALES OF
SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of U.S. Government
securities were $810 and $814, respectively. Purchases and sales of securities,
other than U.S. Government securities and short-term securities, were $97,145
and $142,782, respectively.
26 MainStay Global High Income Fund
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31, 2008
(a):
Shares sold 460,861 $ 5,118,838
Shares issued to shareholders
in reinvestment of
dividends and distributions 52,591 544,395
Shares redeemed (264,625) (2,779,976)
-----------------------
Net increase in shares
outstanding before
conversion 248,827 2,883,257
Shares converted into
Investor Class (See Note 1) 1,460,537 16,144,606
Shares converted from
Investor Class (See Note 1) (139,571) (1,458,463)
-----------------------
Net increase 1,569,793 $17,569,400
=======================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 1,712,333 $ 19,078,353
Shares issued to
shareholders in
reinvestment of dividends
and distributions 588,304 6,477,205
Shares redeemed (5,169,258) (54,184,103)
-------------------------
Net decrease in shares
outstanding before
conversion (2,868,621) (28,628,545)
Shares converted into Class
A (See Note 1) 284,176 3,049 715
Shares converted from Class
A (See Note 1) (1,416,051) (15,592,376)
-------------------------
Net decrease (4,000,496) $(41,171,206)
=========================
Year ended October 31, 2007:
Shares sold 3,312,514 $ 38,935,957
Shares issued to
shareholders in
reinvestment of dividends
and distributions 610,602 7,156,143
Shares redeemed (3,035,084) (35,495,220)
-------------------------
Net increase in shares
outstanding before
conversion 888,032 10,596,880
Shares converted from Class
B (See Note 1) 266,067 3,114,762
-------------------------
Net increase 1,154,099 $ 13,711,642
=========================
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 321,100 $ 3,507,746
Shares issued to
shareholders in
reinvestment of dividends
and distributions 180,175 1,955,791
Shares redeemed (900,354) (9,647,430)
-------------------------
Net decrease in shares
outstanding before
conversion (399,079) (4,183,893)
Shares converted from Class
B (See Note 1) (196,767) (2,143,482)
-------------------------
Net decrease (595,846) $ (6,327,375)
=========================
Year ended October 31, 2007:
Shares sold 467,515 $ 5,463,284
Shares issued to
shareholders in
reinvestment of dividends
and distributions 204,494 2,377,543
Shares redeemed (842,768) (9,783,767)
-------------------------
Net decrease in shares
outstanding before
conversion (170,759) (1,942,940)
Shares reacquired upon
conversion into Class A
(See Note 1) (268,428) (3,114,762)
-------------------------
Net decrease (439,187) $ (5,057,702)
=========================
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 691,238 $ 7,502,171
Shares issued to
shareholders in
reinvestment of dividends
and distributions 178,021 1,931,330
Shares redeemed (1,336,692) (13,970,477)
-------------------------
Net decrease (467,433) $ (4,536,976)
=========================
Year ended October 31, 2007:
Shares sold 1,441,124 $ 16,851,314
Shares issued to
shareholders in
reinvestment of dividends
and distributions 166,779 1,937,942
Shares redeemed (1,037,635) (11,989,916)
-------------------------
Net increase 570,268 $ 6,799,340
=========================
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 344 $ 3,907
Shares issued to
shareholders in
reinvestment of dividends
and distributions 198 2,150
Shares redeemed (2,045) (23,010)
-------------------------
Net decrease (1,503) $ (16,953)
=========================
Year ended October 31, 2007
(b):
Shares sold 4,804 $ 55,000
Shares issued to
shareholders in
reinvestment of dividends
and distributions 23 263
-------------------------
Net increase 4,827 $ 55,263
=========================
</Table>
(b) The Class I shares commenced operations on August 31, 2007.
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
28 MainStay Global High Income Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Global High Income Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Global High Income Fund of The MainStay Funds as of October 31, 2008,
the results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended,
in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
mainstayinvestments.com 29
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBSIDIARY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Global High Income Fund (the "Fund"), which was
comprised solely of Independent Trustees, unanimously approved the Management
and Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider
30 MainStay Global High Income Fund
of shareholder services, which has been recognized by independent third-parties
on numerous occasions. The Board noted the role that the MainStay Family of
Funds historically has played in serving the investment needs of New York Life
Insurance Company policyholders, who often maintain smaller account balances
than other retail investors. The Board acknowledged that it had approved NYLIM's
recommendation to create a new "Investor Class" of shares designed principally
to address the higher shareholder-servicing costs typically associated with
smaller shareholder accounts. The Board considered the experience of senior
personnel at NYLIM providing management and administrative services to the Fund,
as well as NYLIM's reputation and financial condition. The Board also reviewed
NYLIM's willingness to invest in personnel designed to benefit the Fund, and
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and MacKay
Shields' method for compensating portfolio managers. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio managers and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position
mainstayinvestments.com 31
is important in order for NYLIM to continue to provide high-quality ongoing
services to the Fund and its shareholders. The Board noted, for example,
increased costs borne by NYLIM and its affiliates due to new and ongoing
regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
32 MainStay Global High Income Fund
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
mainstayinvestments.com 33
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advised shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $4,347,132.
The dividends paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 100% to arrive at the amount eligible for qualified
interest income.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
34 MainStay Global High Income Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
mainstayinvestments.com 35
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
36 MainStay Global High Income Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 37
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
38 MainStay Global High Income Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A014622 (RECYCLE LOGO) MS308-08 MSGH11-12/08
20
(MAINSTAY LOGO)
MAINSTAY
COMMON STOCK FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY LOGO)
MAINSTAY
COMMON STOCK FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
<Table>
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 12
- ---------------------------------------------
FINANCIAL STATEMENTS 17
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 22
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 29
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT 30
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 33
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 33
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 33
- ---------------------------------------------
TRUSTEES AND OFFICERS 34
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUC-TUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (40.74%) (1.78%) (0.54%)
Excluding sales charges (37.29) (0.66) 0.03
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (40.67%) (1.76%) (0.53%)
Excluding sales charges (37.22) (0.64) 0.04
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (40.62%) (1.75%) (0.71%)
Excluding sales charges (37.77) (1.39) (0.71)
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund- share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class
C shares are sold with no initial sales charge, are subject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 1.00%. Class I shares are sold with no initial sales charge or CDSC, have
no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Performance figures reflect
THE FOOTNOTES ON THE NEXT TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (38.41%) (1.39%) (0.72%)
Excluding sales charges (37.84) (1.39) (0.72)
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------------------
(36.92%) (0.12%) 0.43%
</Table>
(PERFORMANCE GRAPH)
CLASS R2 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -------------------------------------------------------
(37.28%) (0.74%) (0.06%)
</Table>
(PERFORMANCE GRAPH)
certain fee waivers and/or expense limitations, without which total returns may
have been lower. These fee waivers and/or expense limitations are contractual
and may be modified or terminated only with the approval of the Board of
Trustees. The Manager may recoup the amount of certain management fee waivers
or expense reimbursements from the Fund pursuant to the contract if such action
does not cause the Fund to exceed existing expense limitations and the
recoupment is made within three years after the year in which the Manager
incurred the expense.
2. Investor Class shares were first offered to the public on February 28, 2008.
Performance figures for Investor Class shares include the historical
performance of Class A shares through February 27, 2008, adjusted for
differences in certain
THE FOOTNOTE ON THE PRECEDING PAGE AND THE FOOTNOTES ON THE FOLLOWING PAGE ARE
AN INTEGRAL PART OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN
CONJUNCTION WITH THEM.
6 MainStay Common Stock Fund
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ------------------------------------------------------------------------
S&P 500(R) Index(5) (36.10%) 0.26% 0.40%
Russell 1000(R) Index(6) (36.80) 0.37 0.75
Average Lipper large-cap core fund(7) (36.22) (0.41) 0.08
</Table>
contractual fees and expenses. Unadjusted, the performance shown for the
Investor Class shares might have been lower.
3. Performance figures for Class I shares, first offered on December 28, 2004,
include historical performance of Class A shares through December 27, 2004,
adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Class I shares might have been lower.
4. Performance figures for Class R2 shares, first offered to the public on
December 14, 2007, include the historical performance of Class A shares
through April 30, 2008, adjusted for differences in fees and expenses.
Unadjusted, the performance shown for Class R2 shares might have been lower.
5. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
Index is an unmanaged index and is widely regarded as the standard for
measuring large-cap U.S. stock-market performance. Results assume
reinvestment of all income and capital gains. The S&P 500(R) Index is
considered to be the Fund's broad-based securities-market index for
comparison purposes. An investment cannot be made directly in an index.
6. The Russell 1000(R) Index is an unmanaged index that measures the performance
of the 1,000 largest U.S. companies based on total market capitalization.
Results assume reinvestment of all income and capital gains. An investment
cannot be made directly in an index.
7. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital gain
distributions reinvested.
THE FOOTNOTES ON THE PRECEDING TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY COMMON STOCK FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $699.10 $5.98 $1,018.10 $ 7.10
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $700.40 $3.89 $ 1020.60 $ 4.62
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $696.90 $9.17 $1,014.30 $10.89
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $696.10 $9.17 $1,014.30 $10.89
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $701.30 $2.65 $1,022.00 $ 3.15
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.40% for Investor Class, 0.91% for Class A, 2.15% for Class B and Class C
and 0.62% for Class I) multiplied by the average account value over the
period, divided by 366 and multiplied by 184 (to reflect the one-half year
period). The table above represents actual expenses incurred during the one-
half year period and does not take into account the Fund's written expense
limitation agreement.
8 MainStay Common Stock Fund
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2008
<Table>
<Caption>
Oil, Gas & Consumable Fuels 12.2%
Pharmaceuticals 7.7
Computers & Peripherals 6.8
Exchange Traded Funds 5.5
Insurance 4.7
Software 4.2
Specialty Retail 3.9
Diversified Telecommunication
Services 3.5
Capital Markets 3.0
Semiconductors & Semiconductor
Equipment 3.0
Road & Rail 2.9
Energy Equipment & Services 2.6
Household Products 2.5
Industrial Conglomerates 2.4
Food & Staples Retailing 2.2
Beverages 2.1
Media 2.1
Communications Equipment 2.0
Aerospace & Defense 1.9
Tobacco 1.8
Biotechnology 1.7
Consumer Finance 1.7
Diversified Financial Services 1.6
Machinery 1.6
IT Services 1.5
Health Care Providers & Services 1.4
Commercial Banks 1.3
Internet Software & Services 1.3
Chemicals 1.0
Health Care Equipment & Supplies 1.0%
Air Freight & Logistics 0.8
Multiline Retail 0.8
Food Products 0.7
Household Durables 0.7
Airlines 0.6
Metals & Mining 0.6
Multi-Utilities 0.6
Textiles, Apparel & Luxury Goods 0.6
Hotels, Restaurants & Leisure 0.5
Construction & Engineering 0.4
Life Sciences Tools & Services 0.4
Electric Utilities 0.3
Leisure Equipment & Products 0.3
Wireless Telecommunication Services 0.3
Electrical Equipment 0.2
Electronic Equipment & Instruments 0.2
Real Estate Investment Trusts 0.2
Auto Components 0.1
Diversified Consumer Services 0.1
Gas Utilities 0.1
Professional Services 0.1
Trading Companies & Distributors 0.1
Commercial Services & Supplies 0.0++
Containers & Packaging 0.0++
Health Care Technology 0.0++
Independent Power Producers & Energy
Traders 0.0++
Thrifts & Mortgage Finance 0.0++
Short-Term Investment 0.1
Cash and Other Assets, Less
Liabilities 0.1
-----
100.0%
=====
</Table>
++ Less than one-tenth of a percent.
See Portfolio of Investments on page 12 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. ExxonMobil Corp.
2. S&P 500 Index--SPDR Trust Series 1
3. Microsoft Corp.
4. Procter & Gamble Co. (The)
5. Johnson & Johnson
6. Wal-Mart Stores, Inc.
7. International Business Machines Corp.
8. Pfizer, Inc.
9. AT&T, Inc.
10. Chevron Corp.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS HARVEY FRAM, CFA, AND MIGENE KIM, CFA,
OF NEW YORK LIFE INVESTMENT MANAGEMENT LLC, THE FUND'S MANAGER.
HOW DID MAINSTAY COMMON STOCK FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Common Stock Fund returned -37.29% for
Investor Class shares,(1) -37.22% for Class A shares, -37.77% for Class B shares
and -37.84% for Class C shares for the 12 months ended October 31, 2008. Over
the same period, the Fund's Class I shares returned -36.92% and Class R2
shares(2) returned -37.28%. All share classes underperformed the -36.22% return
of the average Lipper(3) large-cap core fund and the -36.10% return of the S&P
500(R) Index(4) for the 12 months ended October 31, 2008. The S&P 500(R) Index
is the Fund's broad-based securities-market index. See pages 5 and 6 for Fund
returns with sales charges.
WHAT ACCOUNTED FOR THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD?
The Fund underperformed the S&P 500(R) Index primarily because our proprietary
quantitative model did not expect as severe a market environment as we had
during the reporting period. The Fund performed well through the first half of
2008, as our overweight position relative to the S&P 500(R) Index in commodity
stocks--notably those in the energy sector--helped performance. One important
part of the model, however, seeks to identify market trends. It generally takes
a number of months to pick up on a new trend, and since the change was so
severe, the Fund underperformed from July through October 2008.
DURING THE REPORTING PERIOD, WHICH SECTORS MADE THE STRONGEST CONTRIBUTIONS TO
THE FUND'S RELATIVE PERFORMANCE AND WHICH SECTORS MADE THE WEAKEST
CONTRIBUTIONS?
Even in a broadly declining market, some sectors and securities performed better
than others. The sectors that made the strongest contributions to the Fund's
performance relative to the S&P 500(R) Index were financials, followed by
information technology and consumer discretionary. Unfortunately, all three of
these sectors provided negative total returns. Within the financials sector, the
Fund held no positions--or underweight positions--in almost all of the high-
profile bankruptcy and near-bankruptcy stocks, such as American International
Group (AIG), Fannie Mae and Lehman Brothers.
The Fund's worst-contributing sectors on a relative basis were consumer staples,
health care and materials. Our model did not anticipate as severe a market
environment as we saw during the reporting period, and hence the Fund was
underweight in the typically recession-resistant consumer staples sector. The
Fund was also underweight in the health care sector, but the Fund's
underperformance was mainly due to a lack of exposure to specific stocks, such
as Abbott Laboratories and Johnson & Johnson, that performed well during the
reporting period.
WHICH INDIVIDUAL STOCKS WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S ABSOLUTE
PERFORMANCE DURING THE REPORTING PERIOD AND WHICH STOCKS DETRACTED?
In absolute terms, the strongest contributors to the Fund's performance during
the reporting period were Amgen, Wal-Mart Stores and Electronic Data Systems.
Amgen's stock performed well because a number of its drugs received Food and
Drug Administration (FDA) approval. Wal-Mart regained market share in the
current cost-conscious retail environment. Electronic Data Systems saw its stock
price rise in anticipation of an acquisition by Hewlett Packard in August 2008.
Major detractors included Exxon Mobil, Microsoft and General Electric. Exxon
Mobil and Microsoft actually outperformed the S&P 500(R) Index, but contributed
negatively to performance on an absolute basis because of their large weights in
the Fund.
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. The principal risk of
growth stocks is that investors expect growth companies to increase their
earnings at a certain rate that is generally higher than the rate expected for
nongrowth companies. If these expectations are not met, the market price of the
stock may decline significantly, even if earnings showed an absolute increase.
Growth company stocks also typically lack the dividend yield that can cushion
stock prices in market downturns. The Fund may experience a portfolio turnover
rate of more than 100% and may generate taxable short-term capital gains.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the perform-ance shown for Investor Class shares
might have been lower.
2. Performance for Class R2 shares prior to 12/14/07, the date the shares were
first offered, includes the historical performance of Class A shares adjusted
to reflect the differences in fees and expenses for such shares.
3. See footnote on page 7 for more information on Lipper Inc.
4. See footnote on page 7 for more information on the S&P 500(R) Index.
10 MainStay Common Stock Fund
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES AND SALES DURING THE REPORTING
PERIOD?
The Fund seeks stocks with attractive valuations, reliable earnings and strong
price trends. Among the stocks purchased by the Fund during the reporting period
were Wal-Mart Stores and Johnson & Johnson. Both companies' earnings have held
up well despite a difficult economic environment.
We sold stocks, such as Citigroup and Morgan Stanley, that were adversely
affected by the continued turmoil in the economy and by the fallout from the
mortgage crisis.
HOW DID THE FUND'S WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
Weighting changes in the Fund result from a combination of security performance
and the Fund's proprietary quantitative security-selection process. During the
reporting period, the Fund increased its weighting in information technology
from neutral to overweight. Information technology stocks traded at extremely
low valuations, indicating that the market was pricing in a much more severe
recession than our model expects. We also increased the Fund's weighting in
consumer staples from very underweight to moderately underweight relative to the
S&P 500(R) Index. We decreased the Fund's weighting in financials from
overweight to underweight. In the utilities sector we moved from a moderate
underweight to a more substantially underweight position.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2008, the Fund's most substantially overweight positions
relative to the S&P 500(R) Index were in information technology and energy.
Within energy, the Fund tends to own larger integrated oil companies, such as
Exxon Mobil and Chevron.
On the same date, the Fund's most substantially underweight positions relative
to the Index were in consumer staples and utilities. Although these sectors have
traditionally performed relatively well during periods of economic weakness, we
believe that many stocks in these sectors have become relatively expensive. The
Fund's exposure in utilities, combined with an underweight in materials,
translates to a fairly neutral exposure to very volatile commodities, such as
crude oil and copper.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
mainstayinvestments.com 11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 94.3%+
- -----------------------------------------------------------
AEROSPACE & DEFENSE 1.9%
Boeing Co. (The) 68,940 $ 3,603,494
General Dynamics Corp. 6,474 390,512
Honeywell International,
Inc. 71,898 2,189,294
Northrop Grumman Corp. 4,946 231,918
United Technologies Corp. 13,588 746,796
-------------
7,162,014
-------------
AIR FREIGHT & LOGISTICS 0.8%
FedEx Corp. 42,041 2,748,220
United Parcel Service, Inc.
Class B 6,101 322,011
-------------
3,070,231
-------------
AIRLINES 0.6%
Southwest Airlines Co. 189,588 2,233,347
-------------
AUTO COMPONENTS 0.1%
BorgWarner, Inc. 15,698 352,734
-------------
BEVERAGES 2.1%
Anheuser-Busch Cos., Inc. 51,598 3,200,624
Coca-Cola Co. (The) 40,295 1,775,398
Pepsi Bottling Group, Inc.
(The) 26,320 608,518
PepsiCo, Inc. 38,528 2,196,481
-------------
7,781,021
-------------
BIOTECHNOLOGY 1.7%
Amgen, Inc. (a) 85,770 5,136,765
Biogen Idec, Inc. (a) 732 31,147
Celgene Corp. (a) 7,858 504,955
Cephalon, Inc. (a) 5,866 420,709
United Therapeutics Corp. (a) 1,349 117,673
Vertex Pharmaceuticals, Inc.
(a) 4,608 120,776
-------------
6,332,025
-------------
CAPITAL MARKETS 3.0%
Ameriprise Financial, Inc. 38,668 835,229
Bank of New York Mellon Corp.
(The) 48,829 1,591,825
Charles Schwab Corp. (The) 145,588 2,783,643
Federated Investors, Inc.
Class B 1,935 46,827
Goldman Sachs Group, Inc.
(The) 4,417 408,573
Invesco, Ltd. 29,081 433,598
Merrill Lynch & Co., Inc. 115,063 2,139,021
Northern Trust Corp. 13,004 732,255
Raymond James Financial,
Inc. 10,845 252,580
State Street Corp. 49,752 2,156,749
-------------
11,380,300
-------------
CHEMICALS 1.0%
Airgas, Inc. 11,327 434,504
Ashland, Inc. 14,490 327,329
CF Industries Holdings, Inc. 12,155 780,230
Hercules, Inc. 1,967 33,065
Monsanto Co. 18,198 1,619,258
Rohm & Haas Co. 3,648 256,637
Terra Industries, Inc. 16,768 368,728
-------------
3,819,751
-------------
COMMERCIAL BANKS 1.3%
Bancorpsouth, Inc. 2,090 50,724
BB&T Corp. 6,071 217,645
Fifth Third Bancorp 8,668 94,048
National City Corp. 37,984 102,557
SunTrust Banks, Inc. 2,261 90,756
U.S. Bancorp 9,449 281,675
Wachovia Corp. 628,660 4,029,711
-------------
4,867,116
-------------
COMMERCIAL SERVICES & SUPPLIES 0.0%++
Allied Waste Industries, Inc.
(a) 165 1,719
Stericycle, Inc. (a) 2,480 144,907
-------------
146,626
-------------
COMMUNICATIONS EQUIPMENT 2.0%
Cisco Systems, Inc. (a) 351,718 6,250,029
F5 Networks, Inc. (a) 6,812 169,074
Foundry Networks, Inc. (a) 7,679 114,033
QUALCOMM, Inc. 27,118 1,037,535
-------------
7,570,671
-------------
COMPUTERS & PERIPHERALS 6.8%
Apple, Inc. (a) 40,674 4,376,116
Dell, Inc. (a) 188,470 2,289,910
Diebold, Inc. 1,741 51,743
EMC Corp. (a) 259,119 3,052,422
Hewlett-Packard Co. 154,421 5,911,236
V International Business
Machines Corp. 78,055 7,256,773
Lexmark International, Inc.
Class A (a) 23,944 618,473
NetApp, Inc. (a) 92,124 1,246,438
QLogic Corp. (a) 13,867 166,681
Sun Microsystems, Inc. (a) 18,795 86,457
Western Digital Corp. (a) 39,866 657,789
-------------
25,714,038
-------------
CONSTRUCTION & ENGINEERING 0.4%
Fluor Corp. 35,374 1,412,484
Shaw Group, Inc. (The) (a) 4,455 79,700
URS Corp. (a) 2,461 72,329
-------------
1,564,513
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
Among the Fund's 10 largest holdings, as of October 31, 2008,
excluding short-term investment. May be subject to change daily.
12 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
CONSUMER FINANCE 1.7%
American Express Co. 97,359 $ 2,677,372
Capital One Financial Corp. 70,532 2,759,212
Discover Financial Services 68,184 835,254
-------------
6,271,838
-------------
CONTAINERS & PACKAGING 0.0%++
Pactiv Corp. (a) 647 15,243
Sonoco Products Co. 5,878 148,008
-------------
163,251
-------------
DIVERSIFIED CONSUMER SERVICES 0.1%
Apollo Group, Inc. Class A
(a) 4,385 304,801
-------------
DIVERSIFIED FINANCIAL SERVICES 1.6%
Bank of America Corp. 27,410 662,499
Citigroup, Inc. 111,349 1,519,914
JPMorgan Chase & Co. 95,991 3,959,629
-------------
6,142,042
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 3.5%
V AT&T, Inc. 266,794 7,142,076
CenturyTel, Inc. 8,076 202,788
Verizon Communications, Inc. 190,155 5,641,899
-------------
12,986,763
-------------
ELECTRIC UTILITIES 0.3%
Edison International 15,744 560,329
FPL Group, Inc. 9,524 449,914
-------------
1,010,243
-------------
ELECTRICAL EQUIPMENT 0.2%
Emerson Electric Co. 21,324 697,934
Hubbel, Inc. Class B 3,796 136,163
-------------
834,097
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.2%
Agilent Technologies, Inc.
(a) 9,210 204,370
Arrow Electronics, Inc. (a) 2,939 51,285
Jabil Circuit, Inc. 38,792 326,241
Molex, Inc. 8,405 121,116
-------------
703,012
-------------
ENERGY EQUIPMENT & SERVICES 2.6%
ENSCO International, Inc. 35,077 1,333,277
FMC Technologies, Inc. (a) 20,813 728,247
Halliburton Co. 21,020 415,986
Helmerich & Payne, Inc. 18,818 645,645
Nabors Industries, Ltd. (a) 47,069 676,852
National Oilwell Varco, Inc.
(a) 48,438 1,447,812
Noble Corp. 61,365 1,976,567
Patterson-UTI Energy, Inc. 27,419 363,850
Pride International, Inc. (a) 20,515 385,477
Schlumberger, Ltd. 23,774 1,227,927
Superior Energy Services,
Inc. (a) 8,075 172,159
Tidewater, Inc. 10,982 478,925
-------------
9,852,724
-------------
FOOD & STAPLES RETAILING 2.2%
BJ's Wholesale Club, Inc. (a) 8,159 287,196
Sysco Corp. 6,744 176,693
V Wal-Mart Stores, Inc. 136,422 7,613,712
-------------
8,077,601
-------------
FOOD PRODUCTS 0.7%
Corn Products International,
Inc. 11,839 287,925
General Mills, Inc. 23,381 1,583,829
H.J. Heinz Co. 6,865 300,824
J.M. Smucker Co. (The) 1,650 73,524
Kellogg Co. 6,005 302,772
Kraft Foods, Inc. Class A 356 10,374
-------------
2,559,248
-------------
GAS UTILITIES 0.1%
Nicor, Inc. 6,966 321,899
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 1.0%
Baxter International, Inc. 13,341 806,997
Becton, Dickinson & Co. 298 20,681
Boston Scientific Corp. (a) 29,912 270,105
Covidien, Ltd. 24,272 1,075,007
Edwards Lifesciences Corp.
(a) 10,514 555,560
Medtronic, Inc. 4,175 168,378
STERIS Corp. 3,496 119,004
Teleflex, Inc. 4,492 238,031
Varian Medical Systems, Inc.
(a) 10,874 494,876
-------------
3,748,639
-------------
HEALTH CARE PROVIDERS & SERVICES 1.4%
Aetna, Inc. 46,924 1,167,000
CIGNA Corp. 64,846 1,056,990
DaVita, Inc. (a) 8,457 479,935
Laboratory Corp. of America
Holdings (a) 4,196 258,012
Lincare Holdings, Inc. (a) 11,906 313,723
Omnicare, Inc. 18,342 505,689
Quest Diagnostics, Inc. 12,440 582,192
Universal Health Services,
Inc. Class B 8,116 341,196
WellPoint, Inc. (a) 16,041 623,514
-------------
5,328,251
-------------
HEALTH CARE TECHNOLOGY 0.0%++
Cerner Corp. (a) 1,972 73,418
-------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
HOTELS, RESTAURANTS & LEISURE 0.5%
Darden Restaurants, Inc. 22,434 $ 497,362
McDonald's Corp. 22,921 1,327,813
-------------
1,825,175
-------------
HOUSEHOLD DURABLES 0.7%
D.R. Horton, Inc. 57,489 424,269
KB Home 1,957 32,662
Leggett & Platt, Inc. 26,130 453,617
Lennar Corp. Class A 14,213 110,009
NVR, Inc. (a) 1,144 560,800
Pulte Homes, Inc. 65,017 724,289
Stanley Works (The) 30 982
Toll Brothers, Inc. (a) 14,167 327,541
-------------
2,634,169
-------------
HOUSEHOLD PRODUCTS 2.5%
Church & Dwight Co., Inc. 5,743 339,354
Clorox Co. (The) 5,009 304,597
Kimberly-Clark Corp. 6,466 396,301
V Procter & Gamble Co. (The) 131,242 8,470,359
-------------
9,510,611
-------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.0%++
Constellation Energy Group,
Inc. 1,891 45,781
-------------
INDUSTRIAL CONGLOMERATES 2.4%
3M Co. 39,165 2,518,309
General Electric Co. 340,278 6,638,824
-------------
9,157,133
-------------
INSURANCE 4.7%
Aflac, Inc. 62,584 2,771,219
Allstate Corp. (The) 77,309 2,040,184
American International Group,
Inc. 2,596 4,958
Arthur J. Gallagher & Co. 2,724 66,357
Assurant, Inc. 3,519 89,664
Brown & Brown, Inc. 6,820 139,946
Chubb Corp. (The) 7,405 383,727
Cincinnati Financial Corp. 6,620 172,054
Everest Re Group, Ltd. 1,508 112,648
Genworth Financial, Inc.
Class A 40,289 194,999
HCC Insurance Holdings, Inc. 8,901 196,356
Loews Corp. 72,514 2,408,190
Marsh & McLennan Cos., Inc. 7,686 225,354
MetLife, Inc. (a) 79,080 2,627,038
Old Republic International
Corp. 34,504 317,782
Philadelphia Consolidated
Holding Corp. (a) 2,885 168,744
Principal Financial Group,
Inc. 35,282 670,005
Protective Life Corp. 1,644 13,727
Prudential Financial, Inc. 55,801 1,674,030
StanCorp Financial Group,
Inc. 1,177 40,112
Travelers Cos., Inc. (The) 39,136 1,665,237
Unum Group 60,881 958,876
W.R. Berkley Corp. 30,920 812,268
-------------
17,753,475
-------------
INTERNET SOFTWARE & SERVICES 1.3%
eBay, Inc. (a) 151,350 2,311,114
Google, Inc. Class A (a) 4,965 1,784,222
VeriSign, Inc. (a) 7,574 160,569
Yahoo!, Inc. (a) 41,946 537,748
-------------
4,793,653
-------------
IT SERVICES 1.5%
Affiliated Computer Services,
Inc. Class A (a) 16,071 658,911
Alliance Data Systems Corp.
(a) 10,987 551,108
Broadridge Financial
Solutions LLC 25,846 312,737
Computer Sciences Corp. (a) 44,895 1,354,033
Fiserv, Inc. (a) 49,019 1,635,274
Global Payments, Inc. 8,741 354,098
Lender Processing Services,
Inc. 3,403 78,507
Western Union Co. (The) 40,360 615,893
-------------
5,560,561
-------------
LEISURE EQUIPMENT & PRODUCTS 0.3%
Eastman Kodak Co. 11,728 107,663
Hasbro, Inc. 39,671 1,153,236
-------------
1,260,899
-------------
LIFE SCIENCES TOOLS & SERVICES 0.4%
Applied Biosystems, Inc. 43,773 1,349,522
-------------
MACHINERY 1.6%
AGCO Corp. (a) 4,967 156,560
Caterpillar, Inc. 21,202 809,280
Cummins, Inc. 39,944 1,032,552
Dover Corp. 50,452 1,602,860
Flowserve Corp. 728 41,438
Illinois Tool Works, Inc. 8,233 274,900
Joy Global, Inc. 2,590 75,058
Nordson Corp. 33 1,219
Parker Hannifin Corp. 47,437 1,839,133
Wabtec Corp. 3,875 154,070
-------------
5,987,070
-------------
MEDIA 2.1%
CBS Corp. Class B 20,702 201,016
Comcast Corp. Class A 85,594 1,348,962
DIRECTV Group, Inc. (The) (a) 86,819 1,900,468
DreamWorks Animation SKG,
Inc. (a) 13,066 367,155
</Table>
14 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
MEDIA (CONTINUED)
Interpublic Group of Cos.,
Inc. (The) (a) 91,198 $ 473,318
Time Warner, Inc. 321,580 3,244,742
Walt Disney Co. (The) 7,196 186,376
-------------
7,722,037
-------------
METALS & MINING 0.6%
Freeport-McMoRan Copper &
Gold, Inc. Class B 26,527 771,936
Nucor Corp. 26,563 1,076,067
Reliance Steel & Aluminum
Co. 9,708 243,088
United States Steel Corp. 8,164 301,088
-------------
2,392,179
-------------
MULTI-UTILITIES 0.6%
MDU Resources Group, Inc. 4,956 90,249
NSTAR 3,111 102,819
PG&E Corp. 52,950 1,941,676
-------------
2,134,744
-------------
MULTILINE RETAIL 0.8%
Big Lots, Inc. (a) 24,360 595,115
Dollar Tree, Inc. (a) 19,227 731,010
Family Dollar Stores, Inc. 31,404 845,082
Macy's, Inc. 61,023 749,973
-------------
2,921,180
-------------
OIL, GAS & CONSUMABLE FUELS 12.2%
Apache Corp. 30,241 2,489,742
Arch Coal, Inc. 14,419 308,711
Chesapeake Energy Corp. 32,866 722,066
V Chevron Corp. 90,557 6,755,552
Cimarex Energy Co. 15,260 617,420
ConocoPhillips 91,209 4,744,692
CONSOL Energy, Inc. 5,014 157,389
Devon Energy Corp. 32,700 2,644,122
Encore Acquisition Co. (a) 5,131 159,831
EOG Resources, Inc. 3,855 311,947
V ExxonMobil Corp. 243,532 18,050,592
Forest Oil Corp. (a) 5,268 153,878
Hess Corp. 13,882 835,835
Marathon Oil Corp. 37,187 1,082,142
Massey Energy Co. 21,893 505,509
Murphy Oil Corp. 17,067 864,273
Noble Energy, Inc. 21,003 1,088,375
Occidental Petroleum Corp. 67,635 3,756,448
Pioneer Natural Resources
Co. 7,703 214,374
Plains Exploration &
Production Co. (a) 2,571 72,502
Southwestern Energy Co. (a) 10,163 362,006
-------------
45,897,406
-------------
PHARMACEUTICALS 7.7%
Abbott Laboratories 34,198 1,886,020
Barr Pharmaceuticals, Inc.
(a) 12,762 820,086
Eli Lilly & Co. 77,775 2,630,350
Endo Pharmaceuticals
Holdings, Inc. (a) 21,489 397,547
Forest Laboratories, Inc. (a) 63,934 1,485,187
V Johnson & Johnson 131,121 8,042,962
King Pharmaceuticals, Inc.
(a) 73,832 648,983
Merck & Co., Inc. 115,938 3,588,281
V Pfizer, Inc. 408,797 7,239,795
Schering-Plough Corp. 118,629 1,718,934
Watson Pharmaceuticals, Inc.
(a) 14,509 379,701
Wyeth 938 30,185
-------------
28,868,031
-------------
PROFESSIONAL SERVICES 0.1%
Robert Half International,
Inc. 23,037 434,708
-------------
REAL ESTATE INVESTMENT TRUSTS 0.2%
Liberty Property Trust 2,525 60,221
Plum Creek Timber Co., Inc. 13,820 515,210
-------------
575,431
-------------
ROAD & RAIL 2.9%
Burlington Northern Santa Fe
Corp. 16,810 1,497,099
CSX Corp. 49,787 2,276,262
J.B. Hunt Transport Services,
Inc. 15,579 442,911
Kansas City Southern (a) 12,814 395,568
Norfolk Southern Corp. 51,486 3,086,071
Ryder System, Inc. 14,733 583,721
Union Pacific Corp. 40,005 2,671,134
-------------
10,952,766
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 3.0%
Altera Corp. 11,894 206,361
Applied Materials, Inc. 35,796 462,126
Broadcom Corp. Class A (a) 32,414 553,631
Intel Corp. 323,680 5,178,880
KLA-Tencor Corp. 11,878 276,163
Lam Research Corp. (a) 12,899 288,422
LSI Corp. (a) 145,055 558,462
National Semiconductor Corp. 46,037 606,307
Novellus Systems, Inc. (a) 24,395 385,441
Texas Instruments, Inc. 136,964 2,679,016
-------------
11,194,809
-------------
SOFTWARE 4.2%
Adobe Systems, Inc. (a) 32,990 878,854
Autodesk, Inc. (a) 34,731 740,118
BMC Software, Inc. (a) 34,469 889,989
Compuware Corp. (a) 49,165 313,673
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
SOFTWARE (CONTINUED)
V Microsoft Corp. 392,299 $ 8,760,037
Oracle Corp. (a) 99,202 1,814,404
Sybase, Inc. (a) 17,016 453,136
Symantec Corp. (a) 153,371 1,929,407
Synopsys, Inc. (a) 7,311 133,645
-------------
15,913,263
-------------
SPECIALTY RETAIL 3.9%
Abercrombie & Fitch Co. Class
A 7,972 230,869
Advance Auto Parts, Inc. 15,572 485,846
American Eagle Outfitters,
Inc. 12,150 135,108
AutoZone, Inc. (a) 2,989 380,470
Best Buy Co., Inc. 73,810 1,978,846
Foot Locker, Inc. 21,188 309,769
Gap, Inc. (The) 114,829 1,485,887
Home Depot, Inc. (The) 52,981 1,249,822
Limited Brands, Inc. 23,426 280,644
Lowe's Cos., Inc. 143,610 3,116,337
PetSmart, Inc. 7,235 142,457
RadioShack Corp. 33,681 426,401
Ross Stores, Inc. 28,229 922,806
Sherwin-Williams Co. (The) 29,233 1,663,650
TJX Cos., Inc. 63,096 1,688,449
-------------
14,497,361
-------------
TEXTILES, APPAREL & LUXURY GOODS 0.6%
Coach, Inc. (a) 65,023 1,339,474
Hanesbrands, Inc. (a) 2,521 44,042
Jones Apparel Group, Inc. 16,431 182,548
Polo Ralph Lauren Corp. 17,219 812,220
-------------
2,378,284
-------------
THRIFTS & MORTGAGE FINANCE 0.0%++
Hudson City Bancorp, Inc. 6,510 122,453
-------------
TOBACCO 1.8%
Altria Group, Inc. 143,213 2,748,258
Philip Morris International,
Inc. 74,686 3,246,600
Reynolds American, Inc. 12,044 589,674
UST, Inc. 3,436 232,239
-------------
6,816,771
-------------
TRADING COMPANIES & DISTRIBUTORS 0.1%
W.W. Grainger, Inc. 2,640 207,425
-------------
WIRELESS TELECOMMUNICATION SERVICES 0.3%
Sprint Nextel Corp. 333,999 1,045,417
Telephone and Data Systems,
Inc. 2,090 56,116
-------------
1,101,533
-------------
Total Common Stocks
(Cost $464,569,254) 354,380,644
-------------
EXCHANGE TRADED FUNDS 5.5% (B)
- -----------------------------------------------------------
DIAMONDS Trust Series I 32,705 3,054,647
V S&P 500 Index--SPDR Trust
Series 1 179,889 17,418,652
-------------
Total Exchange Traded Funds
(Cost $19,517,511) 20,473,299
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 0.1%
- -----------------------------------------------------------
REPURCHASE AGREEMENT 0.1%
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
552,932
(Collateralized by a
Federal Home Loan Bank
Security with a rate of
3.35% and a
maturity date of 1/23/09,
with a Principal Amount of
$565,000 and a
Market Value of $565,000) $552,928 552,928
-------------
Total Short-Term Investment
(Cost $552,928) 552,928
-------------
Total Investments
(Cost $484,639,693) (c) 99.9% 375,406,871
Cash and Other Assets,
Less Liabilities 0.1 284,588
----- ------------
Net Assets 100.0% $ 375,691,459
----- ============
-----
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) Non-income producing security.
(b) Exchange Traded Fund-represents a basket
of securities that are traded on an
exchange.
(c) At October 31, 2008, cost is $492,702,906
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 3,339,994
Gross unrealized depreciation (120,636,029)
-------------
Net unrealized depreciation $(117,296,035)
=============
</Table>
16 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $484,639,693) $ 375,406,871
Receivables:
Dividends and interest 467,389
Fund shares sold 118,587
Investment securities sold 71,814
Other assets 49,504
-------------
Total assets 376,114,165
-------------
LIABILITIES:
Payables:
Manager (See Note 3) 116,850
Fund shares redeemed 88,868
Transfer agent (See Note 3) 66,207
Shareholder communication 60,076
Professional fees 37,539
Custodian 28,294
NYLIFE Distributors (See Note 3) 17,925
Directors 1,311
Accrued expenses 5,636
-------------
Total liabilities 422,706
-------------
Net assets $ 375,691,459
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest
outstanding (par value of $.01
per share) unlimited shares
authorized $ 404,391
Additional paid-in capital 526,251,511
-------------
526,655,902
Accumulated undistributed net
investment income 4,054,109
Accumulated net realized loss on
investments (45,785,730)
Net unrealized depreciation on
investments (109,232,822)
-------------
Net assets $ 375,691,459
=============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 11,810,666
=============
Shares of beneficial interest
outstanding 1,274,378
=============
Net asset value per share
outstanding $ 9.27
Maximum sales charge (5.50% of
offering price) 0.54
-------------
Maximum offering price per share
outstanding $ 9.81
=============
CLASS A
Net assets applicable to
outstanding shares $ 12,529,505
=============
Shares of beneficial interest
outstanding 1,349,567
=============
Net asset value per share
outstanding $ 9.28
Maximum sales charge (5.50% of
offering price) 0.54
-------------
Maximum offering price per share
outstanding $ 9.82
=============
CLASS B
Net assets applicable to
outstanding shares $ 13,211,863
=============
Shares of beneficial interest
outstanding 1,537,045
=============
Net asset value and offering price
per share outstanding $ 8.60
=============
CLASS C
Net assets applicable to
outstanding shares $ 1,610,601
=============
Shares of beneficial interest
outstanding 187,399
=============
Net asset value and offering price
per share outstanding $ 8.59
=============
CLASS I
Net assets applicable to
outstanding shares $ 336,528,824
=============
Shares of beneficial interest
outstanding 36,090,691
=============
Net asset value and offering price
per share outstanding $ 9.32
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
17
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 7,745,232
Income from securities
loaned--net 103,715
Interest 42,806
-------------
Total income 7,891,753
-------------
EXPENSES:
Manager (See Note 3) 2,965,137
Transfer agent--Investor Class
(See Note 3) 50,846
Transfer agent--Class A (See Note
3) 78,291
Transfer agent--Classes B and C
(See Note 3) 132,214
Transfer agent--Class I (See Note
3) 152,189
Distribution--Class B (See Note
3) 175,316
Distribution--Class C (See Note
3) 19,324
Distribution/Service--Investor
Class (See Note 3) 22,738
Distribution/Service--Class A
(See Note 3) 67,400
Service--Class B (See Note 3) 58,439
Service--Class C (See Note 3) 6,441
Professional fees 91,122
Shareholder communication 79,107
Registration 71,310
Recordkeeping (a) 54,003
Custodian 54,705
Trustees 15,942
Miscellaneous 30,319
-------------
Total expenses before waiver 4,124,843
Expense waiver from Manager (See
Note 3) (779,738)
-------------
Net expenses 3,345,105
-------------
Net investment income 4,546,648
-------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments (44,369,359)
Net change in unrealized
appreciation on investments (138,553,283)
-------------
Net realized and unrealized loss on
investments (182,922,642)
-------------
Net decrease in net assets
resulting from operations $(178,375,994)
=============
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
18 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
INCREASE IN NET ASSETS:
Operations:
Net investment income $ 4,546,648 $ 1,953,977
Net realized gain (loss) on
investments (44,369,359) 21,750,830
Net change in unrealized
appreciation (depreciation)
on investments (138,553,283) 7,082,651
----------------------------
Net increase (decrease) in
net assets resulting from
operations (178,375,994) 30,787,458
----------------------------
Dividends and distributions to shareholders:
From net investment income:
Class A (171,686) (153,634)
Class I (2,226,407) (1,431,004)
----------------------------
(2,398,093) (1,584,638)
----------------------------
From net realized gain on investments:
Class A (3,126,114) (733,266)
Class B (2,498,775) (779,636)
Class C (246,790) (66,841)
Class I (15,731,958) (2,634,965)
----------------------------
(21,603,637) (4,214,708)
----------------------------
Total dividends and
distributions to
shareholders (24,001,730) (5,799,346)
----------------------------
Capital share transactions:
Net proceeds from sale of
shares 185,061,531 86,557,097
Net asset value of shares
issued in connection with
acquisition of McMorgan
Equity Investment Fund 199,326,482 --
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 23,714,447 5,730,271
Cost of shares redeemed (130,902,856) (31,441,335)
----------------------------
Increase in net assets
derived from capital
share transactions 277,199,604 60,846,033
----------------------------
Net increase in net
assets 74,821,880 85,834,145
NET ASSETS:
Beginning of year 300,869,579 215,035,434
----------------------------
End of year $ 375,691,459 $300,869,579
============================
Accumulated undistributed net
investment income at end of
year $ 4,054,109 $ 1,808,457
============================
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------
FEBRUARY 28,
2008** CLASS A
THROUGH ---------------------------------------------------------
OCTOBER 31, YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 13.17 $ 16.10 $ 14.66 $ 12.62 $ 11.41 $ 10.69
------- ------- ------- ------- ------- -------
Net investment income
(loss) (a) 0.03 0.08 0.06 0.09 0.08 (b) (0.01)
Net realized and
unrealized gain (loss)
on investments (3.93) (5.70) 1.72 1.97 1.13 0.73
------- ------- ------- ------- ------- -------
Total from investment
operations (3.90) (5.62) 1.78 2.06 1.21 0.72
------- ------- ------- ------- ------- -------
Less dividends and
distributions:
From net investment
income -- (0.06) (0.06) (0.02) -- --
From net realized gain
on investments -- (1.14) (0.28) -- -- --
------- ------- ------- ------- ------- -------
Total dividends and
distributions -- (1.20) (0.34) (0.02) -- --
------- ------- ------- ------- ------- -------
Net asset value at end of
period $ 9.27 $ 9.28 $ 16.10 $ 14.66 $ 12.62 $ 11.41
======= ======= ======= ======= ======= =======
Total investment return
(c)(e) (29.61%)(d) (37.22%) 12.24% 16.43% 10.60% 6.74%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 0.41% ++ 0.65% 0.42% 0.63% 0.67%(b) (0.05%)
Net expenses 1.40% ++ 1.15% 1.29% 1.30% 1.38% 1.65%
Expenses (before
waiver/reimburse-
ment) 1.58% ++ 1.30% 1.48% 1.60% 1.72% 1.77%
Portfolio turnover rate 158% 158% 122% 144% 105% 136%
Net assets at end of
period (in 000's) $11,811 $12,530 $44,874 $38,940 $35,886 $34,957
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 15.07 $13.79 $11.94 $10.87 $10.25
------- ------ ------ ------ ------
Net investment income
(loss) (a) (0.04) (0.05) (0.01) (0.01)(b) (0.09)
Net realized and
unrealized gain (loss)
on investments (5.30) 1.61 1.86 1.08 0.71
------- ------ ------ ------ ------
Total from investment
operations (5.34) 1.56 1.85 1.07 0.62
------- ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income -- -- -- -- --
From net realized gain
on investments (1.14) (0.28) -- -- --
------- ------ ------ ------ ------
Total dividends and
distributions (1.14) (0.28) -- -- --
------- ------ ------ ------ ------
Net asset value at end of
period $ 8.59 $15.07 $13.79 $11.94 $10.87
======= ====== ====== ====== ======
Total investment return
(c)(e) (37.84%) 11.47% 15.49% 9.84% 6.05%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) (0.30%) (0.32%) (0.09%) (0.08%)(b) (0.80%)
Net expenses 2.10% 2.04% 2.05% 2.13% 2.40%
Expenses (before
waiver/reimburse-
ment) 2.27% 2.23% 2.35% 2.47% 2.52%
Portfolio turnover rate 158% 122% 144% 105% 136%
Net assets at end of
period (in 000's) $ 1,611 $3,334 $3,254 $3,045 $2,926
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income and the ratio of net investment income includes $0.03
per share and 0.24%, for Class A, Class B and Class C shares, respectively as
a result of a special one time dividend from Microsoft Corp.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I shares are not subject to
sales charges.
(d) Total return is not annualized.
(e) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
20 MainStay Common Stock Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- ---------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2008 2007 2006 2005 2004
$ 15.07 $ 13.80 $ 11.94 $ 10.87 $ 10.26
------- ------- ------- ------- -------
(0.04) (0.04) (0.01) (0.01)(b) (0.09)
(5.29) 1.59 1.87 1.08 0.70
------- ------- ------- ------- -------
(5.33) 1.55 1.86 1.07 0.61
------- ------- ------- ------- -------
-- -- -- -- --
(1.14) (0.28) -- -- --
------- ------- ------- ------- -------
(1.14) (0.28) -- -- --
------- ------- ------- ------- -------
$ 8.60 $ 15.07 $ 13.80 $ 11.94 $ 10.87
======= ======= ======= ======= =======
(37.77%) 11.39% 15.58% 9.84% 5.95%
(0.30%) (0.31%) (0.05%) (0.08%)(b) (0.80%)
2.10% 2.04% 2.05% 2.13% 2.40%
2.27% 2.23% 2.35% 2.47% 2.52%
158% 122% 144% 105% 136%
$13,212 $33,203 $39,024 $50,815 $53,640
</Table>
<Table>
<Caption>
CLASS I
------------------------------------------------
DECEMBER 28,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
------------------------------------------------
2008 2007 2006 2005
$ 16.19 $ 14.73 $ 12.68 $ 12.25
-------- -------- -------- -------
0.15 0.16 0.17 0.10
(5.73) 1.73 1.99 0.33
-------- -------- -------- -------
(5.58) 1.89 2.16 0.43
-------- -------- -------- -------
(0.15) (0.15) (0.11) --
(1.14) (0.28) -- --
-------- -------- -------- -------
(1.29) (0.43) (0.11) --
-------- -------- -------- -------
$ 9.32 $ 16.19 $ 14.73 $ 12.68
======== ======== ======== =======
(36.92%) 13.03% 17.19% 3.51%(d)
1.16% 1.06% 1.24% 0.94%++
0.62% 0.62% 0.66% 0.76%++
0.80% 0.87% 0.96% 1.10%++
158% 122% 144% 105%
$336,529 $219,460 $133,818 $69,177
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
21
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Common Stock Fund (the "Fund"), a diversified fund.
The Fund currently offers six classes of shares. Class A shares and Class B
shares commenced on June 1, 1998. Class C shares commenced on September 1, 1998.
Class I shares commenced on December 28, 2004. Class R2 shares commenced on
December 14, 2007. Investor Class shares commenced on February 28, 2008.
Investor Class and Class A shares are offered at net asset value per share plus
an initial sales charge. No sales charge applies on investments of $1 million or
more (and certain other qualified purchases) in Investor Class and Class A
shares, but a contingent deferred sales charge is imposed on certain redemptions
of such shares within one year of the date of purchase. Class B shares and Class
C shares are offered without an initial sales charge, although a declining
contingent deferred sales charge may be imposed on redemptions made within six
years of purchase of Class B shares and a 1% contingent deferred sales charge
may be imposed on redemptions made within one year of purchase of Class C
shares. Class I and Class R2 shares are not subject to a sales charge. Depending
upon eligibility, Class B shares convert to either Investor Class or Class A
shares eight years after the date they were purchased. Additionally, depending
upon eligibility, Investor Class shares may convert to Class A shares and Class
A shares may convert to Investor Class shares. The six classes of shares have
the same voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and bear the same conditions except that Class B
and Class C shares are subject to higher distribution fee rates than Investor
Class, Class A and Class R2 shares under a distribution plan pursuant to Rule
12b-1 under the 1940 Act. Class I shares are not subject to a distribution or
service fee. Class R2 shares are authorized to pay to the Manager, as defined in
Note 3, its affiliates, or third-party service providers, as compensation for
services rendered to shareholders of Class R2 shares, a shareholder service fee.
There was no investment activity for Class R2 during the year ended October 31,
2008.
The Fund's investment objective is to seek long-term growth of capital, with
income as a secondary consideration.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Investments
in other mutual funds are valued at their net asset values as of the close of
the New York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor ,as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund did not hold
securities that were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation
22 MainStay Common Stock Fund
established for all entities, including pass-through entities such as the Fund,
a minimum threshold for financial statement recognition of the benefit of
positions taken in filing tax returns (including whether an entity is taxable in
a particular jurisdiction), and requires certain expanded tax disclosures. The
Interpretation became effective for the Fund's 2008 fiscal year, and was applied
to all open tax years as of the date of effectiveness. The Manager, as defined
in Note 3 (A), determined that the adoption of the Interpretation did not have
an impact on the Fund's financial statements upon adoption. The Manager
continually reviews the Fund's tax positions and such conclusions under the
Interpretation based on factors, including, but not limited to, ongoing analyses
of tax laws and regulations and interpretations thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(I) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER. New York Life Investment Management LLC ("NYLIM" or "Manager"), a
registered investment adviser and an indirect wholly-owned subsidiary of New
York Life Insurance Company ("New York Life"), serves as the Fund's Manager,
pursuant to an Amended and Restated Management Agreement ("Management
Agreement"). The Manager provides offices and conducts clerical, recordkeeping
and bookkeeping services, and is responsible for the financial and accounting
records required to be maintained by the Fund. The Manager also pays the
salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. The Fund is
advised by NYLIM directly, without a subadvisor.
Effective August 1, 2008, the Trust, on behalf of the Fund, pays the Manager a
monthly fee for services performed and facilities furnished at an annual rate of
the Fund's average daily net assets as follows: 0.55% on assets up to $500
million, 0.525% on assets from $500 million to $1.0 billion and 0.50% on assets
in excess of $1.0 billion. Prior to August 1, 2008, the Fund was contractually
obligated to pay the Manager at an annual rate of: 0.70% on assets up to $500
million and 0.65% on assets in excess of $500 million. NYLIM had also
contractually agreed to waive a portion of its management fee so that the
management fee was 0.60% on assets up to $500 million and 0.55% on assets in
excess of $500 million. This waiver may not be recouped by NYLIM.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage and other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.40%; Class A, 1.04%; Class B,
2.15%; Class C, 2.15%; Class I, 0.62%; and Class R2, 0.97%. This expense
limitation may be modified or terminated only with the approval of the Board of
Trustees. NYLIM may recoup the amount of certain management fee waivers or
expense reimbursements from the Fund pursuant to the agreement if such action
does not cause the Fund to exceed the existing expense limitation and the
recoupment is made within three years after the year in which NYLIM incurred the
expense.
Prior to April 1, 2008, NYLIM had a written expense limitation agreement under
which it had agreed to waive a portion of the Fund's management fee or reimburse
the expenses of the appropriate class of the Fund so that the class' total
ordinary operating expenses would not exceed the following percentages of
average daily net assets for each class: Class A, 1.30%; Class B, 2.05%; Class
C, 2.05%; and Class I, 0.62%. Prior to April 1, 2008, NYLIM also had a written
expense limitation agreement that set the expense limit for Class R2 share at
0.97%.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $2,965,137 and waived expenses in the amount of $779,738, of which
$440,071 is subject to recoupment.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2010 2011 TOTAL
$550,657 $348,057 $440,071 $1,338,785
- -----------------------------------------------
</Table>
The Fund had $124,534 of waived fees for which the recoupment period expired
during the year ended October 31, 2008.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
these services
24 MainStay Common Stock Fund
provided to the Fund by the Manager amounted to $54,003 for the period November
1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to each class of shares, other than Class I shares, has adopted
distribution plans (the "Plans") in accordance with the provisions of Rule 12b-1
under the 1940 Act.
Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor
receives a monthly distribution fee from the Fund at an annual rate of 0.25% of
the average daily net assets of the Fund's Investor Class, Class A and Class R2
shares, which is an expense of the Investor Class, Class A and Class R2 shares
of the Fund for distribution or service activities as designated by the
Distributor. Pursuant to the Class B and Class C Plans, the Fund pays the
Distributor a monthly distribution fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Plans provide that the
Class B and Class C shares of the Fund also incur a service fee at the annual
rate of 0.25% of the average daily net asset value of the Class B and Class C
shares of the Fund. Class I shares are not subject to a distribution or service
fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R2 shares, the
Manager has agreed to provide, through its affiliates or independent third
parties, various shareholder and administrative support services to shareholders
of the Class R2 shares. For its services, the Manager is entitled to a
Shareholder Service Fee accrued daily and paid monthly at an annual rate of
0.10% of the average daily net assets attributable to the Class R2 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were $3,460
and $5,693, respectively, for the year ended October 31, 2008 . The Fund was
also advised that the Distributor retained contingent deferred sales charges on
redemptions of Class A, Class B and Class C shares of $3,495, $32,582 and $731,
respectively, for the year ended October 31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $413,540.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 201 0.0%++
- -------------------------------------------------
Class C 101 0.0++
- -------------------------------------------------
Class I 1,729 0.0++
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $16,718.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$4,054,109 $(37,722,517) $-- $(117,296,035) $(150,964,443)
- -----------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals.
mainstayinvestments.com 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$97,097 $(97,098) $1
- -----------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to distribution
redesignations and prior year adjustments.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $37,722,517 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2015 $37,723
- ---------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007 shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Ordinary Income $11,669,581 $1,584,638
Long-Term Capital Gains 12,332,149 4,214,708
- -----------------------------------------------------
$24,001,730 $5,799,346
- -----------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $741,928 and $679,149, respectively.
NOTE 8--CAPITAL SHARES TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 342,116 $ 4,510,559
Shares redeemed (201,860) (2,437,748)
-----------------------
Net increase in shares
outstanding before
conversion 140,256 2,072,811
Shares converted into
Investor Class (See Note
1) 1,229,687 15,419,969
Shares converted from
Investor Class (See Note
1) (95,565) (1,112,371)
-----------------------
Net increase 1,274,378 $16,380,409
=======================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
26 MainStay Common Stock Fund
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 356,197 $ 4,154,902
Shares issued to
shareholders in
reinvestment of dividends
and distributions 234,231 3,166,810
Shares redeemed (1,328,534) (16,819,357)
-------------------------
Net decrease in shares
outstanding before
conversion (738,106) (9,497,645)
Shares converted into Class
A
(See Note 1) 338,378 4,348,759
Shares converted from Class
A
(See Note 1) (1,037,546) (12,990,210)
-------------------------
Net decrease (1,437,274) $(18,139,096)
=========================
Year ended October 31,
2007:
Shares sold 431,781 $ 6,606,649
Shares issued to
shareholders in
reinvestment of dividends
and distributions 58,387 861,416
Shares redeemed (740,583) (11,368,187)
-------------------------
Net decrease in shares
outstanding before
conversion (250,415) (3,900,122)
Shares converted from Class
B (See Note 1) 381,870 5,898,019
-------------------------
Net increase 131,455 $ 1,997,897
=========================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 161,297 $ 1,873,691
Shares issued to
shareholders in
reinvestment of dividends
and distributions 189,788 2,398,897
Shares redeemed (549,285) (6,440,645)
----------------------
Net decrease in shares
outstanding before
conversion (198,200) (2,168,057)
Shares converted from Class
B
(See Note 1) (467,311) (5,666,147)
----------------------
Net decrease (665,511) $(7,834,204)
======================
Year ended October 31,
2007:
Shares sold 284,510 $ 4,053,162
Shares issued to
shareholders in
reinvestment of dividends
and distributions 54,270 750,547
Shares redeemed (558,371) (7,998,304)
----------------------
Net increase (decrease) in
shares outstanding before
conversion (219,591) (3,194,595)
Shares reacquired upon
conversion into Class A
(See Note 1) (406,641) (5,898,019)
----------------------
Net decrease (626,232) $(9,092,614)
======================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 36,057 $ 448,663
Shares issued to
shareholders in
reinvestment of dividends
and distributions 15,134 191,158
Shares redeemed (85,016) (1,008,279)
---------------------
Net decrease (33,825) $ (368,458)
=====================
Year ended October 31,
2007:
Shares sold 51,132 $ 735,165
Shares issued to
shareholders in
reinvestment of dividends
and distributions 3,785 52,354
Shares redeemed (69,672) (1,006,435)
---------------------
Net decrease (14,755) $ (218,916)
=====================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 14,609,539 $ 174,073,716
Shares issued in
connection with
acquisition of McMorgan
Equity Investment Fund 14,658,946 199,326,482
Shares issued to
shareholders in
reinvestment of
dividends and
distributions 1,326,247 17,957,582
Shares redeemed (8,061,915) (104,196,827)
--------------------------
Net increase 22,532,817 $ 287,160,953
==========================
Year ended October 31,
2007:
Shares sold 4,918,331 $ 75,162,121
Shares issued to
shareholders in
reinvestment of
dividends and
distributions 274,421 4,065,954
Shares redeemed (716,824) (11,068,409)
--------------------------
Net increase 4,475,928 $ 68,159,666
==========================
</Table>
NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
measurements reported in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
NOTE 10--FUND ACQUISITION:
On November 27, 2007, the Fund acquired the assets, including portfolio
investments, and assumed the identified liabilities of McMorgan Equity
Investment Fund, a series of the McMorgan Trust.
This reorganization was completed after shareholders approved the plan on
November 20, 2007. The aggregate net assets of the Fund immediately before the
acquisition were $286,164,279 and the combined net assets after the acquisition
were $485,490,761.
The acquisition was accomplished by a tax-free exchange of the following:
<Table>
<Caption>
SHARES VALUE
McMorgan Equity Investment
Fund
- ------------------------------------------------------
Class McMorgan 7,437,716 $186,185,373
- ------------------------------------------------------
Class Z 525,373 13,141,109
- ------------------------------------------------------
</Table>
In exchange for the McMorgan Equity Investment Fund shares and net assets, the
Fund issued 14,658,946 Class I shares.
McMorgan Equity Investment Fund's net assets after adjustments for any permanent
book-to-tax differences at the acquisition date were as follows, which include
the following amounts of capital stock, unrealized appreciation/ depreciation
and accumulated net realized loss:
<Table>
<Caption>
ACCUMULATED UNDISTRIBUTED
CAPITAL UNREALIZED NET REALIZED NET INVESTMENT TOTAL
PAID-IN APPRECIATION LOSS INCOME NET ASSETS
McMorgan Equity Investment Fund $197,202,820 $3,381,822 $(1,287,026) $28,866 $199,326,482
- ----------------------------------------------------------------------------------------------------------------
</Table>
NOTE 11--SUBSEQUENT EVENT:
As of January 1, 2009, the portfolio managers who manage the day-to-day
investment operations of the Fund will transition from a division within NYLIM,
currently referred to as NYLIM Equity Investors or Equity Investors Group, into
a wholly-owned subsidiary of NYLIM Holdings LLC. The new legal entity will be
named Madison Square Investors LLC ("MSI"). The creation of MSI is not expected
to impact the portfolio management team or investment strategy of the Fund. The
Fund's Board of Directors (the "Board") approved the appointment of MSI as a
subadvisor to the Fund at a meeting on September 25, 2008. The Board also
approved a new Subadvisory Agreement between NYLIM and MSI. There will be no
change in the management fees paid by the Fund as a result of this transition.
28 MainStay Common Stock Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Common Stock Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2008, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year 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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Common Stock Fund of The MainStay Funds as of October 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
mainstayinvestments.com 29
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Common Stock Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management Agreement
(the "Agreement") for the Fund for one year.
In reaching its decision to approve the Agreement, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management fee and
ordinary operating expenses. The Board also requested and received information
on the profitability of the Fund to NYLIM and its affiliates, discussed in
greater detail below, and responses to a comprehensive list of questions
encompassing a variety of topics prepared on behalf of the Board by independent
legal counsel to the Board.
In determining to approve the Agreement for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM; (ii) the investment
performance of the Fund; (iii) the costs of the services to be provided, and
profits to be realized, by NYLIM and its affiliates from NYLIM's relationship
with the Fund; (iv) the extent to which economies of scale may be realized as
the Fund grows, and the extent to which economies of scale may benefit Fund
investors; and (v) the reasonableness of the Fund's management fee level and
overall total ordinary operating expenses, particularly as compared to similar
portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreement was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreement were based also
on the Board's consideration of the Agreement in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreement is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM
In considering the approval of the Agreement, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles. The Board considered
NYLIM's performance in fulfilling its responsibilities for overseeing the Fund's
legal and compliance environment and for implementing Board directives as they
relate to the Fund. The Board considered the scope and quality of NYLIM's
services provided to the Fund's shareholders (including services provided
through its affiliate, NYLIM Service Company LLC), such as the more extensive
servicing needs of New York Life agents and reputation as a high-quality
provider of shareholder services, which has been recognized by independent
third-parties on numerous occasions. The Board noted the role that the MainStay
Family of Funds historically has played in serving the investment needs of New
York Life Insurance Company policyholders, who often maintain smaller account
balances than other retail investors. The Board acknowledged that it had
approved NYLIM's recommendation to create a new "Investor Class" of shares
designed principally to address the higher shareholder-servicing costs typically
associated with smaller shareholder accounts. The Board considered the
experience of senior personnel at NYLIM providing management and
30 MainStay Common Stock Fund
administrative services to the Fund, as well as NYLIM's reputation and financial
condition. The Board also reviewed NYLIM's willingness to invest in personnel
designed to benefit the Fund, and that NYLIM also is responsible for paying all
of the salaries and expenses for the Fund's officers. The Board further
considered NYLIM's track record and experience in providing investment advisory
services to the Fund. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreement, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM concerning Fund investment
performance, as well as discussions between the Fund's portfolio managers and
the Board that occurred at meetings from time to time throughout the year and in
previous years. In considering the Fund's investment performance, the Board
focused principally on the Fund's long-term performance track record, as opposed
to the Fund's short-term investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreement, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreement and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund. The Board acknowledged that NYLIM must be in a position to pay
and retain experienced professional personnel to provide services to the Fund,
and that NYLIM's ability to maintain a strong financial position is important in
order for NYLIM to continue to provide high-quality ongoing services to the Fund
and its shareholders. The Board noted, for example, increased costs borne by
NYLIM and its affiliates due to new and ongoing regulatory and compliance
requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM from legally permitted "soft-dollar" arrangements
by which brokers provide research and other services to NYLIM in exchange for
commissions paid by the Fund with respect to trades on the Fund's portfolio
securities. The Board also considered that, in addition to fees earned by NYLIM
for managing the Fund, NYLIM affiliates also earn revenues from serving the Fund
in various other capacities, including as transfer agent and distributor. The
information provided to the Board indicated that the profitability to NYLIM and
its affiliates arising directly from these other arrangements was not excessive.
The Board noted that, although it assessed the overall profitability of the Fund
to NYLIM and its affiliates as part of the annual contract review process, when
considering the
mainstayinvestments.com 31
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreement, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreement, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreement, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT FEE AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreement and the Fund's total ordinary operating expenses.
The Board considered information provided by NYLIM on the fees that NYLIM
charges to other investment advisory clients, including institutional separate
accounts and other funds with similar investment objectives as the Fund. In this
regard, the Board took into account the relative scope of services provided to
the Fund as opposed to NYLIM's other investment advisory clients. The Board also
considered comparative data provided by Strategic Insight on the fees and
expense ratios charged by similar mutual funds managed by other investment
advisers. This comparative information assisted the Board in evaluating the
reasonableness of the Fund's management fee when compared to similar fees
charged by NYLIM to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
In assessing the reasonableness of the Fund's management fee and total ordinary
operating expenses, the Board took note of any fee and expense arrangements that
had been negotiated by the Board with NYLIM in recent years and observed that
NYLIM has subsidized the total ordinary operating expenses of the Fund and Fund
share classes through the imposition of expense limitation arrangements that may
be modified only with the prior approval of the Board.
Based on these considerations, the Board concluded that the Fund's management
fee and total ordinary operating expenses were within a range that is
competitive and, within the context of the Board's overall conclusions regarding
the Agreement, supports the conclusion that these fees and expenses are
reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreement for one year.
32 MainStay Common Stock Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $12,332,149.
For the fiscal year ended October 31, 2008, the Fund designates approximately
$6,727,183 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividend paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 0.2% to arrive at the amount eligible for qualified
interest income and 39.6% for the corporate dividends received deduction.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
mainstayinvestments.com 33
TRUSTEES AND OFFICERS
The Trustees oversee the Fund and the Manager. Each Trustee serves until his or
her successor is elected and qualified or until his or her resignation, death or
removal. The Retirement Policy provides that a Trustee shall tender his or her
resignation upon reaching age 72. A Trustee reaching the age of 72 may continue
for additional one-year periods with the approval of the Board's Nominating and
Governance Committee, except that no Trustee shall serve on the Board past his
or her 75th birthday. Officers serve a term of one year and are elected annually
by the Trustees. The business address of each Trustee and officer listed below
is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
34 MainStay Common Stock Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. Trustee since Capital Management; since 2007 (3 funds);
NOLAN, 2007 President--Shields/Alli- Director, Eclipse Funds
JR. ance, Alliance Capital Inc. since 2007 (22
11/16/46 Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 35
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
Expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios); since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
36 MainStay Common Stock Fund
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 37
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A014501 (RECYCLE LOGO) MS308-08 MSCS11-12/08
21
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP GROWTH FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP GROWTH FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 14
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 20
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 26
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 27
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 31
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 31
- ---------------------------------------------
TRUSTEES AND OFFICERS 32
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (43.39%) (6.10%) 0.82%
Excluding sales charges (40.09) (5.03) 1.40
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP GROWTH RUSSELL 2000(R)
FUND GROWTH INDEX
-------------- ---------------
10/31/98 9450 10000
16561 12928
21188 15018
12702 10287
10531 8068
14048 11825
14226 12478
15593 13840
17169 16202
18119 18912
10/31/08 10854 11750
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (43.39%) (6.10%) 0.82%
Excluding sales charges (40.09) (5.03) 1.40
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP GROWTH RUSSELL 2000(R)
FUND GROWTH INDEX
-------------- ---------------
10/31/98 23625 25000
41401 32320
52970 37545
31754 25717
26327 20171
35120 29562
35564 31196
38982 34600
42922 40505
45296 47280
10/31/08 27136 29376
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (43.59%) (6.14%) 0.61%
Excluding sales charges (40.62) (5.76) 0.61
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP GROWTH RUSSELL 2000(R)
FUND GROWTH INDEX
-------------- ---------------
10/31/98 10000 10000
17386 12928
22070 15018
13124 10287
10807 8068
14299 11825
14376 12478
15640 13840
17092 16202
17901 18912
10/31/08 10630 11750
</Table>
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class
C shares are sold with no initial sales charge, are subject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 1.00%. Class I shares are sold with no initial sales charge or CDSC, have
no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Performance figures reflect certain fee waivers
and/or expense limitations, without which total returns may have been lower.
These fee waivers and/or expense limitations are contractual and may be
modified or terminated only with the approval of the Board of Trustees. The
Manager may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the contract if such action does not
cause the Fund to exceed existing expense limitations and the recoupment is
made within three years after the year in which the Manager incurred the
expense.
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (41.19%) (5.74%) 0.62%
Excluding sales charges (40.59) (5.74) 0.62
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP GROWTH RUSSELL 2000(R)
FUND GROWTH INDEX
-------------- ---------------
10/31/98 10000 10000
17386 12928
22070 15018
13124 10287
10807 8068
14299 11825
14376 12478
15640 13840
17092 16202
17912 18912
10/31/08 10641 11750
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE
ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------
(39.78%) (4.63%) 1.73%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP GROWTH RUSSELL 2000(R)
FUND GROWTH INDEX
-------------- ---------------
10/31/98 10000 10000
17568 12928
22534 15018
13542 10287
11256 8068
15053 11825
15281 12478
16792 13840
18572 16202
19720 18912
10/31/08 11875 11750
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
Russell 2000(R) Growth Index(4) (37.87%) (0.13%) 1.63%
Average Lipper small-cap growth fund(5) (42.01) (1.75) 3.60
</Table>
2. Performance figures for Investor Class shares, first offered to the public on
February 28, 2008, include the historical performance of Class A shares
through February 27, 2008, adjusted for differences in certain contractual
expenses and fees. Unadjusted, the performance shown for Investor Class
shares might have been lower.
3. Performance figures for Class I shares, first offered to the public on May
31, 2006, include the historical performance of Class A shares through May
30, 2006, adjusted for differences in certain contractual expenses and fees.
Class A shares were also introduced on June 1, 1998. Unadjusted, the
performance shown for Class I shares might have been lower.
4. The Russell 2000(R) Growth Index is an unmanaged index that measures the
performance of those Russell 2000(R) companies with higher price-to-book
ratios and higher forecasted growth values. The Russell 2000(R) Index is an
unmanaged index that measures the performance of the 2,000 smallest companies
in the Russell 3000(R) Index, which, in turn, is an unmanaged index that
measures the performance of the 3,000 largest U.S. companies based on total
market capitalization. Results assume the reinvestment of all income and
capital gains. The Russell 2000(R) Growth Index is considered to be the
Fund's broad-based securities-market index for comparison purposes. An
investment cannot be made directly in an index.
5. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND GRAPHS
AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Small Cap Growth Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY SMALL CAP GROWTH FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $702.20 $6.76 $1,017.20 $ 8.01
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $702.70 $6.33 $1,017.70 $ 7.51
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $699.00 $9.95 $1,013.40 $11.79
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $699.70 $9.95 $1,013.40 $11.79
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $704.30 $3.98 $1,020.50 $ 4.72
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.58% for Investor Class, 1.48% for Class A, 2.33% for Class B, 2.33% for
Class C and 0.93% for Class I) multiplied by the average account value over
the period, divided by 366 and multiplied by 184 (to reflect the one-half
year period). The table above represents actual expenses incurred during the
one-half year period and does not take into account the Fund's written
expense limitation agreement.
mainstayinvestments.com 7
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2008
<Table>
<Caption>
Software 8.2%
Energy Equipment & Services 5.2
Electronic Equipment & Instruments 5.1
Health Care Equipment & Supplies 4.4
Biotechnology 4.3
Health Care Providers & Services 4.3
Semiconductors & Semiconductor
Equipment 4.3
Commercial Services & Supplies 4.0
Specialty Retail 3.6
Machinery 3.4
Internet Software & Services 3.3
Aerospace & Defense 3.1
Personal Products 2.8
Capital Markets 2.6
Textiles, Apparel & Luxury Goods 2.5
Construction & Engineering 2.3
Diversified Telecommunication
Services 2.3
Oil, Gas & Consumable Fuels 2.1
Hotels, Restaurants & Leisure 1.8
Road & Rail 1.6
Professional Services 1.5
Air Freight & Logistics 1.4
Electrical Equipment 1.3
Food Products 1.3
Household Products 1.3
IT Services 1.3
Wireless Telecommunication Services 1.3
Consumer Finance 1.2
Distributors 1.1
Diversified Consumer Services 1.1
Multiline Retail 1.1
Containers & Packaging 0.9
Life Sciences Tools & Services 0.7
Internet & Catalog Retail 0.6
Trading Companies & Distributors 0.5
Beverages 0.4
Pharmaceuticals 0.3
Chemicals 0.3
Exchange Traded Fund 1.0
Short-Term Investment 12.8
Liabilities in Excess of Cash and
Other Assets (2.6)
-----
100.0%
=====
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. Chattem, Inc.
2. NTELOS Holdings Corp.
3. FLIR Systems, Inc.
4. optionsXpress Holdings, Inc.
5. Alliant Techsystems, Inc.
6. Hittite Microwave Corp.
7. Equinix, Inc.
8. Genesee & Wyoming, Inc., Class A
9. Waste Connections, Inc.
10. Quanta Services, Inc.
</Table>
8 MainStay Small Cap Growth Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS EDMUND C. SPELMAN AND DENISE E.
HIGGINS, CFA, OF MACKAY SHIELDS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY SMALL CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Small Cap Growth Fund returned -40.09% for
Investor Class shares,(1) -40.09% for Class A shares, -40.62% for Class B shares
and -40.59% for Class C shares for the 12 months ended October 31, 2008. Over
the same period, Class I shares returned -39.78%. All share classes outperformed
the -42.01% return of the average Lipper(2) small-cap growth fund and
underperformed the -37.87% return of the Russell 2000(R) Growth Index(3) for the
12 months ended October 31, 2008. The Russell 2000(R) Growth Index is the Fund's
broad-based securities-market index. See pages 5 and 6 for Fund returns with
sales charges.
WHICH SECTORS MADE THE STRONGEST CONTRIBUTIONS TO THE FUND'S RELATIVE
PERFORMANCE DURING THE REPORTING PERIOD AND WHICH SECTORS DETRACTED THE MOST?
Even in a broadly declining market, some sectors and securities performed better
than others. During the 12-month reporting period, favorable stock selection in
the telecommunication services sector helped strengthen the Fund's performance
relative to the Russell 2000(R) Growth Index. Overweight positions in the
consumer staples, energy and industrials sectors also helped, as did an
underweight position in information technology stocks.
On the other hand, stock selection in energy, industrials and financials
detracted from the Fund's relative performance during the reporting period. An
underweight position in health care also detracted from the Fund's performance
in relation to its primary benchmark.
WHAT WERE SOME OF THE FUND'S STOCK-SPECIFIC SUCCESS STORIES DURING THE REPORTING
PERIOD?
Oil services company W-H Energy Services was among the Fund's top performers.
The company's share price rose sharply following a takeover offer from Smith
International. Home health care provider Amedisys announced several
acquisitions, which enhanced its earnings growth and helped offset difficulties
in the reimbursement environment. STEC, a manufacturer of memory and storage
solutions for the technology industry, benefited from the company's introduction
of a new high-end flash drive. We sold the Fund's positions in W-H Energy
Services and STEC during the reporting period.
WHICH INDIVIDUAL STOCKS LOST GROUND DURING THE REPORTING PERIOD?
The Fund's weakest performers during the reporting period included OYO Geospace,
NETGEAR and Diodes, each of which reported disappointing earnings results.
Seismic data-services provider OYO Geospace was hurt by rising costs and weaker-
than-expected sales. NETGEAR reported disappointing sales of its home and small-
business networking equipment, and aggressive pricing by competitors hurt
NETGEAR's margins. Semiconductor manufacturer Diodes suffered from weakness in
its major computer and consumer end-markets. We sold the Fund's positions in OYO
Geospace and NETGEAR during the reporting period.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
The Fund established new positions in discount retailer Dollar Tree, personal
products manufacturer Chattem and synthetic tissue manufacturer Lifecell. During
the reporting period, Lifecell received a takeover offer and was subsequently
sold by the Fund. Each of these purchases contributed positively to the Fund's
performance during the reporting period.
In addition to the previously mentioned sales, we eliminated the Fund's
positions in online travel services firm Travelzoo, specialty mattress provider
TempurPedic International and semiconductor manufacturing company Ultra Clean
Holdings. All three of these companies have since experienced disappointing
earnings or unfavorable corporate developments, and the sales helped the Fund's
relative results.
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. The principal risk of
growth stocks is that investors expect growth companies to increase their
earnings at a certain rate that is generally higher than the rate expected for
nongrowth companies. If these expectations are not met, the market price of the
stock may decline significantly, even if earnings showed an absolute increase.
Growth company stocks also typically lack the dividend yield that can cushion
stock prices in market downturns.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 6 for more information about Lipper Inc.
3. See footnote on page 6 for more information on the Russell 2000(R) Growth
Index.
mainstayinvestments.com 9
HOW DID THE FUND ADJUST ITS SECTOR WEIGHTINGS DURING THE REPORTING PERIOD?
During the 12 months ended October 31, 2008, we increased the Fund's weightings
in consumer staples, health care, industrials and information technology. Over
the same period, we decreased the Fund's weightings in energy, financials and
materials.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2008, the Fund was overweight relative to the Russell 2000(R)
Growth Index in consumer staples, information technology, industrials and
telecommunication services. On the same date, the Fund was underweight in health
care, financials and materials. At the end of the reporting period, the Fund had
no representation in utilities and its weightings in consumer discretionary and
energy were similar to the corresponding sector weightings in the Index. On a
cumulative basis, sector positioning had a positive impact on the Fund's
relative performance during the reporting period.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Small Cap Growth Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 88.8%+
- ----------------------------------------------------------------
AEROSPACE & DEFENSE 3.1%
V Alliant Techsystems, Inc.
(a) 18,900 $ 1,560,006
Triumph Group, Inc. 27,200 1,192,992
-------------
2,752,998
-------------
AIR FREIGHT & LOGISTICS 1.4%
HUB Group, Inc. Class A (a) 40,600 1,276,870
-------------
BEVERAGES 0.4%
Central European
Distribution Corp. (a) 12,200 351,238
-------------
BIOTECHNOLOGY 4.3%
Alexion Pharmaceuticals,
Inc. (a) 27,100 1,104,325
BioMarin Pharmaceuticals,
Inc. (a) 25,300 463,496
Myriad Genetics, Inc. (a) 16,400 1,034,676
Onyx Pharmaceuticals, Inc.
(a) 18,800 507,224
United Therapeutics Corp.
(a) 8,400 732,732
-------------
3,842,453
-------------
CAPITAL MARKETS 2.6%
Affiliated Managers Group,
Inc. (a) 11,500 533,370
V optionsXpress Holdings,
Inc. 102,600 1,822,176
-------------
2,355,546
-------------
CHEMICALS 0.3%
CF Industries Holdings, Inc. 4,000 256,760
-------------
COMMERCIAL SERVICES & SUPPLIES 4.0%
Copart, Inc. (a) 27,200 949,280
Sykes Enterprises, Inc. (a) 79,500 1,268,820
V Waste Connections, Inc.
(a) 42,200 1,428,470
-------------
3,646,570
-------------
CONSTRUCTION & ENGINEERING 2.3%
Layne Christensen Co. (a) 25,220 662,782
V Quanta Services, Inc. (a) 72,000 1,422,720
-------------
2,085,502
-------------
CONSUMER FINANCE 1.2%
Cash America International,
Inc. 30,800 1,089,396
-------------
CONTAINERS & PACKAGING 0.9%
Crown Holdings, Inc. (a) 42,000 847,560
-------------
DISTRIBUTORS 1.1%
LKQ Corp. (a) 88,500 1,012,440
-------------
DIVERSIFIED CONSUMER SERVICES 1.1%
Capella Education Co.(a) 20,600 976,440
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 2.3%
V NTELOS Holdings Corp. 78,300 2,035,800
-------------
ELECTRICAL EQUIPMENT 1.3%
II-VI, Inc. (a) 42,400 1,191,016
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 5.1%
Anixter International, Inc.
(a) 23,900 803,279
V FLIR Systems, Inc. (a) 60,600 1,945,260
Itron, Inc. (a) 15,700 761,136
Mettler-Toledo
International, Inc. (a) 13,800 1,056,252
-------------
4,565,927
-------------
ENERGY EQUIPMENT & SERVICES 5.2%
Atwood Oceanics, Inc. (a) 44,300 1,217,364
Dawson Geophysical Co.(a) 14,600 358,138
Dril-Quip, Inc. (a) 18,600 459,420
Gulfmark Offshore, Inc. (a) 25,600 947,200
Hornbeck Offshore Services,
Inc. (a) 25,800 614,040
Lufkin Industries, Inc. 10,300 538,896
NATCO Group, Inc. Class A
(a) 27,200 575,008
-------------
4,710,066
-------------
FOOD PRODUCTS 1.3%
Sanderson Farms, Inc. 36,000 1,123,920
-------------
HEALTH CARE EQUIPMENT & SUPPLIES 4.4%
Gen-Probe, Inc. (a) 13,600 640,016
Hologic, Inc. (a) 16,500 201,960
Immucor, Inc. (a) 49,850 1,323,517
NuVasive, Inc. (a) 20,500 965,345
Wright Medical Group, Inc.
(a) 36,700 850,706
-------------
3,981,544
-------------
HEALTH CARE PROVIDERS & SERVICES 4.3%
Amedisys, Inc. (a) 16,100 908,201
Bio-Reference Laboratories,
Inc. (a) 49,800 1,224,582
Genoptix, Inc. (a) 26,100 872,784
Healthspring, Inc. (a) 53,200 878,864
-------------
3,884,431
-------------
HOTELS, RESTAURANTS & LEISURE 1.8%
Bally Technologies, Inc. (a) 16,300 361,045
Panera Bread Co. Class A (a) 12,300 554,976
WMS Industries, Inc. (a) 29,300 732,500
-------------
1,648,521
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2008,
excluding short-term investment. May be subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
HOUSEHOLD PRODUCTS 1.3%
Church & Dwight Co., Inc. 19,700 $ 1,164,073
-------------
INTERNET & CATALOG RETAIL 0.6%
Priceline.com, Inc. (a) 10,400 547,352
-------------
INTERNET SOFTWARE & SERVICES 3.3%
Ariba, Inc. (a) 43,600 466,520
Bankrate, Inc. (a) 14,800 487,068
V Equinix, Inc. (a) 23,600 1,473,112
Omniture, Inc. (a) 26,800 308,200
Vocus, Inc. (a) 14,200 238,986
-------------
2,973,886
-------------
IT SERVICES 1.3%
CyberSource Corp. (a) 98,100 1,191,915
-------------
LIFE SCIENCES TOOLS & SERVICES 0.7%
ICON PLC, Sponsored ADR
(a)(b) 14,600 370,402
PAREXEL International Corp.
(a) 28,400 295,360
-------------
665,762
-------------
MACHINERY 3.4%
Actuant Corp. Class A 54,500 977,185
Bucyrus International, Inc. 21,600 521,208
Gardner Denver, Inc. (a) 21,100 540,582
Kaydon Corp. 12,700 424,307
Middleby Corp. (The) (a) 14,300 577,577
-------------
3,040,859
-------------
MULTILINE RETAIL 1.1%
Dollar Tree, Inc. (a) 26,200 996,124
-------------
OIL, GAS & CONSUMABLE FUELS 2.1%
Comstock Resources, Inc. (a) 7,900 390,418
Mariner Energy, Inc. (a) 33,300 479,187
Penn Virginia Corp. 8,900 330,813
Swift Energy Co. (a) 22,600 725,008
-------------
1,925,426
-------------
PERSONAL PRODUCTS 2.8%
V Chattem, Inc. (a) 33,500 2,534,945
-------------
PHARMACEUTICALS 0.3%
Auxilium Pharmaceuticals,
Inc. (a) 13,400 263,310
-------------
PROFESSIONAL SERVICES 1.5%
FTI Consulting, Inc. (a) 23,400 1,363,050
-------------
ROAD & RAIL 1.6%
V Genesee & Wyoming, Inc.
Class A (a) 43,600 1,454,060
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 4.3%
Diodes, Inc. (a) 70,675 698,269
V Hittite Microwave Corp.
(a) 45,500 1,491,035
Microsemi Corp. (a) 54,100 1,176,134
Monolithic Power Systems,
Inc. (a) 15,100 256,549
Tessera Technologies, Inc.
(a) 14,900 257,472
-------------
3,879,459
-------------
SOFTWARE 8.2%
ANSYS, Inc. (a) 44,500 1,274,035
Informatica Corp. (a) 67,500 948,375
MICROS Systems, Inc. (a) 56,200 957,086
Parametric Technology Corp.
(a) 32,100 416,979
Progress Software Corp. (a) 33,800 775,372
Quality Systems, Inc. 29,000 1,116,210
Solera Holdings, Inc. (a) 39,800 990,622
Sybase, Inc. (a) 35,100 934,713
-------------
7,413,392
-------------
SPECIALTY RETAIL 3.6%
Aeropostale, Inc. (a) 44,400 1,074,924
Dick's Sporting Goods, Inc.
(a) 19,300 295,676
Guess?, Inc. 19,700 428,869
Gymboree Corp. (The) (a) 33,200 858,552
PetSmart, Inc. 29,300 576,917
-------------
3,234,938
-------------
TEXTILES, APPAREL & LUXURY GOODS 2.5%
Fossil, Inc. (a) 25,100 455,565
Phillips-Van Heusen Corp. 28,600 700,986
Warnaco Group, Inc. (The)
(a) 38,200 1,138,742
-------------
2,295,293
-------------
TRADING COMPANIES & DISTRIBUTORS 0.5%
Interline Brands, Inc. (a) 41,800 444,752
-------------
WIRELESS TELECOMMUNICATION SERVICES 1.3%
SBA Communications Corp.
Class A (a) 54,200 1,137,658
-------------
Total Common Stocks
(Cost $101,489,227) 80,161,252
-------------
EXCHANGE TRADED FUND 1.0% (C)
- ----------------------------------------------------------------
iShares Russell 2000 Growth
Index Fund 16,600 919,474
-------------
Total Exchange Traded Fund
(Cost $868,464) 919,474
-------------
</Table>
12 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM INVESTMENT 12.8%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT 12.8%
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$11,586,723
(Collateralized by Federal
Home Loan Bank Security
with a rate of 2.67% and a
maturity date of 3/4/09,
with a
Principal Amount of
$11,790,000 and a
Market Value of
$11,819,475) $11,586,626 $11,586,626
-------------
Total Short-Term Investment
(Cost $11,586,626) 11,586,626
-------------
Total Investments
(Cost $113,944,317) (d) 102.6% 92,667,352
Liabilities in Excess of
Cash and Other Assets (2.6) (2,372,508)
----- ------------
Net Assets 100.0% $ 90,294,844
===== ============
</Table>
<Table>
(a) Non-income producing security.
(b) ADR--American Depositary Receipt.
(c) Exchange Traded Fund--represents a basket
of securities that are traded on an
exchange.
(d) At October 31, 2008, cost is $114,127,423
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 2,065,411
Gross unrealized depreciation (23,525,482)
------------
Net unrealized depreciation $(21,460,071)
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $102,357,691) $ 81,080,726
Repurchase agreement, at value
(identified cost $11,586,626) 11,586,626
Receivables:
Investment securities sold 866,543
Fund shares sold 44,255
Dividends and interest 6,020
Other assets 33,524
-------------
Total assets 93,617,694
-------------
LIABILITIES:
Payables:
Investment securities purchased 2,888,732
Transfer agent (See Note 3) 140,029
Fund shares redeemed 126,890
Shareholder communication 64,046
NYLIFE Distributors (See Note 3) 38,615
Professional fees 25,720
Manager (See Note 3) 25,107
Custodian 9,101
Trustees 384
Accrued expenses 4,226
-------------
Total liabilities 3,322,850
-------------
Net assets $ 90,294,844
=============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 89,242
Additional paid-in capital 217,145,898
-------------
217,235,140
Accumulated net realized loss on
investments (105,663,331)
Net unrealized depreciation on
investments (21,276,965)
-------------
Net assets $ 90,294,844
=============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 28,512,717
=============
Shares of beneficial interest
outstanding 2,742,611
=============
Net asset value per share
outstanding $ 10.40
Maximum sales charge (5.50% of
offering price) 0.61
-------------
Maximum offering price per share
outstanding $ 11.01
=============
CLASS A
Net assets applicable to
outstanding shares $ 27,388,205
=============
Shares of beneficial interest
outstanding 2,633,952
=============
Net asset value per share
outstanding $ 10.40
Maximum sales charge (5.50% of
offering price) 0.61
-------------
Maximum offering price per share
outstanding $ 11.01
=============
CLASS B
Net assets applicable to
outstanding shares $ 28,207,057
=============
Shares of beneficial interest
outstanding 2,940,071
=============
Net asset value and offering price
per share outstanding $ 9.59
=============
CLASS C
Net assets applicable to
outstanding shares $ 2,238,124
=============
Shares of beneficial interest
outstanding 233,267
=============
Net asset value and offering price
per share outstanding $ 9.59
=============
CLASS I
Net assets applicable to
outstanding shares $ 3,948,741
=============
Shares of beneficial interest
outstanding 374,276
=============
Net asset value and offering price
per share outstanding $ 10.55
=============
</Table>
14 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 314,100
Income from securities
loaned--net 255,418
Interest 146,333
------------
Total income 715,851
------------
EXPENSES:
Manager (See Note 3) 1,403,420
Transfer agent--Investor Class
(See Note 3) 154,482
Transfer agent--Class A (See Note
3) 283,823
Transfer agent--Classes B and C
(See Note 3) 350,059
Transfer agent--Class I (See Note
3) 13,961
Distribution--Class B (See Note
3) 393,169
Distribution--Class C (See Note
3) 27,651
Distribution/Service--Investor
Class (See Note 3) 55,052
Distribution/Service--Class A
(See Note 3) 142,088
Service--Class B (See Note 3) 131,056
Service--Class C (See Note 3) 9,217
Registration 60,756
Shareholder communication 50,779
Professional fees 47,360
Recordkeeping (a) 31,004
Custodian 11,805
Trustees 4,379
Miscellaneous 14,938
------------
Total expenses before waiver 3,184,999
Expense waiver from Manager (See
Note 3) (676,039)
------------
Net expenses 2,508,960
------------
Net investment loss (1,793,109)
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments (28,461,448)
Net change in unrealized
appreciation on investments (36,531,508)
------------
Net realized and unrealized loss on
investments (64,992,956)
------------
Net decrease in net assets
resulting from operations $(66,786,065)
============
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
DECREASE IN NET ASSETS:
Operations:
Net investment loss $ (1,793,109) $ (2,921,794)
Net realized gain (loss) on
investments (28,461,448) 56,219,488
Net change in unrealized
appreciation on investments (36,531,508) (42,496,460)
---------------------------
Net increase (decrease) in
net assets resulting from
operations (66,786,065) 10,801,234
---------------------------
Capital share transactions:
Net proceeds from sale of
shares 25,100,759 22,896,401
Cost of shares redeemed (53,978,389) (71,949,571)
---------------------------
Decrease in net assets
derived from capital
share transactions (28,877,630) (49,053,170)
---------------------------
Net decrease in net
assets (95,663,695) (38,251,936)
NET ASSETS:
Beginning of year 185,958,539 224,210,475
---------------------------
End of year $ 90,294,844 $185,958,539
===========================
</Table>
16 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
This page intentionally left blank
mainstayinvestments.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------
FEBRUARY 28,
2008** CLASS A
THROUGH ------------------------------------------------------------
OCTOBER 31, YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 14.59 $ 17.36 $ 16.44 $ 14.94 $ 13.63 $ 13.46
------- ------- ------- -------- ------- -------
Net investment loss (0.10) (a) (0.14) (a) (0.18) (0.18) (0.15) (0.22)
Net realized and
unrealized gain (loss)
on investments (4.09) (6.82) 1.10 1.68 (d) 1.46 0.39
------- ------- ------- -------- ------- -------
Total from investment
operations (4.19) (6.96) 0.92 1.50 1.31 0.17
------- ------- ------- -------- ------- -------
Net asset value at end of
period $ 10.40 $ 10.40 $ 17.36 $ 16.44 $ 14.94 $ 13.63
======= ======= ======= ======== ======= =======
Total investment return
(b)(f) (28.72%) (e) (40.09%) 5.53% 10.11% (c)(d) 9.61% 1.26%
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (1.11%)++ (0.95%) (1.07%) (1.09%) (1.03%) (1.63%)
Net expenses 1.58% ++ 1.48% 1.48% 1.48% 1.65% 1.91%
Expenses (before
waiver/reimbursement) 2.13% ++ 1.91% 1.87% 1.94% (c) 1.94% 1.95%
Portfolio turnover rate 75% 75% 95% 29% 57% 75%
Net assets at end of
period (in 000's) $28,513 $27,388 $96,968 $107,078 $68,981 $70,616
</Table>
<Table>
<Caption>
CLASS C
-----------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------
2008 2007 2006 2005 2004
-----------------------------------------------------------
Net asset value at
beginning of period $ 16.15 $15.42 $14.11 $12.97 $12.90
------- ------ ------ ------ ------
Net investment loss (0.24) (a)(0.29) (0.28) (0.25) (0.31)
Net realized and
unrealized gain (loss)
on investments (6.32) 1.02 1.59 (d) 1.39 0.38
------- ------ ------ ------ ------
Total from investment
operations (6.56) 0.73 1.31 1.14 0.07
------- ------ ------ ------ ------
Net asset value at end of
period $ 9.59 $16.15 $15.42 $14.11 $12.97
======= ====== ====== ====== ======
Total investment return
(b)(f) (40.59%) 4.80% 9.28% (c)(d) 8.79% 0.54%
Ratios (to average net
assets)/Supplemental
Data:
Net investment loss (1.77%) (1.81%) (1.83%) (1.78%) (2.38%)
Net expenses 2.28% 2.23% 2.23% 2.40% 2.66%
Expenses (before
waiver/reimbursement) 2.79% 2.62% 2.69% (c) 2.69% 2.70%
Portfolio turnover rate 75% 95% 29% 57% 75%
Net assets at end of
period (in 000's) $ 2,238 $5,382 $6,725 $7,236 $7,396
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charge and assumes the
reinvestments of dividends and distributions.
(c) Includes nonrecurring reimbursements from the Manager to professional fees.
The effect on total return was less than one-hundredth of a percent.
(d) The impact of nonrecurring dilutive effects resulting from shareholder trading
arrangements and the Manager's reimbursement of such losses was less than
$0.01 per share on net realized gains on investments and the effect on total
investment return was less than 0.01%, respectively.
(e) Total return is not annualized.
(f) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
18 MainStay Small Cap Growth Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- ------------------------------------------------------------
YEAR ENDED OCTOBER 31,
- ------------------------------------------------------------
2008 2007 2006 2005 2004
$ 16.15 $ 15.42 $ 14.11 $ 12.97 $ 12.90
------- ------- -------- -------- --------
(0.24) (a) (0.29) (0.28) (0.25) (0.31)
(6.32) 1.02 1.59 (d) 1.39 0.38
------- ------- -------- -------- --------
(6.56) 0.73 1.31 1.14 0.07
------- ------- -------- -------- --------
$ 9.59 $ 16.15 $ 15.42 $ 14.11 $ 12.97
======= ======= ======== ======== ========
(40.62%) 4.73% 9.28% (c)(d)8.79% 0.54%
(1.76%) (1.81%) (1.83%) (1.78%) (2.38%)
2.28% 2.23% 2.23% 2.40% 2.66%
2.79% 2.62% 2.69% (c) 2.69% 2.70%
75% 95% 29% 57% 75%
$28,207 $79,865 $109,872 $159,380 $172,478
</Table>
<Table>
<Caption>
Class I
- ----------------------------------------------------------
May 31,
2006**
through
Year ended October 31, October 31,
----------------------------------------------------
2008 2007 2006
$ 17.52 $16.50 $16.60
------- ------ ------
(0.06) (a) (0.08) (0.02)
(6.91) 1.10 (0.08)(d)
------- ------ ------
(6.97) 1.02 (0.10)
------- ------ ------
$ 10.55 $17.52 $16.50
======= ====== ======
(39.78%) 6.18% (0.60%)(c)(d)(e)
(0.42%) (0.48%) (0.32%)++
0.93% 0.90% 0.77% ++
1.48% 1.30% 1.43% ++(c)
75% 95% 29%
$ 3,949 $3,744 $ 535
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Small Cap Growth Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class A shares and Class B
shares commenced on June 1, 1998. Class C shares commenced on September 1, 1998.
Class I shares commenced on May 31, 2006. Investor Class shares commenced on
February 28, 2008. Investor Class and Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Investor Class and Class A shares, but a contingent deferred sales charge is
imposed on certain redemptions of such shares within one year of the date of
purchase. Class B shares and Class C shares are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase of Class B shares and a 1%
contingent deferred sales charge may be imposed on redemptions made within one
year of purchase of Class C shares. Class I shares are not subject to a sales
charge. Depending upon eligibility, Class B shares convert to either Investor
Class or Class A shares eight years after the date they were purchased.
Additionally, depending upon eligibility, Investor Class shares may convert to
Class A shares and Class A shares may convert to Investor Class shares. The five
classes of shares have the same voting (except for issues that relate solely to
one class), dividend, liquidation and other rights and bear the same conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Investor Class and Class A shares under a distribution plan pursuant
to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a
distribution or service fee.
The Fund's investment objective is to seek long-term capital appreciation by
investing primarily in securities of small-capitalization companies.
Small-capitalization companies may be more volatile in price and have
significantly lower trading volumes than companies with larger capitalizations.
They may be more vulnerable to adverse business or market developments than
larger-capitalization companies.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Investments
in other mutual funds are valued at their net asset values as of the close of
the New York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor, as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund did not hold
securities that were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established
20 MainStay Small Cap Growth Fund
for all entities, including pass-through entities such as the Fund, a minimum
threshold for financial statement recognition of the benefit of positions taken
in filing tax returns (including whether an entity is taxable in a particular
jurisdiction), and requires certain expanded tax disclosures. The Interpretation
became effective for the Fund's 2008 fiscal year, and was applied to all open
tax years as of the date of effectiveness. The Manager, as defined in Note 3(A),
determined that the adoption of the Interpretation did not have an impact on the
Fund's financial statements upon adoption. The Manager continually reviews the
Fund's tax positions and such conclusions under the Interpretation based on
factors, including, but not limited to, ongoing analyses of tax laws and
regulations and interpretations thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and the Fund
pay dividends of net investment income and distributions of net realized capital
and currency gains, if any, annually. All dividends and distributions are
reinvested in shares of the Fund, at net asset value, unless the shareholder
elects otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Funds' cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
securities out on loan. The Fund and NYLIM reserve the right to reinstitute
lending when deemed appropriate.
(I) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement between NYLIM and the
Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 1.00% on assets up to $1.0 billion and 0.95% on assets in
excess of $1.0 billion. The Manager has contractually agreed to waive its
management fee to 0.85% on assets up to $1.0 billion and to 0.80% on assets in
excess of $1.0 billion.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage, other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.58%; Class A, 1.48%; Class B,
2.33%; Class C, 2.33% and Class I, 0.93%. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. NYLIM
may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed the existing expense limitation and the recoupment is
made within three years after the year in which NYLIM incurred the expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $1,403,420 and waived expenses in the amount of $676,039, of which
$466,939 is subject to recoupment.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2009 2010 2011 TOTAL
$705,943 $486,411 $466,939 $1,659,293
- --------------------------------------------------
</Table>
The Fund had $174,275 of waived fees for which the recoupment period expired
during the year ended October 31, 2008.
Between August 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 1.48%; Class B,
2.23%; Class C, 2.23% and Class I, 0.93%. Prior to August 1, 2007, NYLIM had a
different expense limitation agreement in place with respect to the Fund.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an Accounting Agreement at the annual
rate of 1/20 of 1% for
22 MainStay Small Cap Growth Fund
the first $20 million of average monthly net assets, 1/30 of 1% of the next $80
million of average monthly net assets and 1/100 of 1% of any amount in excess of
$100 million of average monthly net assets. Fees for these services provided to
the Fund by the Manager amounted to $31,004 for the period from November 1, 2007
to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Investor Class and Class A Plans, the Distributor receives a
monthly distribution fee from the Fund at an annual rate of 0.25% of the average
daily net assets of the Fund's Investor Class and Class A shares, which is an
expense of the Investor Class and Class A shares of the Fund for distribution or
service activities as designated by the Distributor. Pursuant to the Class B and
Class C Plans, the Fund pays the Distributor a monthly distribution fee, which
is an expense of the Class B and Class C shares of the Fund, at the annual rate
of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Plans provide that the Class B and Class C shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B and Class C shares of the Fund. Class I shares are not
subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares was $6,777
and $12,943, respectively for the year ended October 31, 2008 . The Fund was
also advised that the Distributor retained contingent deferred sales charges on
redemptions of Class A, Class B and Class C shares of $2,756, $81,599, and $398
respectively, for the year ended October 31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $802,325.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 202 0.0%++
- --------------------------------------------------
Class C 111 0.0++
- --------------------------------------------------
Class I 1,886,724 47.8
- --------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $4,991.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$-- $(105,480,225) $-- $(21,460,071) $(126,940,296)
- -------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sales deferrals.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income and accumulated net
realized gain on investments arising from permanent differences; net assets at
October 31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN (LOSS) ON ADDITIONAL
INCOME (LOSS) INVESTMENTS PAID-IN CAPITAL
$1,793,109 $(1) $(1,793,108)
- --------------------------------------------------------------
</Table>
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The reclassifications for the Fund are primarily due to net operating losses.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $105,480,225 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2009 $ 34,022
2010 40,252
2011 2,925
2016 28,281
$105,480
- -----------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 7--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $99,752 and $136,198, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 679,594 $ 9,954,840
Shares redeemed (416,825) (5,766,337)
---------------------------
Net increase in shares
outstanding before
conversion 262,769 4,188,503
Shares converted into
Investor Class (See Note
1) 2,614,981 36,266,582
Shares converted from
Investor Class (See Note
1) (135,139) (1,872,553)
---------------------------
Net increase 2,742,611 $38,582,532
===========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 468,718 $ 6,724,597
Shares redeemed (1,976,844) (28,889,038)
---------------------------
Net decrease in shares
outstanding before
conversion (1,508,126) (22,164,441)
Shares converted into Class
A
(See Note 1) 694,188 10,188,477
Shares converted from Class
A
(See Note 1) (2,138,924) (29,396,808)
---------------------------
Net decrease (2,952,862) $(41,372,772)
===========================
Year ended October 31, 2007:
Shares sold 673,426 $ 11,500,806
Shares redeemed (2,269,984) (38,740,546)
---------------------------
Net decrease in shares
outstanding before
conversion (1,596,558) (27,239,740)
Shares converted from Class
B
(See Note 1) 671,900 11,560,555
---------------------------
Net decrease (924,658) $(15,679,185)
===========================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 309,084 $ 4,120,854
Shares redeemed (1,195,611) (15,990,020)
---------------------------
Net decrease in shares
outstanding before
conversion (886,527) (11,869,166)
Shares converted from Class
B
(See Note 1) (1,118,496) (15,185,698)
---------------------------
Net decrease (2,005,023) $(27,054,864)
===========================
Year ended October 31, 2007:
Shares sold 434,938 $ 6,907,149
Shares redeemed (1,896,587) (30,127,583)
---------------------------
Net decrease in shares
outstanding before
conversion (1,461,649) (23,220,434)
Shares reacquired upon
conversion into Class A
(See Note 1) (719,481) (11,560,555)
---------------------------
Net decrease (2,181,130) $(34,780,989)
===========================
</Table>
24 MainStay Small Cap Growth Fund
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 30,777 $ 406,562
Shares redeemed (130,676) (1,763,947)
---------------------------
Net decrease (99,899) $(1,357,385)
===========================
Year ended October 31, 2007:
Shares sold 51,900 $ 827,582
Shares redeemed (154,914) (2,469,557)
---------------------------
Net decrease (103,014) $(1,641,975)
===========================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 268,725 $ 3,893,906
Shares redeemed (108,213) (1,569,047)
---------------------------
Net increase 160,512 $ 2,324,859
===========================
Year ended October 31, 2007:
Shares sold 216,453 $ 3,660,864
Shares redeemed (35,148) (611,885)
---------------------------
Net increase 181,305 $ 3,048,979
===========================
</Table>
NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
mainstayinvestments.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Small Cap Growth Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2008, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the five-year
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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate procedures where replies from brokers were
not received. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Small Cap Growth Fund of The MainStay Funds as of October 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
26 MainStay Small Cap Growth Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Small Cap Growth Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management and
Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider
mainstayinvestments.com 27
of shareholder services, which has been recognized by independent third-parties
on numerous occasions. The Board noted the role that the MainStay Family of
Funds historically has played in serving the investment needs of New York Life
Insurance Company policyholders, who often maintain smaller account balances
than other retail investors. The Board acknowledged that it had approved NYLIM's
recommendation to create a new "Investor Class" of shares designed principally
to address the higher shareholder-servicing costs typically associated with
smaller shareholder accounts. The Board considered the experience of senior
personnel at NYLIM providing management and administrative services to the Fund,
as well as NYLIM's reputation and financial condition. The Board also reviewed
NYLIM's willingness to invest in personnel designed to benefit the Fund, and
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
managers, the number of accounts managed by the portfolio managers and MacKay
Shields' method for compensating portfolio managers. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio managers and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
The Board took note of the Fund's unfavorable investment performance when
compared to peer funds in its Lipper performance universe over various time
periods. The Board discussed with NYLIM various proposals for improving the
Fund's relative investment performance, and accepted NYLIM's commitment to
propose actions designed to improve the Fund's investment performance in the
coming year.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board
28 MainStay Small Cap Growth Fund
considered, among other things, NYLIM's investments in personnel, systems,
equipment and other resources necessary to manage the Fund, and the fact that
NYLIM is responsible for paying MacKay Shields' subadvisory fee. The Board
acknowledged that NYLIM and MacKay Shields must be in a position to pay and
retain experienced professional personnel to provide services to the Fund, and
that NYLIM's ability to maintain a strong financial position is important in
order for NYLIM to continue to provide high-quality ongoing services to the Fund
and its shareholders. The Board noted, for example, increased costs borne by
NYLIM and its affiliates due to new and ongoing regulatory and compliance
requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other
mainstayinvestments.com 29
investment advisory clients, and fees charged by other investment advisers to
mutual funds in the Fund's peer group.
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
30 MainStay Small Cap Growth Fund
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
mainstayinvestments.com 31
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
32 MainStay Small Cap Growth Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 33
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
34 MainStay Small Cap Growth Fund
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 35
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
This page intentionally left blank
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A014519 (RECYCLE LOGO) MS308-08 MSSG11-12/08
24
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP VALUE FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
SMALL CAP VALUE FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 9
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 11
- ---------------------------------------------
FINANCIAL STATEMENTS 14
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 20
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 26
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 27
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 31
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 31
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 31
- ---------------------------------------------
TRUSTEES AND OFFICERS 32
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (42.50%) (5.94%) 3.70%
Excluding sales charges (39.15) (4.87) 4.29
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP VALUE RUSSELL 2000
FUND VALUE INDEX
-------------- ------------
10/31/98 9450 10000
9979 10072
13659 11814
14938 12848
14156 12523
18458 17569
21127 20730
21848 23432
24776 28797
23632 29387
10/31/08 14380 20412
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ----------------------------------------------------
With sales charges (42.59%) (5.97%) 3.68%
Excluding sales charges (39.25) (4.90) 4.27
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP VALUE RUSSELL 2000
FUND VALUE INDEX
-------------- ------------
10/31/98 23625 25000
24949 25180
34147 29535
37344 32120
35389 31308
46144 43922
52819 51824
54621 58581
61941 71994
59081 73467
10/31/08 35889 51031
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (42.04%) (5.82%) 3.49%
Excluding sales charges (39.69) (5.62) 3.49
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP VALUE RUSSELL 2000
FUND VALUE INDEX
-------------- ------------
10/31/98 10000 10000
10488 10072
14232 11814
15444 12848
14544 12523
18815 17569
21371 20730
21941 23432
24679 28797
23361 29387
10/31/08 14088 20412
</Table>
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class
C shares are sold with no initial sales charge, are subject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 1.00%. Class I shares are sold with no initial sales charge or CDSC, have
no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Performance figures reflect certain fee waivers
and/or expense limitations, without which total returns may have been lower.
These fee waivers and/or expense limitations are contractual and may be
modified or terminated only with the approval of the Board of Trustees. The
Manager may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund
THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLES AND GRAPHS AND
SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (40.16%) (5.61%) 3.49%
Excluding sales charges (39.69) (5.61) 3.49
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP VALUE RUSSELL 2000
FUND VALUE INDEX
-------------- ------------
10/31/98 10000 10000
10488 10072
14232 11814
15444 12848
14544 12523
18801 17569
21371 20730
21938 23432
24694 28797
23358 29387
10/31/08 14086 20412
</Table>
CLASS I SHARES(3)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ------------------------------------------
(38.97%) (4.63%) 4.55%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY SMALL
CAP VALUE RUSSELL 2000
FUND VALUE INDEX
-------------- ------------
10/31/98 10000 10000
10587 10072
14526 11814
15926 12848
15130 12523
19778 17569
22695 20730
23574 23432
26814 28797
25573 29387
10/31/08 15607 20412
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ------------------------------------------------------------------------
Russell 2000(R) Value Index(4) (30.54%) 3.05% 7.40%
Average Lipper small-cap value fund(5) (34.10) 1.92 6.91%
</Table>
pursuant to the contract if such action does not cause the Fund to exceed
existing expense limitations and the recoupment is made within three years
after the year in which the Manager incurred the expense.
2. Performance figures for Investor Class shares, first offered to the public on
February 28, 2008, include the historical performance for Class A shares
through February 27, 2008, adjusted for differences in certain contractual
expenses and fees. Unadjusted, the performance shown for Investor Class
shares might have been lower.
3. Performance figures for Class I shares, first offered to the public on
February 16, 2005, include the historical performance of Class A shares
through February 15, 2005, adjusted for differences in certain contractual
expenses and fees. Unadjusted, the performance shown for Class I shares might
have been lower.
4. The Russell 2000(R) Value Index is an unmanaged index that measures the
performance of those Russell 2000(R) companies with lower price-to-book
ratios and lower forecasted growth values. The Russell 2000(R) Index is an
unmanaged index that measures the performance of the 2,000 smallest companies
in the Russell 3000(R) Index, which, in turn, is an unmanaged index that
measures the performance of the 3,000 largest U.S. companies based on total
market capitalization. Results assume reinvestment of all income and capital
gains. The Russell 2000(R) Value Index is considered to be the Fund's broad-
based securities-market index for comparison purposes. An investment cannot
be made directly in an index.
5. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTE ON THE PRECEDING PAGE IS AN INTEGRAL PART OF THE TABLES AND GRAPHS
AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay Small Cap Value Fund
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY SMALL CAP VALUE FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD
INVESTOR CLASS SHARES $1,000.00 $667.00 $ 6.91 $1,016.80 $ 8.36
- -------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $667.40 $ 6.50 $1,017.30 $ 7.86
- -------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $664.10 $10.04 $1,013.10 $12.14
- -------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $664.10 $10.04 $1,013.10 $12.14
- -------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $668.20 $ 5.16 $1,019.00 $ 6.24
- -------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.65% for Investor Class, 1.55% for Class A, 2.40% for Class B and Class C
and 1.23% for Class I) multiplied by the average account value over the
period, divided by 366 and multiplied by 184 (to reflect the one-half year
period). The table above represents actual expenses incurred during the one-
half year period and does not take into account the Fund's written expense
limitation agreement.
mainstayinvestments.com 7
INDUSTRY COMPOSITION AS OF OCTOBER 31, 2008
<Table>
<Caption>
Pharmaceuticals 7.0%
Insurance 6.7
Communications Equipment 5.7
Semiconductors & Semiconductor
Equipment 5.3
Thrifts & Mortgage Finance 4.9
Hotels, Restaurants & Leisure 4.6
Machinery 4.5
Metals & Mining 4.3
Biotechnology 4.2
Diversified Financial Services 3.7
Specialty Retail 3.7
Health Care Providers & Services 3.5
Electric Utilities 3.2
Oil, Gas & Consumable Fuels 3.1
Auto Components 2.8
Life Sciences Tools & Services 2.8
Computers & Peripherals 2.5
Commercial Banks 2.3
Electronic Equipment & Instruments 2.3
Chemicals 2.2
Containers & Packaging 1.7
Electrical Equipment 1.6
Energy Equipment & Services 1.6
Airlines 1.4
Capital Markets 1.4
Construction & Engineering 1.3
Multi-Utilities 1.3
Air Freight & Logistics 1.2
Food Products 1.2
Health Care Technology 1.2
Independent Power Producers & Energy
Traders 1.2
Paper & Forest Products 1.2
IT Services 1.1
Trading Companies & Distributors 1.1
Road & Rail 0.9
Aerospace & Defense 0.5
Professional Services 0.4
Short-Term Investment 0.8
Liabilities in Excess of Cash and
Other Assets (0.4)
-----
100.0%
=====
</Table>
See Portfolio of Investments on page 11 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. MDS, Inc.
2. 3Com Corp.
3. Cabot Corp.
4. PDL BioPharma, Inc.
5. Sepracor, Inc.
6. Cleco Corp.
7. Myers Industries, Inc.
8. C&D Technologies, Inc.
9. Omnicare, Inc.
10. Electronics for Imaging, Inc.
</Table>
8 MainStay Small Cap Value Fund
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS JORDAN ALEXANDER, CFA, CPA, AND STEPHEN
FRISCIA, CFA, OF MACKAY SHIELDS LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY SMALL CAP VALUE FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay Small Cap Value Fund returned -39.15% for
Investor Class shares,(1) -39.25% for Class A shares, -39.69% for Class B shares
and -39.69% for Class C shares for the 12 months ended October 31, 2008. Over
the same period, the Fund's Class I shares returned -38.97%. All share classes
underperformed the -34.10% return of the average Lipper(2) small-cap value fund
and the -30.54% return of the Russell 2000(R) Value Index(3) for the 12 months
ended October 31, 2008. The Russell 2000(R) Value Index is the Fund's broad-
based securities-market index. See pages 5 and 6 for Fund returns with sales
charges.
WHAT KEY FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
We believe that Fund underperformed its peers and its benchmark for two
principal reasons. First, we have observed that a number of the Fund's holdings
are or were also held by hedge funds and long-only value funds that we believe
have experienced significant redemptions. Forced selling of small-cap shares can
exert unusual pressure on stock prices. Second, part of our value-oriented
approach is to invest at valuations that have historically been good indicators
of bottoms for the respective stocks. However, a number of stocks in the Fund's
portfolio broke through these historical valuation troughs during the reporting
period, as the market discounted a more severe recession than has been seen in
several decades.
WHICH SECTORS MADE THE STRONGEST CONTRIBUTIONS TO THE FUND'S RELATIVE
PERFORMANCE DURING THE REPORTING PERIOD AND WHICH SECTORS WERE THE WEAKEST
CONTRIBUTORS?
Even in a broadly declining market, some sectors and securities performed better
than others. Relative to the Russell 2000(R) Value Index, the Fund's strongest-
contributing sectors were energy, information technology and telecommunication
services. Energy was the strongest contributor because of strong sector
performance during the first half of the reporting period. We prudently
eliminated a number of the Fund's energy positions before the sizable sell-off
in the sector toward the end of the reporting period. Of the three strongest-
contributing sectors, only energy posted a positive absolute return for the
reporting period.
The three weakest-contributing sectors to the Fund's performance relative to the
Russell 2000(R) Value Index were financials, industrials and materials. Within
financials, a subset of the Fund's holdings dropped well below what we believed
to be tangible shareholders' equity. We do not believe the prices of these
particular stocks were representative of either the intrinsic value of the
businesses or even the value to stockholders in a potential runoff scenario.
DURING THE REPORTING PERIOD, WHAT WERE SOME OF THE FUND'S BEST-PERFORMING
INDIVIDUAL STOCKS?
In terms of absolute performance, the Fund's top-three contributors during the
reporting period were all in the energy sector and all benefited from strong
pricing for their respective products. Coal-mining companies Alpha Natural
Resources and Walter Industries both benefited from surging coal prices and
recorded substantial positive returns. A position in Brigham Exploration, an
independent exploration and production company, was another strong positive
contributor.
WHICH STOCKS DETRACTED FROM THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
The three weakest contributors to the Fund's performance during the reporting
period were life insurance company Conseco, battery manufacturer C&D
Technologies and truck parts manufacturer
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. Stocks of small companies
may have higher price volatility, significantly lower trading volumes, cyclical,
static or moderate growth prospects and greater spreads between bid and ask
prices than stocks of larger companies. Small companies may be more vulnerable
to adverse business or market developments than mid- or large-capitalization
companies. The principal risk of investing in value stocks is that they may
never reach what the portfolio manager believes is their full value or that they
may even go down in value. The Fund's use of securities lending presents the
risk of default by the borrower, which may result in a loss to the Fund. The
Fund may experience a portfolio turnover of more than 100% and may generate
taxable short-term capital gains.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the performance shown for Investor Class shares
might have been lower.
2. See footnote on page 6 for more information on Lipper Inc.
3. See footnote on page 6 for more information on the Russell 2000(R) Value
Index.
mainstayinvestments.com 9
Commercial Vehicle Group. All three stocks posted negative absolute returns
during the reporting period.
Conseco's stock suffered from losses in the company's investment portfolio. C&D
Technologies sold off, despite attractive end-market demand and the rollout of
an innovative new battery product. We believe the stock's decline was an
overreaction to a modest rebound in the price of lead, which is a raw material
used in batteries. Shares of Commercial Vehicle Group declined on reduced
expectations for heavy truck sales. At the end of the reporting period, we
viewed Commercial Vehicle Group's stock as severely undervalued on a normalized-
earnings basis. We also expected fundamentals to improve with the advent of new
mandatory emission requirements, which we believed would increase heavy-truck
orders.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
During the reporting period, we added Olympic Steel and Pharmerica to the Fund.
Both purchases illustrated how market dislocations can create opportunities.
Olympic Steel was trading below tangible book value at the time of purchase yet
had a strong balance sheet with little debt. The company's free cash flow
generation was also particularly attractive. Pharmerica, a pharmacy-services
company, fit the Fund's strategy of buying undiscovered companies. After a spin-
off, Pharmerica initially traded at a significant discount to its peers. Yet the
company was able to dramatically improve profitability with a more focused
management team.
Significant sales included Aventine Renewable Energy and Old Dominion Freight
Line. Both sales reflected our sell discipline. Each stock appreciated to our
price objective, and each company experienced meaningful shifts in its
fundamental prospects. Our analysis of Aventine Renewable Energy indicated that
elevated input prices and decreased gasoline consumption would severely pressure
the margins of this ethanol producer. In the case of Old Dominion Freight Line,
we concluded that a weakening economy might cause trucking company freight
volumes to decline beyond market expectations.
HOW DID THE FUND CHANGE ITS SECTOR WEIGHTINGS DURING THE REPORTING PERIOD?
Toward the end of the reporting period, we meaningfully reduced the Fund's
position in the financials sector to broaden sector diversification and
prudently manage risk. We modestly reduced the Fund's weightings in the
consumer-related and industrials sectors. As a result of our bottom-up stock-
selection process, we meaningfully increased the Fund's weighting in the health
care sector during the reporting period.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2008, the Fund was overweight relative to the Russell 2000(R)
Value Index in the health care and information technology sectors. On the same
date, the Fund was underweight in financials.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecast
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
10 MainStay Small Cap Value Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 99.6%+
- ------------------------------------------------------------
AEROSPACE & DEFENSE 0.5%
AerCap Holdings N.V. (a) 28,600 $ 181,324
-------------
AIR FREIGHT & LOGISTICS 1.2%
Pacer International, Inc. 37,300 421,117
-------------
AIRLINES 1.4%
Alaska Air Group, Inc. (a) 20,400 503,880
-------------
AUTO COMPONENTS 2.8%
ArvinMeritor, Inc. 35,700 211,344
Cooper Tire & Rubber Co. 70,300 536,389
Modine Manufacturing Co. 33,300 246,420
-------------
994,153
-------------
BIOTECHNOLOGY 4.2%
Celera Corp. (a) 48,100 544,011
Enzon Pharmaceuticals, Inc.
(a) 58,600 291,242
V PDL BioPharma, Inc. 66,700 650,325
-------------
1,485,578
-------------
CAPITAL MARKETS 1.4%
Thomas Weisel Partners Group,
Inc. (a) 54,700 307,414
Waddell & Reed Financial, Inc.
Class A 13,909 201,959
-------------
509,373
-------------
CHEMICALS 2.2%
V Cabot Corp. 30,000 793,500
-------------
COMMERCIAL BANKS 2.3%
First Horizon National Corp. 39,085 465,502
Synovus Financial Corp. 35,500 366,715
-------------
832,217
-------------
COMMUNICATIONS EQUIPMENT 5.7%
V 3Com Corp. (a) 301,800 823,914
ADC Telecommunications, Inc.
(a) 74,200 470,428
Avocent Corp. (a) 22,800 342,456
Extreme Networks, Inc. (a) 224,000 412,160
-------------
2,048,958
-------------
COMPUTERS & PERIPHERALS 2.5%
V Electronics for Imaging,
Inc. (a) 52,800 559,680
STEC, Inc. (a) 62,300 342,650
-------------
902,330
-------------
CONSTRUCTION & ENGINEERING 1.3%
Pike Electric Corp. (a) 51,500 450,625
-------------
CONTAINERS & PACKAGING 1.7%
V Myers Industries, Inc. 56,100 592,977
-------------
DIVERSIFIED FINANCIAL SERVICES 3.7%
Asset Acceptance Capital Corp.
(a) 35,565 288,432
CIT Group, Inc. 84,800 351,072
Fifth Street Finance Corp. 64,500 438,600
KKR Financial Holdings LLC 59,700 230,442
-------------
1,308,546
-------------
ELECTRIC UTILITIES 3.2%
V Cleco Corp. 25,900 595,959
Idacorp, Inc. 20,100 535,866
-------------
1,131,825
-------------
ELECTRICAL EQUIPMENT 1.6%
V C&D Technologies, Inc. (a) 162,800 569,800
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 2.3%
Methode Electronics, Inc. 57,800 438,702
Vishay Intertechnology, Inc.
(a) 90,900 391,779
-------------
830,481
-------------
ENERGY EQUIPMENT & SERVICES 1.6%
Hercules Offshore, Inc. (a) 17,700 129,033
Key Energy Services, Inc. (a) 69,200 429,040
-------------
558,073
-------------
FOOD PRODUCTS 1.2%
Smart Balance, Inc. (a) 61,400 439,624
-------------
HEALTH CARE PROVIDERS & SERVICES 3.5%
Cross Country Healthcare, Inc.
(a) 18,463 209,001
V Omnicare, Inc. 20,400 562,428
PharMerica Corp. (a) 22,814 468,372
-------------
1,239,801
-------------
HEALTH CARE TECHNOLOGY 1.2%
IMS Health, Inc. 29,100 417,294
-------------
HOTELS, RESTAURANTS & LEISURE 4.6%
AFC Enterprises, Inc. (a) 98,200 477,252
Brinker International, Inc. 31,100 289,230
Steak N Shake Co. (The) (a) 65,900 339,385
Wendy's International, Inc. 152,200 550,964
-------------
1,656,831
-------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.2%
Reliant Energy, Inc. (a) 82,400 432,600
-------------
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2008,
excluding short-term investment. May be subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
INSURANCE 6.7%
AMBAC Financial Group, Inc. 74,900 $ 200,732
Conseco, Inc. (a) 162,700 302,622
Fidelity National Financial,
Inc. 49,100 442,391
Flagstone Reinsurance
Holdings, Ltd. 49,700 526,323
OneBeacon Insurance Group,
Ltd. 32,600 449,880
Phoenix Cos., Inc. (The) 72,500 469,075
-------------
2,391,023
-------------
IT SERVICES 1.1%
Acxiom Corp. 50,600 397,716
-------------
LIFE SCIENCES TOOLS & SERVICES 2.8%
V MDS, Inc. (a) 95,800 1,019,312
-------------
MACHINERY 4.5%
Commercial Vehicle Group, Inc.
(a) 278,400 370,272
Kennametal, Inc. 21,600 458,352
Trinity Industries, Inc. 21,900 369,672
Xerium Technologies, Inc. 104,800 407,672
-------------
1,605,968
-------------
METALS & MINING 4.3%
Brush Engineered Materials,
Inc. (a) 31,400 385,278
Century Aluminum Co. (a) 27,500 345,675
Olympic Steel, Inc. 20,100 459,486
Stillwater Mining Co. (a) 84,100 333,036
-------------
1,523,475
-------------
MULTI-UTILITIES 1.3%
CH Energy Group, Inc. 11,400 470,022
-------------
OIL, GAS & CONSUMABLE FUELS 3.1%
Frontier Oil Corp. 34,500 455,745
International Coal Group, Inc.
(a) 77,100 360,828
Stone Energy Corp. (a) 9,500 288,230
-------------
1,104,803
-------------
PAPER & FOREST PRODUCTS 1.2%
Buckeye Technologies, Inc. (a) 73,700 434,093
-------------
PHARMACEUTICALS 7.0%
Endo Pharmaceuticals Holdings,
Inc. (a) 23,000 425,500
Flamel Technologies S.A. ADR
(a)(b) 77,600 543,200
Medicis Pharmaceutical Corp.
Class A 32,100 458,067
Noven Pharmaceuticals, Inc.
(a) 40,400 454,500
V Sepracor, Inc. (a) 45,600 607,392
-------------
2,488,659
-------------
PROFESSIONAL SERVICES 0.4%
Spherion Corp. (a) 47,800 152,004
-------------
ROAD & RAIL 0.9%
P.A.M. Transportation
Services, Inc. (a) 38,000 329,840
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 5.3%
Advanced Analogic
Technologies, Inc. (a) 156,300 470,463
FormFactor, Inc. (a) 30,200 526,084
MKS Instruments, Inc. (a) 23,100 428,505
Teradyne, Inc. (a) 91,200 465,120
-------------
1,890,172
-------------
SPECIALTY RETAIL 3.7%
Collective Brands, Inc. (a) 37,000 473,230
Foot Locker, Inc. 37,800 552,636
Pacific Sunwear of California,
Inc. (a) 92,300 315,666
-------------
1,341,532
-------------
THRIFTS & MORTGAGE FINANCE 4.9%
Bank Mutual Corp. 27,082 312,255
Brookline Bancorp, Inc. 40,200 470,340
NewAlliance Bancshares, Inc. 29,151 402,284
PMI Group, Inc. (The) 107,200 266,928
Radian Group, Inc. 84,200 303,120
-------------
1,754,927
-------------
TRADING COMPANIES & DISTRIBUTORS 1.1%
United Rentals, Inc. (a) 37,800 387,450
-------------
Total Common Stocks
(Cost $52,767,108) 35,591,903
-------------
<Caption>
PRINCIPAL
AMOUNT
SHORT-TERM INVESTMENT 0.8%
- ------------------------------------------------------------
<Caption>
REPURCHASE AGREEMENT 0.8%
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$284,629 (Collateralized by
a Federal Home Loan Bank
Security with a rate of
3.63% and a maturity date of
7/1/11 with a Principal
Amount of $290,000 and a
Market Value of $294,710) $284,626 284,626
-------------
Total Short-Term Investment
(Cost $284,626) 284,626
-------------
Total Investments
(Cost $53,051,734)(c) 100.4% 35,876,529
Liabilities in Excess of
Cash and Other Assets (0.4) (155,561)
----- ------------
Net Assets 100.0% $ 35,720,968
===== ============
</Table>
12 MainStay Small Cap Value Fund
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
<Table>
(a) Non-income producing security.
(b) ADR--American Depositary Receipt.
(c) At October 31, 2008, cost is $53,100,469
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 451,615
Gross unrealized depreciation (17,675,555)
------------
Net unrealized depreciation $(17,223,940)
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $53,051,734) $ 35,876,529
Receivables:
Investment securities sold 220,965
Dividends and interest 24,567
Fund shares sold 11,661
Other assets 30,833
------------
Total assets 36,164,555
------------
LIABILITIES:
Payables:
Investment securities purchased 256,139
Transfer agent (See Note 3) 49,067
Shareholder communication 39,918
Fund shares redeemed 36,687
Professional fees 24,368
NYLIFE Distributors (See Note 3) 16,716
Manager (See Note 3) 8,787
Custodian 7,758
Directors 162
Accrued expenses 3,985
------------
Total liabilities 443,587
------------
Net assets $ 35,720,968
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 63,290
Additional paid-in capital 71,019,202
------------
71,082,492
Accumulated undistributed net
investment income 447,259
Accumulated net realized loss on
investments (18,633,578)
Net unrealized depreciation on
investments (17,175,205)
------------
Net assets $ 35,720,968
============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 8,526,001
============
Shares of beneficial interest
outstanding 1,442,635
============
Net asset value per share
outstanding $ 5.91
Maximum sales charge (5.50% of
offering price) 0.34
------------
Maximum offering price per share
outstanding $ 6.25
============
CLASS A
Net assets applicable to
outstanding shares $ 13,790,733
============
Shares of beneficial interest
outstanding 2,338,157
============
Net asset value per share
outstanding $ 5.90
Maximum sales charge (5.50% of
offering price) 0.34
------------
Maximum offering price per share
outstanding $ 6.24
============
CLASS B
Net assets applicable to
outstanding shares $ 10,766,382
============
Shares of beneficial interest
outstanding 2,046,960
============
Net asset value and offering price
per share outstanding $ 5.26
============
CLASS C
Net assets applicable to
outstanding shares $ 2,632,022
============
Shares of beneficial interest
outstanding 500,237
============
Net asset value and offering price
per share outstanding $ 5.26
============
CLASS I
Net assets applicable to
outstanding shares $ 5,830
============
Shares of beneficial interest
outstanding 975
============
Net asset value and offering price
per share outstanding $ 5.98
============
</Table>
14 MainStay Small Cap Value Fund
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 1,414,292
Income from securities
loaned--net 300,721
Interest 15,975
------------
Total income 1,730,988
------------
EXPENSES:
Manager (See Note 3) 502,432
Transfer agent--Investor Class
(See Note 3) 39,779
Transfer agent--Class A (See Note
3) 116,972
Transfer agent--Classes B and C
(See Note 3) 126,427
Transfer agent--Class I (See Note
3) 18
Distribution--Class B (See Note
3) 148,214
Distribution--Class C (See Note
3) 34,293
Distribution/Service--Investor
Class (See Note 3) 17,789
Distribution/Service--Class A
(See Note 3) 67,689
Service--Class B (See Note 3) 49,405
Service--Class C (See Note 3) 11,431
Registration 58,708
Shareholder communication 43,459
Professional fees 42,426
Recordkeeping (a) 17,938
Custodian 9,709
Trustees 1,619
Miscellaneous 11,884
------------
Total expenses before
waiver/reimbursement 1,300,192
Expense waiver/reimbursement from
Manager (See Note 3) (190,847)
------------
Net expenses 1,109,345
------------
Net investment income 621,643
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments (18,726,026)
Net change in unrealized
depreciation on investments (7,900,711)
------------
Net realized and unrealized loss on
investments (26,626,737)
------------
Net decrease in net assets
resulting from operations $(26,005,094)
============
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
DECREASE IN NET ASSETS:
Operations:
Net investment income $ 621,643 $ 1,039,013
Net realized gain (loss) on
investments (18,726,026) 15,765,623
Net change in unrealized
appreciation (depreciation)
on investments (7,900,711) (20,014,055)
---------------------------
Net decrease in net assets
resulting from operations (26,005,094) (3,209,419)
---------------------------
Dividends and distributions to
shareholders:
From net investment income:
Class A (440,221) (417,038)
Class B (54,499) (21,051)
Class C (12,815) (5,209)
Class I (68) (119,899)
---------------------------
(507,603) (563,197)
---------------------------
From net realized gain on investments:
Class A (8,172,046) (4,597,917)
Class B (5,669,519) (4,088,012)
Class C (1,371,162) (1,024,040)
Class I (1,305) (2,249,782)
---------------------------
(15,214,032) (11,959,751)
---------------------------
Total dividends and
distributions to
shareholders (15,721,635) (12,522,948)
---------------------------
Capital share transactions:
Net proceeds from sale of
shares 11,557,658 11,786,519
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions 14,455,629 11,556,410
Cost of shares redeemed (28,326,174) (60,254,816)
---------------------------
Decrease in net assets
derived from capital
share transactions (2,312,887) (36,911,887)
---------------------------
Net decrease in net
assets (44,039,616) (52,644,254)
NET ASSETS:
Beginning of year 79,760,584 132,404,838
---------------------------
End of year $ 35,720,968 $ 79,760,584
===========================
Accumulated undistributed net
investment income at end of
year $ 447,259 $ 428,394
===========================
</Table>
16 MainStay Small Cap Value Fund
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
This page intentionally left blank
mainstayinvestments.com 17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------
FEBRUARY 28,
2008** CLASS A
THROUGH ---------------------------------------------------
OCTOBER 31, YEAR ENDED OCTOBER 31,
---------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 8.77 $ 12.26 $ 14.19 $ 13.39 $ 15.59 $ 14.09
------- ------- ------- ------- ------- -------
Net investment income
(loss) (a) 0.04 0.13 0.17 0.03 (0.05) (0.09)
Net realized and
unrealized gain (loss)
on investments (2.90) (4.06) (0.73) 1.70 0.68 2.09
------- ------- ------- ------- ------- -------
Total from investment
operations (2.86) (3.93) (0.56) 1.73 0.63 2.00
------- ------- ------- ------- ------- -------
Less dividends and
distributions:
From net investment
income -- (0.10) (0.11) -- -- --
From net realized gain
on investments -- (2.33) (1.26) (0.93) (2.83) (0.50)
------- ------- ------- ------- ------- -------
Total dividends and
distributions -- (2.43) (1.37) (0.93) (2.83) (0.50)
------- ------- ------- ------- ------- -------
Net asset value at end of
period $ 5.91 $ 5.90 $ 12.26 $ 14.19 $ 13.39 $ 15.59
======= ======= ======= ======= ======= =======
Total investment return
(b)(e) (32.61%)(c) (39.25%) (4.62%) 13.40% 3.41% 14.46%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 0.78% ++ 1.52% 1.28% 0.19% (0.32%) (0.62%)
Net expenses 1.65% ++ 1.55% 1.44% 1.40% 1.47% 1.70%
Expenses (before
waiver/reimbursement) 2.02% ++ 1.85% 1.69% 1.65% 1.72% 1.78%
Portfolio turnover rate 164% 164% 189% 44% 75% 103%
Net assets at end of
period (in 000's) $ 8,526 $13,791 $44,742 $52,995 $47,849 $55,640
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 11.19 $13.06 $ 12.48 $ 14.80 $ 13.49
------- ------ ------- ------- -------
Net investment income
(loss) (a) 0.05 0.07 (0.07) (0.15) (0.20)
Net realized and
unrealized gain (loss)
on investments (3.63) (0.67) 1.58 0.66 2.01
------- ------ ------- ------- -------
Total from investment
operations (3.58) (0.60) 1.51 0.51 1.81
------- ------ ------- ------- -------
Less dividends and
distributions:
From net investment
income (0.02) (0.01) -- -- --
From net realized gain
on investments (2.33) (1.26) (0.93) (2.83) (0.50)
------- ------ ------- ------- -------
Total dividends and
distributions (2.35) (1.27) (0.93) (2.83) (0.50)
------- ------ ------- ------- -------
Net asset value at end of
period $ 5.26 $11.19 $ 13.06 $ 12.48 $ 14.80
======= ====== ======= ======= =======
Total investment return
(b)(e) (39.69%) (5.41%) 12.56% 2.65% 13.67%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income
(loss) 0.63% 0.56% (0.56%) (1.07%) (1.37%)
Net expenses 2.35% 2.19% 2.15% 2.22% 2.45%
Expenses (before
waiver/reimbursement) 2.69% 2.44% 2.40% 2.47% 2.53%
Portfolio turnover rate 164% 189% 44% 75% 103%
Net assets at end of
period (in 000's) $ 2,632 $6,815 $10,879 $12,070 $10,054
</Table>
<Table>
** Commencement of operations.
++ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and assumes the
reinvestments of dividends and distributions. Class I shares are not subject
to sales charges.
(c) Total return is not annualized.
(d) The amount shown for a share outstanding does not correspond with aggregated
net realized and unrealized gain (loss) on investments due to significant
redemptions of Class I shares.
(e) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
18 MainStay Small Cap Value Fund The notes to the financial statements are an
integral part of, and should be read in conjunction with, the financial
statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
- ---------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
2008 2007 2006 2005 2004
$ 11.19 $ 13.06 $ 12.48 $ 14.80 $ 13.50
------- ------- ------- ------- -------
0.05 0.07 (0.07) (0.14) (0.20)
(3.63) (0.67) 1.58 0.65 2.00
------- ------- ------- ------- -------
(3.58) (0.60) 1.51 0.51 1.80
------- ------- ------- ------- -------
(0.02) (0.01) -- -- --
(2.33) (1.26) (0.93) (2.83) (0.50)
------- ------- ------- ------- -------
(2.35) (1.27) (0.93) (2.83) (0.50)
------- ------- ------- ------- -------
$ 5.26 $ 11.19 $ 13.06 $ 12.48 $ 14.80
======= ======= ======= ======= =======
(39.69%) (5.34%) 12.48% 2.67% 13.59%
0.63% 0.57% (0.57%) (1.07%) (1.37%)
2.35% 2.19% 2.15% 2.22% 2.45%
2.69% 2.44% 2.40% 2.47% 2.53%
164% 189% 44% 75% 103%
$10,766 $28,197 $43,137 $63,611 $66,355
</Table>
<Table>
<Caption>
CLASS I
--------------------------------------------
FEBRUARY 16,
2005**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
--------------------------------------------
2008 2007 2006 2005
$ 12.35 $14.30 $ 13.44 $ 14.01
------- ------ ------- -------
0.15 0.48 0.08 0.02
(4.09) (1.05)(d) 1.71 (0.59)
------- ------ ------- -------
(3.94) (0.57) 1.79 (0.57)
------- ------ ------- -------
(0.10) (0.12) -- --
(2.33) (1.26) (0.93) --
------- ------ ------- -------
(2.43) (1.38) (0.93) --
------- ------ ------- -------
$ 5.98 $12.35 $ 14.30 $ 13.44
======= ====== ======= =======
(38.97%) (4.63%) 13.74% (4.07%)(c)
1.74% 3.35% 0.56% 0.25% ++
1.14% 1.03% 1.05% 0.96% ++
1.45% 1.28% 1.30% 1.21% ++
164% 189% 44% 75%
$ 6 $ 7 $25,394 $20,322
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Small Cap Value Fund (the "Fund"), a diversified fund.
The Fund currently offers five classes of shares. Class A shares and Class B
shares commenced on June 1, 1998. Class C shares commenced on September 1, 1998.
Class I shares commenced on February 16, 2005. Investor Class shares commenced
on February 28, 2008. Investor Class and Class A shares are offered at net asset
value per share plus an initial sales charge. No sales charge applies on
investments of $1 million or more (and certain other qualified purchases) in
Investor Class and Class A shares, but a contingent deferred sales charge is
imposed on certain redemptions of such shares within one year of the date of
purchase. Class B shares and Class C shares are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase of Class B shares and a 1%
contingent deferred sales charge may be imposed on redemptions made within one
year of purchase of Class C shares. Class I shares are not subject to a sales
charge. Depending upon eligibility, Class B shares convert to either Investor
Class or Class A shares eight years after the date they were purchased.
Additionally, depending upon eligibility, Investor Class shares may convert to
Class A shares and Class A shares may convert to Investor Class shares. The five
classes of shares have the same voting (except for issues that relate solely to
one class), dividend, liquidation and other rights and bear the same conditions
except that Class B and Class C shares are subject to higher distribution fee
rates than Investor Class and Class A shares under a distribution plan pursuant
to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a
distribution or service fee.
The Fund's investment objective is to seek long-term capital appreciation by
investing primarily in securities of small-cap companies.
Small-capitalization companies may be more volatile in price and have
significantly lower trading volumes than companies with larger capitalizations.
They may be more vulnerable to adverse business or market developments than
large-capitalization companies.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the Fund is open for business
("valuation date"). Securities that are not traded on the valuation date are
valued at the mean of the latest quoted bid and asked prices. Prices normally
are taken from the principal market in which each security trades. Investments
in other mutual funds are valued at their net asset values as of the close of
the New York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor, as defined in Note 3(A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund did not hold
securities that were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation
20 MainStay Small Cap Value Fund
established for all entities, including pass-through entities such as the Fund,
a minimum threshold for financial statement recognition of the benefit of
positions taken in filing tax returns (including whether an entity is taxable in
a particular jurisdiction), and requires certain expanded tax disclosures. The
Interpretation became effective for the Fund's 2008 fiscal year, and was applied
to all open tax years as of the date of effectiveness. The Manager, as defined
in Note 3(A), determined that the adoption of the Interpretation did not have an
impact on the Fund's financial statements upon adoption. The Manager continually
reviews the Fund's tax positions and such conclusions under the Interpretation
based on factors, including, but not limited to, ongoing analyses of tax laws
and regulations and interpretations thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to a borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
securities out on loan. The Fund and NYLIM reserve the right to reinstitute
lending when deemed appropriate.
(I) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. MacKay Shields
LLC (the "Subadvisor"), a registered investment adviser and an indirect wholly-
owned subsidiary of New York Life, serves as subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the
terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement")
between NYLIM and the Subadvisor, NYLIM pays for the services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.85% on assets up to $1.0 billion and 0.80% on assets in
excess of $1.0 billion. The Manager has also contractually agreed to waive its
management fee so that the management fee is 0.60% on assets up to $1.0 billion
and 0.55% on assets in excess of $1.0 billion.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage, other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net assets: Investor Class, 1.65%; Class A, 1.55%; Class B,
2.40%; Class C, 2.40%; and Class I, 1.24%. This expense limitation may be
modified or terminated only with the approval of the Board of Trustees. NYLIM
may recoup the amount of certain management fee waivers or expense
reimbursements from the Fund pursuant to the agreement if such action does not
cause the Fund to exceed the existing expense limitation and the recoupment is
made within three years after the year in which NYLIM incurred the expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $502,432 and waived expenses in the amount of $190,847, of which
$44,516 is subject to recoupment.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2011 TOTAL
$44,516 $44,516
----------------------------------------
</Table>
Between August 1, 2007 and April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 1.55%; Class B,
2.30%; Class C, 2.30%; and Class I, 1.24%. Prior to August 1, 2007, NYLIM had a
different expense limitation agreement in place with respect to the Fund.
Effective August 1, 2008, the fee for fund accounting and recordkeeping services
provided is included within the management fee paid by the Fund. Prior to August
1, 2008, the Fund paid the Manager a monthly fee for certain pricing and
recordkeeping services provided under an Accounting Agreement at the annual rate
of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30 of
1% of the next $80 million of average monthly net assets and 1/100 of 1% of any
amount in excess of $100 million of
22 MainStay Small Cap Value Fund
average monthly net assets. Fees for these services provided to the Fund by the
Manager amounted to $17,938 for the period from November 1, 2007 to July 31,
2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an
indirect wholly-owned subsidiary of New York Life. The Fund, with respect to
each class of shares, other than Class I shares, has adopted distribution plans
(the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940
Act.
Pursuant to the Investor Class and Class A Plans, the Distributor receives a
monthly distribution fee from the Fund at an annual rate of 0.25% of the average
daily net assets of the Fund's Investor Class and Class A shares, which is an
expense of the Investor Class and Class A shares of the Fund for distribution or
service activities as designated by the Distributor. Pursuant to the Class B and
Class C Plans, the Fund pays the Distributor a monthly distribution fee, which
is an expense of the Class B and Class C shares of the Fund, at the annual rate
of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Plans provide that the Class B and Class C shares of the Fund also
incur a service fee at the annual rate of 0.25% of the average daily net asset
value of the Class B and Class C shares of the Fund. Class I shares are not
subject to a distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares was $3,135
and $5,659, respectively for the year ended October 31, 2008. The Fund was also
advised that the Distributor retained contingent deferred sales charges on
redemptions of Class A, Class B and Class C shares of $258, $22,391, and $847,
respectively, for the year ended October 31, 2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $283,196.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees shown on the Statement of
Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 206 0.0%++
- -------------------------------------------------
Class C 127 0.0 ++
- -------------------------------------------------
Class I 1,270 21.8
- -------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $2,028.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$447,259 $(18,584,843) $-- $(17,223,940) $(35,361,524)
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sales deferrals and partnership basis adjustments.
The following table discloses the current year reclassifications between
accumulated distributions in excess of net investment income and accumulated net
realized gain on investments arising from permanent differences; net assets at
October 31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$(95,175) $86,434 $8,741
---------------------------------------------
</Table>
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The reclassifications for the Fund are primarily due to partnership basis
adjustments, distribution redesignations and REIT adjustments.
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $18,584,843 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS CAPITAL LOSS
AVAILABLE AMOUNTS
THROUGH (000'S)
2016 $18,585
-------------------------------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Ordinary Income $ 6,096,969 $ 563,197
Long-term Capital Gains 9,624,666 11,959,751
- -------------------------------------------------------
$15,721,635 $12,522,948
- -------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 7--PURCHASES AND SALES OF
SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $95,593 and $111,858, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008(a):
Shares sold 425,186 $ 3,736,979
Shares redeemed (293,644) (2,388,239)
-----------------------
Net increase in shares
outstanding before
conversion 131,542 1,348,740
Shares converted into
Investor Class (See Note
1) 1,416,869 12,188,268
Shares converted from
Investor Class (See Note
1) (105,776) (889,575)
-----------------------
Net Increase 1,422,635 $12,647,433
=======================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 616,196 $ 5,306,125
Shares issued to
shareholders in
reinvestment of
dividends and
distributions 848,565 7,904,036
Shares redeemed (1,851,705) (16,133,608)
-------------------------
Net decrease in shares
outstanding before
conversion (386,944) (2,923,447)
Shares converted into
Class A
(See Note 1) 361,960 3,163,741
Shares converted from
Class A
(See Note 1) (1,284,806) (11,037,536)
-------------------------
Net decrease (1,309,790) $(10,797,242)
=========================
Year ended October 31, 2007:
Shares sold 556,548 $ 7,376,177
Shares issued to
shareholders in
reinvestment of
dividends and
distributions 341,363 4,545,677
Shares redeemed (1,406,351) (18,527,209)
-------------------------
Net decrease in shares
outstanding before
conversion (508,440) (6,605,355)
Shares converted from
Class B (See Note 1) 421,745 5,545,030
-------------------------
Net decrease (86,695) $ (1,060,325)
=========================
</Table>
24 MainStay Small Cap Value Fund
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 253,215 $ 1,941,829
Shares issued to
shareholders in
reinvestment of
dividends and
distributions 653,789 5,425,315
Shares redeemed (943,613) (7,306,604)
-----------------------
Net increase (decrease) in
shares outstanding
before conversion (36,609) 60,540
Shares converted from Class
B
(See Note 1) (435,611) (3,424,898)
-----------------------
Net decrease (472,220) $ (3,364,358)
=======================
Year ended October 31, 2007:
Shares sold 239,117 $ 2,909,517
Shares issued to
shareholders in
reinvestment of
dividends and
distributions 318,066 3,867,412
Shares redeemed (881,148) (10,613,469)
-----------------------
Net decrease in shares
outstanding before
conversion (323,965) (3,836,540)
Shares reacquired upon
conversion into Class A
(See Note 1) (460,329) (5,545,030)
-----------------------
Net decrease (784,294) $ (9,381,570)
=======================
</Table>
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 72,869 $ 570,325
Shares issued to
shareholders in
reinvestment of dividends
and distributions 135,559 1,124,905
Shares redeemed (317,066) (2,497,723)
----------------------
Net decrease (108,638) $ (802,493)
======================
Year ended October 31, 2007:
Shares sold 86,603 $ 1,059,407
Shares issued to
shareholders in
reinvestment of dividends
and distributions 63,626 773,640
Shares redeemed (374,468) (4,530,652)
----------------------
Net decrease (224,239) $(2,697,605)
======================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 286 $ 2,400
Shares issued to
shareholders in
reinvestment of
dividends and
distributions 146 1,373
Shares redeemed -- --
-------------------------
Net increase 432 $ 3,773
=========================
Year ended October 31, 2007:
Shares sold 30,744 $ 441,418
Shares issued to
shareholders in
reinvestment of
dividends and
distributions 176,381 2,369,681
Shares redeemed (1,982,648) (26,583,486)
-------------------------
Net decrease (1,775,523) $(23,772,387)
=========================
</Table>
NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
NOTES 10--FUND REORGANIZATION:
On September 25, 2008, the Board of Trustees approved the reorganization of the
MainStay Small Cap Value Fund with and into the MainStay Small Cap Opportunity
Fund, a series of Eclipse Funds, for submission to shareholders. If the
shareholders approve the reorganization, the transaction is expected to close on
or about February 13, 2009. This reorganization is contingent upon the approval
by the shareholders of MainStay Small Cap Opportunity Fund and Mackay Shields
LLC, as that Fund's subadvisor.
mainstayinvestments.com 25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Small Cap Value Fund ("the Fund"),
one of the funds constituting The MainStay Funds, as of October 31, 2008, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year 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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or other appropriate auditing procedures where replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Small Cap Value Fund of The MainStay Funds as of October 31, 2008, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
26 MainStay Small Cap Value Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Small Cap Value Fund (the "Fund"), which was comprised
solely of Independent Trustees, unanimously approved the Management and
Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and MacKay Shields
LLC ("MacKay Shields"), an affiliate of NYLIM that serves as subadviser to the
Fund; (ii) the investment performance of the Fund; (iii) the costs of the
services to be provided, and profits to be realized, by NYLIM and its affiliates
from NYLIM's relationship with the Fund; (iv) the extent to which economies of
scale may be realized as the Fund grows, and the extent to which economies of
scale may benefit Fund investors; and (v) the reasonableness of the Fund's
management fee level and overall total ordinary operating expenses, particularly
as compared to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MACKAY SHIELDS
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing MacKay Shields and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing MacKay Shields' compliance with the
Fund's policies and investment objectives, and for implementing Board directives
as they relate to the Fund. The Board considered the scope and quality of
NYLIM's services provided to the Fund's shareholders (including services
provided through its affiliate, NYLIM Service Company LLC), such as the more
extensive servicing needs of New York Life agents and reputation as a high-
quality provider
mainstayinvestments.com 27
of shareholder services, which has been recognized by independent third-parties
on numerous occasions. The Board noted the role that the MainStay Family of
Funds historically has played in serving the investment needs of New York Life
Insurance Company policyholders, who often maintain smaller account balances
than other retail investors. The Board acknowledged that it had approved NYLIM's
recommendation to create a new "Investor Class" of shares designed principally
to address the higher shareholder-servicing costs typically associated with
smaller shareholder accounts. The Board considered the experience of senior
personnel at NYLIM providing management and administrative services to the Fund,
as well as NYLIM's reputation and financial condition. The Board also reviewed
NYLIM's willingness to invest in personnel designed to benefit the Fund, and
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
MacKay Shields provides to the Fund. The Board evaluated MacKay Shields'
experience in serving as subadviser to the Fund, noting that MacKay Shields
serves a variety of other investment advisory clients, including other pooled
investment vehicles. It examined MacKay Shields' track record and experience in
providing investment advisory services to the Fund, the experience of senior
management and administrative personnel at MacKay Shields, and MacKay Shields'
overall legal and compliance environment. The Board also reviewed MacKay
Shields' willingness to invest in personnel designed to benefit the Fund. In
this regard, the Board considered the experience of the Fund's portfolio
manager, the number of accounts managed by the portfolio manager and MacKay
Shields' method for compensating portfolio manager. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of MacKay Shields'
experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and MacKay Shields
concerning Fund investment performance, as well as discussions between the
Fund's portfolio manager and the Board that occurred at meetings from time to
time throughout the year and in previous years. The Board considered specific
actions that MacKay Shields had taken, or had agreed with the Board to take, to
improve investment performance, and any results of those actions. In considering
the Fund's investment performance, the Board focused principally on the Fund's
long-term performance track record, as opposed to the Fund's short-term
investment performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because MacKay Shields is
an affiliate of NYLIM whose subadvisory fee for advising the Fund is paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and MacKay Shields in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying MacKay
Shields' subadvisory fee. The Board acknowledged that NYLIM and MacKay Shields
must be in a position to pay and retain experienced professional personnel to
provide services to the Fund, and that NYLIM's ability to maintain a strong
financial position
28 MainStay Small Cap Value Fund
is important in order for NYLIM to continue to provide high-quality ongoing
services to the Fund and its shareholders. The Board noted, for example,
increased costs borne by NYLIM and its affiliates due to new and ongoing
regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and MacKay Shields from legally permitted "soft-
dollar" arrangements by which brokers provide research and other services to
NYLIM and MacKay Shields in exchange for commissions paid by the Fund with
respect to trades on the Fund's portfolio securities. The Board also considered
that, in addition to fees earned by NYLIM for managing the Fund, NYLIM
affiliates also earn revenues from serving the Fund in various other capacities,
including as transfer agent and distributor. The information provided to the
Board indicated that the profitability to NYLIM and its affiliates arising
directly from these other arrangements was not excessive. The Board noted that,
although it assessed the overall profitability of the Fund to NYLIM and its
affiliates as part of the annual contract review process, when considering the
reasonableness of the fees to be paid to NYLIM and its affiliates under the
Agreements, the Board considered the profitability of NYLIM's relationship with
the Fund on a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because MacKay Shields is an affiliate of NYLIM whose subadvisory
fee for advising the Fund is paid directly by NYLIM, the Board primarily
considered the reasonableness of the overall management fee paid by the Fund to
NYLIM as compared with peer funds.
The Board considered information provided by NYLIM and MacKay Shields on the
fees that NYLIM and MacKay Shields charge to other investment advisory clients,
including institutional separate accounts and other funds with similar
investment objectives as the Fund. In this regard, the Board took into account
the relative scope of services provided to the Fund as opposed to NYLIM's and
MacKay Shields' other investment advisory clients. The Board also considered
comparative data provided by Strategic Insight on the fees and expense ratios
charged by similar mutual funds managed by other investment advisers. This
comparative information assisted the Board in evaluating the reasonableness of
the Fund's management fee when compared to similar fees charged by NYLIM and
MacKay Shields to other investment advisory clients, and fees charged by other
investment advisers to mutual funds in the Fund's peer group.
mainstayinvestments.com 29
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
30 MainStay Small Cap Value Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advised shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $9,624,666.
For the fiscal year ended October 31, 2008, the Fund designates approximately
$509,789 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividends paid by the Fund during the fiscal year ended October 31, 2008
should be multiplied by 0.1% to arrive at the amount eligible for qualified
interest income and 29.8% for the corporate dividends received deduction.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
mainstayinvestments.com 31
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of
KIM Trustee since Managers and President and
9/24/60 September Chief Executive Officer
2008 (since April 2008) of New
York Life Investment
Management LLC and New York
Life Investment Management
Holdings LLC; Member of the
Board of Managers, MacKay
Shields LLC (since April
2008); Chairman of the
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
32 MainStay Small Cap Value Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 33
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
34 MainStay Small Cap Value Fund
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 35
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
This page intentionally left blank
This page intentionally left blank
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO14598 (RECYCLE LOGO) MS156-08 MSSV11-12/08
25
(MAINSTAY LOGO)
MAINSTAY
MAP FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY LOGO)
MAINSTAY
MAP FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 10
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 13
- ---------------------------------------------
FINANCIAL STATEMENTS 18
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 26
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 33
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS 34
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 37
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 37
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 37
- ---------------------------------------------
TRUSTEES AND OFFICERS 38
</Table>
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
INVESTOR CLASS SHARES(2)--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (6/9/99)
- -------------------------------------------------------
With sales charges (40.28%) 1.10% 3.50%
Excluding sales charges (36.80) 2.25 4.12
</Table>
(PERFORMANCE GRAPH) (With sales charges)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000 S&P 500 RUSSELL MIDCAP
FUND INDEX INDEX INDEX
------------ ------------ ------- --------------
6/9/99 9450 10000 10000 10000
9407 10311 10395 9791
11215 11304 11028 12115
10959 8459 8282 9932
9538 7245 7031 9135
12364 8961 8493 12412
14145 9813 9293 14285
16056 10854 10104 16869
18754 12630 11754 19806
21868 14466 13466 22823
10/31/08 13820 9171 8605 13541
</Table>
CLASS A SHARES--MAXIMUM 5.5% INITIAL SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (6/9/99)
- -------------------------------------------------------
With sales charges (40.28%) 1.10% 3.50%
Excluding sales charges (36.80) 2.25 4.12
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000 S&P 500 RUSSELL MIDCAP
FUND INDEX INDEX INDEX
------------ ------------ ------- --------------
6/9/99 23625 25000 25000 25000
23517 25777 25987 24478
28038 28260 27570 30286
27397 21148 20704 24829
23846 18112 17576 22837
30910 22403 21232 31031
35363 24533 23233 35712
40140 27134 25259 42172
46884 31576 29386 49514
54670 36165 33665 57058
10/31/08 34550 22927 21513 33852
</Table>
CLASS B SHARES--MAXIMUM 5% CDSC IF REDEEMED WITHIN THE FIRST SIX YEARS OF
PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (6/9/99)
- -------------------------------------------------------
With sales charges (40.08%) 1.17% 3.35%
Excluding sales charges (37.33) 1.47 3.35
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000 S&P 500 RUSSELL MIDCAP
FUND INDEX INDEX INDEX
------------ ------------ ------- --------------
6/9/99 10000 10000 10000 10000
9929 10311 10395 9791
11757 11304 11028 12115
11395 8459 8282 9932
9840 7245 7031 9135
12667 8961 8493 12412
14386 9813 9293 14285
16205 10854 10104 16869
18788 12630 11754 19806
21744 14466 13466 22823
10/31/08 13627 9171 8605 13541
</Table>
1. Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect maximum applicable sales charges explained in this paragraph,
change in share price, and reinvestment of dividend and capital-gain
distributions. The graphs assume an initial investment of $25,000 for Class A
shares and $10,000 for all other classes and reflect the deduction of all
sales charges that would have applied for the period of investment.
(Effective September 15, 2008, Class A shares have a $15,000 minimum initial
investment with no minimum subsequent purchase amount for investors that, in
the aggregate, have assets of $100,000 or more invested in any share classes
of any of the MainStay Funds.) Investor Class shares and Class A shares are
sold with a maximum initial sales charge of 5.50% and an annual 12b-1 fee of
0.25%. Class B shares are sold with no initial sales charge, are subject to a
contingent deferred sales charge ("CDSC") of up to 5.00%, if redeemed within
the first six years of purchase, and have an annual 12b-1 fee of 1.00%. Class
C shares are sold with no initial sales charge are sub-ject to a CDSC of
1.00%, if redeemed within one year of purchase, and have an annual 12b-1 fee
of 1.00%. Class I shares are sold with no initial sales charge or CDSC, have
no annual 12b-1 fee and are generally available to corporate and
institutional investors or individual investors with a minimum initial
investment of $5 million. Class R1 shares are sold with no initial sales
charge or CDSC and have no annual 12b-1 fee. Class R2 shares are sold with no
initial sales charge or CDSC and have an annual 12b-1 fee of 0.25%. Class R1
and R2 shares are available only through corporate-sponsored
THE FOOTNOTES ON THE FOLLOWING TWO PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 5
CLASS C SHARES--MAXIMUM 1% CDSC IF REDEEMED WITHIN ONE YEAR OF PURCHASE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (6/9/99)
- --------------------------------------------------------
With sales charges (37.85%) 1.48% 3.35%
Excluding sales charges (37.30) 1.48 3.35
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000 S&P 500 RUSSELL MIDCAP
FUND INDEX INDEX INDEX
------------ ------------ ------- --------------
6/9/99 10000 10000 10000 10000
9929 10311 10395 9791
11757 11304 11028 12115
11395 8459 8282 9932
9840 7245 7031 9135
12667 8961 8493 12412
14386 9813 9293 14285
16205 10854 10104 16869
18788 12630 11754 19806
21744 14466 13466 22823
10/31/08 13633 9171 8605 13541
</Table>
CLASS I SHARES(3)--MAXIMUM 4.75% INITIAL SALES CHARGE THROUGH 6/8/99
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
With sales charges (36.59%) 2.61% 5.23%
Excluding sales charges (36.59) 2.61 5.75
</Table>
(With sales charges)
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000 S&P 500
FUND INDEX INDEX
------------ ------------ -------
10/31/98 10000 10000 10000
11577 10311 10395
13841 11304 11028
13556 8459 8282
11827 7245 7031
15370 8961 8493
17649 9813 9293
20112 10854 10104
23573 12630 11754
27580 14466 13466
10/31/08 16657 11098 10403
</Table>
CLASS R1 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (6/9/99)
- -----------------------------------------------------------
(36.67%) 2.49% 4.33%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000 S&P 500 RUSSELL MIDCAP
FUND INDEX INDEX INDEX
------------ ------------ ------- --------------
6/9/99 10000 10000 10000 10000
9963 10311 10395 9791
11896 11304 11028 12115
11638 8459 8282 9932
10146 7245 7031 9135
13170 8961 8493 12412
15096 9813 9293 14285
17185 10854 10104 16869
20121 12630 11754 19806
23519 14466 13466 22823
10/31/08 14895 9171 8605 13541
</Table>
retirement programs, which include certain minimum program requirements.
Class R3 shares are sold with no initial sales charge or CDSC, have an annual
12b-1 fee of 0.50% and are available in certain individual retirement
accounts or in certain retirement plans. Performance figures reflect certain
fee waivers and/or expense limitations, without which total returns may have
been lower. These fee waivers and/or expense limitations are contractual and
may be modified or terminated only with the approval of the Board of
Trustees. The Manager may recoup the amount of certain management fee waivers
or expense reimbursements from the Fund pursuant to the contract if such
action does not cause the Fund to exceed existing limitations and the
recoupment is made within three years after the year in which the Manager
incurred the expense. On June 9, 1999, MAP-Equity Fund was reorganized as
MainStay MAP Fund Class I shares.
2. Performance figures for Investor Class shares, first offered on February 28,
2008, include the historical performance of Class A shares through February
27, 2008, adjusted for differences in certain contractual expenses and fees.
Unadjusted, the performance shown for Investor Class shares might have been
lower.
3. Performance figures for Class I shares, first offered on June 9, 1999,
include the historical performance of the MAP-Equity Fund shares (a
predecessor to the Fund) through June 8, 1999. Unadjusted, the performance
shown for Class I shares might have been lower.
4. Performance figures for Class R1 and R2 shares, each of which was first
offered to the public on January 2, 2004, include the historical performance
of Class A shares through December 31, 2003, adjusted for differences in
certain contractual expenses and fees. Unadjusted, the performance shown for
Class R1 and R2 shares might have been lower.
THE FOOTNOTES ON THE PRECEDING PAGE AND THE FOLLOWING PAGE ARE AN INTEGRAL PART
OF THE TABLES AND GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
6 MainStay MAP Fund
CLASS R2 SHARES(4)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (6/9/99)
- ----------------------------------------------
(36.78%) 2.26% 4.08%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000 S&P 500 RUSSELL MIDCAP
FUND INDEX INDEX INDEX
------------ ------------ ------- --------------
6/9/99 10000 10000 10000 10000
10/31/99 9950 10311 10395 9791
10/31/00 11851 11304 11028 12115
10/31/01 11566 8459 8282 9932
10/31/02 10057 7245 7031 9135
10/31/03 13022 8961 8493 12412
10/31/04 14894 9813 9293 14285
10/31/05 16911 10854 10104 16869
10/31/06 19753 12630 11754 19806
10/31/07 23033 14466 13466 22823
10/31/08 14562 9171 8605 13541
</Table>
CLASS R3 SHARES(5)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
SINCE
AVERAGE ANNUAL ONE FIVE INCEPTION
TOTAL RETURNS YEAR YEARS (6/9/99)
- ----------------------------------------------
(36.96%) 1.94% 3.79%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
MAINSTAY MAP RUSSELL 3000 S&P 500 RUSSELL MIDCAP
FUND INDEX INDEX INDEX
------------ ------------ ------- --------------
6/9/99 10000 10000 10000 10000
9940 10311 10395 9791
11810 11304 11028 12115
11499 8459 8282 9932
9974 7245 7031 9135
12883 8961 8493 12412
14688 9813 9293 14285
16614 10854 10104 16869
19336 12630 11754 19806
22502 14466 13466 22823
10/31/08 14184 9171 8605 13541
</Table>
<Table>
<Caption>
BENCHMARK PERFORMANCE
- ------------------------------------- One Five Since
Year Years Inception
- ---------------------------------------------------------------------------
Russell 3000(R) Index(6) (36.60%) 0.46% (0.93%)
S&P 500(R) Index(7) (36.10) 0.26 (1.60)
Average Lipper large-cap core fund(8) (36.22) (0.41) (1.68)
</Table>
5. Performance figures for Class R3 shares, which were first offered to the
public on April 28, 2006, include the historical performance of Class A
shares through April 27, 2006, adjusted for differences in certain
contractual expenses and fees. Unadjusted, the performance shown for Class R3
shares might have been lower.
6. The Russell 3000(R) Index measures the performance of the 3,000 largest U.S.
companies based on total market capitalization. Results assume reinvestment
of all income and capital gains. An investment cannot be made directly in an
index. The Russell 3000(R) Index is considered to be the Fund's broad-based
securities-market index for comparison purposes. An investment cannot be made
directly in an index.
7. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R)
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock-market performance. Results assume reinvestment of all
income and capital gains. An investment cannot be made directly in an index.
8. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
THE FOOTNOTES ON THE TWO PRECEDING PAGES ARE AN INTEGRAL PART OF THE TABLES AND
GRAPHS AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM.
mainstayinvestments.com 7
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MAP FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
INVESTOR CLASS SHARES $1,000.00 $689.60 $5.78 $1,018.30 $ 6.90
- --------------------------------------------------------------------------------------------------------
CLASS A SHARES $1,000.00 $690.00 $5.06 $1,019.20 $ 6.04
- --------------------------------------------------------------------------------------------------------
CLASS B SHARES $1,000.00 $686.80 $8.95 $1,014.50 $10.68
- --------------------------------------------------------------------------------------------------------
CLASS C SHARES $1,000.00 $687.10 $8.95 $1,014.50 $10.68
- --------------------------------------------------------------------------------------------------------
CLASS I SHARES $1,000.00 $691.10 $4.21 $1,020.20 $ 5.03
- --------------------------------------------------------------------------------------------------------
CLASS R1 SHARES $1,000.00 $690.80 $4.12 $1,020.30 $ 4.93
- --------------------------------------------------------------------------------------------------------
CLASS R2 SHARES $1,000.00 $689.80 $5.86 $1,018.20 $ 7.00
- --------------------------------------------------------------------------------------------------------
CLASS R3 SHARES $1,000.00 $689.00 $6.75 $1,017.10 $ 8.06
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class
(1.36% for Investor Class, 1.19% for Class A, 2.11% for Class B and Class C,
0.99% for Class I, 0.97% for Class R1, 1.38% for Class R2 and 1.59% for Class
R3) multiplied by the average account value over the period, divided by 366
and multiplied by 184 (to reflect the one-half year period). The table above
represents actual expenses incurred during the one-half year period and does
not take into account the Fund's written expense limitation agreement.
8 MainStay MAP Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2008
(COMPOSITION PIE CHART)
<Table>
Common Stocks 97.4
Short-Term Investment 3.8
Warrants 0.0
Convertible Preferred Stocks 0.0
Corporate Bonds 0.0
Liabilities in Excess of Cash and Other
Assets (1.2)
</Table>
++ Less than one-tenth of a percent.
See Portfolio of Investments on page 13 for specific holdings within these
categories.
TOP TEN HOLDINGS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENT)
<Table>
1. E.I. du Pont de Nemours & Co.
2. CVS Caremark Corp.
3. Wyeth
4. JPMorgan Chase & Co.
5. PepsiCo, Inc.
6. Johnson & Johnson
7. Coca-Cola Co. (The)
8. Occidental Petroleum Corp.
9. Cisco Systems, Inc.
10. ACE, Ltd.
</Table>
mainstayinvestments.com 9
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGERS MICHAEL J. MULLARKEY, ROGER LOB AND
CHRISTOPHER MULLARKEY OF FUND SUBADVISOR MARKSTON INTERNATIONAL LLC AND BY
PORTFOLIO MANAGERS JERROLD K. SENSER, CFA, AND THOMAS R. WENZEL, CFA, OF FUND
SUBADVISOR INSTITUTIONAL CAPITAL LLC.
HOW DID MAINSTAY MAP FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING
THE 12 MONTHS ENDED OCTOBER 31, 2008?
Excluding all sales charges, MainStay MAP Fund returned -36.80% for Investor
Class shares,(1) -36.80% for Class A shares, -37.33% for Class B shares and
- -37.30% for Class C shares for the 12 months ended October 31, 2008. Over the
same period, the Fund's Class I shares returned -36.59%, Class R1 shares
returned -36.67%, Class R2 shares returned -36.78% and Class R3 shares returned
- -36.96%. All share classes underperformed the -36.22% return of the average
Lipper(2) large-cap core fund for the 12 months ended October 31, 2008. Over the
same period, Class I shares outperformed--and all other share classes
underperformed--the -36.60% return of the Russell 3000(R) Index.(3) The Russell
3000(R) Index is the Fund's broad-based securities-market index. See pages 5 and
6 for Fund returns with sales charges.
WHAT KEY FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING
PERIOD?
Markston International:
During the reporting period, our portion of the Fund outperformed the Russell
3000(R) Index because of stock selection. In addition, the Fund kept its beta(4)
below 1 for the 12 months ended October 31, 2008.
ICAP:
Our portion of the Fund that invests in U.S. stocks underperformed the S&P
500(R) Index(5) during the reporting period. Favorable stock selection in the
financials sector helped us outperform the financials sector of the S&P 500(R)
Index. This advantage, however, was more than offset by unfavorable stock
selections in the industrials, health care and consumer discretionary sectors.
Our portion of the Fund that invests in global stocks(6) outperformed the MSCI
World(R) Index.(7) Favorable stock selection and weightings in the financials
and materials sectors helped contribute to the outperformance of this portion of
the Fund relative to this benchmark.
DURING THE REPORTING PERIOD, WHICH MARKET SEGMENTS MADE THE GREATEST
CONTRIBUTIONS TO PERFORMANCE IN YOUR PORTION OF THE FUND AND WHICH MARKET
SEGMENTS WERE THE GREATEST DETRACTORS?
Markston International:
In our portion of the Fund, select biotechnology, health care and information
technology stocks performed well relative to the Russell 3000(R) Index. These
market segments were less affected than other segments by the drop in consumer
spending during the reporting period. Compared to the Russell 3000(R) Index, the
weakest-performing market segments in our portion of the Fund were energy,
agriculture and financials. The credit crisis destroyed a lot of value in the
financials sector. As the lack of credit negatively affected the economy, income
levels dropped, which led to a decrease in consumption and declining commodity
prices.
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate those changes that
can adversely affect the value of the Fund's holdings. The principal risk of
investing in value stocks is that they may never reach what the portfolio
manager believes is their full value or they may even go down in value. Issuers
of convertible securities may not be as financially strong as issuers of
securities with higher credit ratings and may be more vulnerable to changes in
the economy. If an issuer stops making interest payments, principal payments or
both on its convertible securities, these securities may become worthless and
the Fund could lose its entire investment in them. Investments in foreign
securities may be subject to greater risks than U.S. investments, including
currency fluctuations, less-liquid trading markets, greater price volatility,
political and economic instability, less publicly available information, and
changes in tax or currency laws or monetary policy. These risks are likely to be
greater in emerging markets than in developed markets. The Fund may experience a
portfolio turnover of more than 100% and may generate taxable short-term capital
gains.
1. Performance for Investor Class shares prior to 2/28/08, the date the shares
were first offered, includes the historical performance of Class A shares
adjusted to reflect the differences in certain contractual fees and expenses
for such shares. Unadjusted, the perfor-mance shown for Investor Class shares
might have been lower.
2. See footnote on page 7 for more information on Lipper Inc.
3. See footnote on page 7 for more information on the Russell 3000(R) Index.
4. Beta is a measure of volatility in relation to the market as a whole. A beta
higher than 1 indicates that a security or portfolio will tend to exhibit
higher volatility than the market. A beta lower than 1 indicates that a
security or portfolio will tend to exhibit lower volatility than the market.
5. See footnote on page 7 for more information on the S&P 500(R) Index. The S&P
500(R) Index is a secondary benchmark of the Fund.
6. Effective September 2, 2008, MainStay MAP Fund's Principal Investment
Strategy was amended. As of that date, the Fund could invest up to 35% of its
net assets, plus any borrowings for investment purposes, in foreign
securities.
7. The Morgan Stanley Capital International World Index--the MSCI World
Index--is an unmanaged index that is considered to be representative of the
global stock market. Results assume reinvestment of all income and capital
gains. An investment cannot be made directly into an index.
10 MainStay MAP Fund
ICAP:
Relative to the S&P 500(R) Index, financials, materials and information
technology were the best-performing domestic equity sectors in our portion of
the Fund. Industrials, health care and consumer discretionary were our worst-
performing domestic equity sectors relative to the S&P 500(R) Index.
In the global equity portion of the Fund, financials, materials and information
technology were the best-performing sectors relative to the MSCI World(R) Index.
Industrials, energy and consumer staples were our worst-performing global equity
sectors relative to this benchmark.
DURING THE REPORTING PERIOD, WHICH STOCKS WERE STRONG CONTRIBUTORS TO
PERFORMANCE IN YOUR PORTION OF THE FUND AND WHICH STOCKS DETRACTED?
Markston International:
Strong contributors in our portion of the Fund included biotechnology company
Genentech, healthcare company Covidien Limited and discount retailer Wal-Mart
Stores. Genentech's shares rose after Roche offered to buy all the Genentech
shares that it didn't already own. Covidien performed well following its spin-
off from Tyco, and Wal-Mart benefited from its price-leadership strategy. Stocks
that detracted from performance included American International Group (AIG),
Wachovia and Morgan Stanley. All three saw their equity substantially impaired
as a result of the credit crisis.
ICAP:
Among our domestic equity holdings, XTO Energy, shipping and transportation
company Norfolk Southern and insurance company ACE Ltd. were the strongest
contributors to absolute performance. Our domestic equity holdings that
detracted the most from absolute performance were General Electric, mobile
telecommunications company Vodafone Group PLC ADR and networking equipment
company Cisco Systems.
Among our global equity holdings, oil and gas company Total S.A. ADR, ACE Ltd.
and JPMorgan Chase & Co. were the strongest contributors to absolute
performance. The global holdings that detracted the most from absolute
performance were Allianz SE, Baker Hughes and Prudential PLC.
DID YOU MAKE ANY SIGNIFICANT PURCHASES OR SALES IN YOUR PORTION OF THE FUND
DURING THE REPORTING PERIOD?
Markston International:
During the reporting period, we initiated positions in health care companies
Medtronic and Abbot Labs. Both companies appealed to us because they were
attractively priced, operated in consolidating industries, had insider buying or
stock accumulation and showed some operational restructuring. Two stocks that we
sold during the reporting period were AIG and Wachovia. Our original analysis of
these companies failed to adequately reflect how much their equity would be
impaired by a significant drop in housing prices.
ICAP:
In our portion of the Fund, we initiated a domestic equity position in Johnson &
Johnson, based on our perception that progress in the company's drug pipeline
would support solid earnings growth. We also added Lowe's as we believed that
the company's strong balance sheet, flexibility and increased market share had
positioned the company for improvement in the housing market. Among the stocks
that we eliminated during the reporting period were Hess and Norfolk Southern.
Each of these stocks achieved our target price, and we moved to lock in the
gains.
In our portion of the Fund that invests in global stocks, we initiated a
position in China Communications Construction, a company that we believe is
poised to benefit from increased Chinese infrastructure spending. We also added
Shire PLC, as we believed the company's growing portfolio of biotech products
would lead to positive earnings growth. We eliminated our position in Tyco
Electronics, since we believe the catalysts for growth are overwhelmed by the
current weakness in the economy. We also eliminated Morgan Stanley from our
domestic and global holdings, based on our assessment of the company's solvency
and liquidity risks.
DID THE SECTOR WEIGHTINGS IN YOUR PORTION OF THE FUND CHANGE DURING THE
REPORTING PERIOD?
Markston International:
During the reporting period, our portion of the Fund added to its consumer
discretionary allocation, which remained underweight relative to the Russell
3000(R) Index. We also selectively added to financial stocks that were favored
by the U.S. government's loan programs. Over the same period, we lowered the
cash position in our portion of the Fund. As of October 31, 2008, our portion of
the Fund was underweight consumer staples, information technology and consumer
discretionary stocks. As of the
mainstayinvestments.com 11
same date, our portion of the Fund was overweight relative to the Index in
financials and industrials and had roughly a 3.8% weighting in Treasurys.
ICAP:
Relative to the S&P 500(R) Index, our domestic equity weightings increased most
significantly in the consumer discretionary, financials and health care sectors.
Our relative weightings decreased most significantly in industrials, materials
and telecommuni-cation services. As of October 31, 2008, the largest sector
overweights relative to the S&P 500(R) Index among our domestic holdings were in
financials, consumer discretionary and health care. Our most significant sector
underweights were in industrials, utilities and energy.
Relative to the MSCI World Index(R), global weightings in our portion of the
Fund increased most signifi-cantly in the utilities, health care and consumer
discretionary sectors. Our global relative weightings decreased most
significantly in information technology, consumer staples and financials.
As of October 31, 2008, we felt that economic weakness might be building abroad
and our portion of the Fund was positioned accordingly. On that date, among our
global holdings, the most significant overweight sectors relative to the MSCI
World(R) Index included health care and consumer discretionary. Our most
significant global sector underweight positions were in information technology,
energy and financials. From a geographic perspective, we were also underweight
in Asia relative to the MSCI World(R) Index.
The opinions expressed are those of the portfolio managers as of the date of
this report and are subject to change. There is no guarantee that any forecasts
made will come to pass. This material does not constitute investment advice and
is not intended as an endorsement of any specific investment.
12 MainStay MAP Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS 97.4%+
- ---------------------------------------------------------------
AEROSPACE & DEFENSE 3.2%
BAE Systems PLC 499,200 $ 2,804,511
Boeing Co. (The) 187,300 9,790,171
GenCorp, Inc. (a) 142,100 696,290
Hexcel Corp. (a) 67,300 888,360
Honeywell International,
Inc. 35,800 1,090,110
Lockheed Martin Corp. 21,700 1,845,585
Northrop Grumman Corp. 169,728 7,958,546
Orbital Sciences Corp. (a) 136,500 2,796,885
Raytheon Co. 182,300 9,317,353
--------------
37,187,811
--------------
AIR FREIGHT & LOGISTICS 0.2%
TNT N.V. 116,100 2,430,700
--------------
AIRLINES 0.7%
Singapore Airlines, Ltd. 565,400 4,265,623
Southwest Airlines Co. 349,100 4,112,398
--------------
8,378,021
--------------
AUTO COMPONENTS 0.1%
Goodyear Tire & Rubber Co.
(The) (a) 95,650 853,198
--------------
AUTOMOBILES 0.8%
Daimler A.G. 81,050 2,798,602
Toyota Motor Corp.,
Sponsored ADR (b) 91,100 6,931,799
--------------
9,730,401
--------------
BEVERAGES 4.6%
V Coca-Cola Co. (The) 522,700 23,030,162
V PepsiCo, Inc. 447,941 25,537,117
SABMiller PLC 322,800 5,142,734
--------------
53,710,013
--------------
BIOTECHNOLOGY 2.0%
Alkermes, Inc. (a) 94,080 929,510
Amgen, Inc. (a) 75,253 4,506,902
Celgene Corp. (a) 108,892 6,997,400
Cubist Pharmaceuticals,
Inc. (a) 39,027 990,896
Genentech, Inc. (a) 67,630 5,609,232
Genzyme Corp. (a) 53,771 3,918,831
--------------
22,952,771
--------------
BUILDING PRODUCTS 0.6%
Masco Corp. 647,900 6,576,185
--------------
CAPITAL MARKETS 2.7%
Ameriprise Financial, Inc. 37,460 809,136
Bank of New York Mellon
Corp. (The) 413,675 13,485,805
Credit Suisse Group A.G.,
Sponsored ADR (b) 157,800 5,901,720
Jefferies Group, Inc. 207,838 3,290,075
Legg Mason, Inc. 22,110 490,621
Merrill Lynch & Co., Inc. 83,700 1,555,983
State Street Corp. 131,000 5,678,850
U.S. Global Investors, Inc.
Class A 2,870 20,693
Waddell & Reed Financial,
Inc. Class A 47,800 694,056
--------------
31,926,939
--------------
CHEMICALS 3.9%
Akzo Nobel N.V. 170,500 7,094,615
C.F. Industries Holdings,
Inc. 15,000 962,850
Chemtura Corp. 85,300 147,569
V E.I. du Pont de Nemours
& Co. 887,050 28,385,600
Monsanto Co. 88,914 7,911,568
Mosaic Co. (The) 21,740 856,773
--------------
45,358,975
--------------
COMMERCIAL BANKS 1.9%
Banco Santander S.A. 199,500 2,157,893
Danske Bank A/S 157,700 2,339,669
Popular, Inc. 424,171 3,223,700
U.S. Bancorp 191,900 5,720,539
Wells Fargo & Co. 267,174 9,097,275
--------------
22,539,076
--------------
COMMERCIAL SERVICES & SUPPLIES 0.6%
Covanta Holding Corp. (a) 256,173 5,523,090
Waste Management, Inc. 47,500 1,483,425
--------------
7,006,515
--------------
COMMUNICATIONS EQUIPMENT 2.0%
V Cisco Systems, Inc. (a) 1,175,250 20,884,192
Corning, Inc. 82,600 894,558
Finisar Corp. (a) 343,489 209,528
Harris Stratex Networks,
Inc. Class A (a) 6,102 40,456
Motorola, Inc. 10,100 54,237
NMS Communications Corp.
(a) 157,228 19,025
Nokia OYJ, Sponsored ADR
(b) 50,200 762,036
Nortel Networks Corp. (a) 547 684
--------------
22,864,716
--------------
COMPUTERS & PERIPHERALS 3.2%
Apple, Inc. (a) 142,625 15,345,024
Dell, Inc. (a) 249,500 3,031,425
Hewlett-Packard Co. 434,200 16,621,176
SanDisk Corp. (a) 200,442 1,781,929
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest holdings, as of October 31, 2008,
excluding short-term investment. May be subject to change daily.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
COMPUTERS & PERIPHERALS (CONTINUED)
Sun Microsystems, Inc. (a) 124,649 $ 573,386
--------------
37,352,940
--------------
CONSTRUCTION & ENGINEERING 0.4%
Chicago Bridge & Iron Co.
N.V. 42,000 520,380
China Communications
Construction Co., Ltd.
Class H 1,704,300 1,190,557
Jacobs Engineering Group,
Inc. (a) 82,000 2,987,260
--------------
4,698,197
--------------
CONSUMER FINANCE 2.6%
American Express Co. 441,700 12,146,750
Capital One Financial Corp. 340,900 13,336,008
Discover Financial Services 352,230 4,314,817
Rewards Network, Inc. (a) 10,186 38,707
--------------
29,836,282
--------------
CONTAINERS & PACKAGING 0.0%++
Smurfit-Stone Container
Corp. (a) 8,050 10,867
--------------
DIVERSIFIED CONSUMER SERVICES 0.2%
Coinstar, Inc. (a) 108,220 2,596,198
--------------
DIVERSIFIED FINANCIAL SERVICES 4.6%
Bank of America Corp. 638,024 15,421,040
Citigroup, Inc. 240,700 3,285,555
CME Group, Inc. 16,600 4,683,690
V JPMorgan Chase & Co. 627,250 25,874,063
Leucadia National Corp. 118,200 3,172,488
PHH Corp. (a) 83,020 669,141
--------------
53,105,977
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.8%
AT&T, Inc. 312,800 8,373,656
Cincinnati Bell, Inc. (a) 178,750 427,213
Global Crossing, Ltd. (a) 24,823 165,321
Verizon Communications,
Inc. 21,400 634,938
--------------
9,601,128
--------------
ELECTRIC UTILITIES 2.4%
ALLETE, Inc. 4,200 147,000
American Electric Power
Co., Inc. 46,365 1,512,890
Duke Energy Corp. 1,015,200 16,628,976
Energias de Portugal S.A. 2,051,200 7,066,551
Westar Energy, Inc. 101,700 1,982,133
--------------
27,337,550
--------------
ELECTRICAL EQUIPMENT 0.2%
Rockwell Automation, Inc. 70,500 1,950,735
--------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.4%
Anixter International, Inc.
(a) 11,000 369,710
Sanmina-SCI Corp. (a) 384,039 288,029
Tyco Electronics, Ltd. 193,689 3,765,314
--------------
4,423,053
--------------
ENERGY EQUIPMENT & SERVICES 2.0%
Baker Hughes, Inc. 314,450 10,990,027
BJ Services Co. 182,872 2,349,905
Exterran Holdings, Inc. (a) 33,000 739,530
Hercules Offshore, Inc. (a) 182,362 1,329,419
Key Energy Services, Inc.
(a) 243,905 1,512,211
Newpark Resources, Inc. (a) 41,620 239,315
Parker Drilling Co. (a) 68,200 349,184
Saipem S.p.A. 148,400 2,794,898
Schlumberger, Ltd. 33,600 1,735,440
Tidewater, Inc. 22,700 989,947
--------------
23,029,876
--------------
FOOD & STAPLES RETAILING 3.1%
V CVS Caremark Corp. 871,576 26,713,804
Great Atlantic & Pacific
Tea Co., Inc. (The) (a) 21,913 181,221
Wal-Mart Stores, Inc. 111,200 6,206,072
Walgreen Co. 130,950 3,333,987
--------------
36,435,084
--------------
FOOD PRODUCTS 0.6%
Archer-Daniels-Midland Co. 170,840 3,541,513
Bunge, Ltd. 47,690 1,831,773
Want Want China Holdings,
Ltd. 3,387,000 1,275,454
--------------
6,648,740
--------------
GAS UTILITIES 0.1%
National Fuel Gas Co. 13,900 503,041
Nicor, Inc. 21,050 972,720
--------------
1,475,761
--------------
HEALTH CARE EQUIPMENT & SUPPLIES 2.6%
ArthroCare Corp. (a) 12,210 253,724
Baxter International, Inc. 20,200 1,221,898
Boston Scientific Corp. (a) 203,150 1,834,444
Covidien, Ltd. 183,169 8,112,555
Gen-Probe, Inc. (a) 26,668 1,254,996
Hospira, Inc. (a) 102,800 2,859,896
Medtronic, Inc. 356,461 14,376,072
SurModics, Inc. (a) 7,030 186,295
--------------
30,099,880
--------------
HEALTH CARE PROVIDERS & SERVICES 1.0%
Aetna, Inc. 329,020 8,182,727
Cardinal Health, Inc. 58,170 2,222,094
</Table>
14 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
HEALTH CARE PROVIDERS & SERVICES (CONTINUED)
Humana, Inc. (a) 27,100 $ 801,889
SunLink Health Systems,
Inc. (a) 50,068 111,151
Universal Health Services,
Inc. Class B 3,000 126,120
--------------
11,443,981
--------------
HOTELS, RESTAURANTS & LEISURE 1.3%
InterContinental Hotels
Group PLC, ADR (b) 749,065 6,449,450
Marriott International,
Inc. Class A 24,164 504,303
McDonald's Corp. 130,800 7,577,244
Wyndham Worldwide Corp. 115,040 942,177
--------------
15,473,174
--------------
HOUSEHOLD DURABLES 0.0%++
Newell Rubbermaid, Inc. 9,500 130,625
--------------
HOUSEHOLD PRODUCTS 0.7%
Colgate-Palmolive Co. 28,200 1,769,832
Procter & Gamble Co. (The) 91,500 5,905,410
--------------
7,675,242
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.4%
AES Corp. (The) (a) 402,000 3,203,940
Dynegy, Inc. Class A (a) 338,000 1,230,320
Mirant Corp. (a) 29,700 520,344
--------------
4,954,604
--------------
INDUSTRIAL CONGLOMERATES 2.4%
3M Co. 39,590 2,545,637
General Electric Co. 869,073 16,955,614
Hutchison Whampoa, Ltd. 342,500 1,874,767
Siemens A.G. 29,900 1,788,893
Tyco International, Ltd. 162,789 4,115,306
--------------
27,280,217
--------------
INSURANCE 6.5%
V ACE, Ltd. 357,500 20,506,200
Allianz SE 57,650 4,317,353
Allstate Corp. (The) 180,100 4,752,839
Aon Corp. 130,740 5,530,302
Chubb Corp. (The) 9,700 502,654
HCC Insurance Holdings,
Inc. 51,000 1,125,060
Marsh & McLennan Cos., Inc. 101,655 2,980,525
MetLife, Inc. 444,611 14,769,977
Phoenix Cos., Inc. (The) 45,900 296,973
Principal Financial Group,
Inc. 62,200 1,181,178
Prudential PLC 548,100 2,813,715
Reinsurance Group of
America, Inc. Class B (a) 15,992 592,344
Travelers Cos., Inc. (The) 181,006 7,701,805
W.R. Berkley Corp. 319,750 8,399,832
--------------
75,470,757
--------------
INTERNET & CATALOG RETAIL 0.2%
Liberty Media Corp.
Interactive Class A (a) 438,790 2,141,295
Stamps.com, Inc. (a) 30,594 298,598
--------------
2,439,893
--------------
INTERNET SOFTWARE & SERVICES 1.8%
eBay, Inc. (a) 216,725 3,309,391
Internet Capital Group,
Inc. (a) 33,850 193,622
S1 Corp. (a) 230,322 1,444,119
Valueclick, Inc. (a) 138,374 1,023,968
VeriSign, Inc. (a) 547,598 11,609,077
Yahoo!, Inc. (a) 237,576 3,045,724
--------------
20,625,901
--------------
IT SERVICES 0.1%
Computer Sciences Corp. (a) 47,400 1,429,584
--------------
MACHINERY 0.2%
Caterpillar, Inc. 75,200 2,870,384
--------------
MARINE 0.1%
American Commercial Lines,
Inc. (a) 139,164 1,033,989
--------------
MEDIA 4.2%
Ascent Media Corp. Class A
(a) 1,729 43,726
British Sky Broadcasting
Group PLC 760,900 4,639,465
Cablevision Systems Corp.
Class A 138,200 2,450,286
Comcast Corp. Class A 113,200 1,784,032
DIRECTV Group, Inc. (The)
(a) 11,000 240,790
Discovery Communications,
Inc.
Class A (a) 17,293 235,876
Class C (a) 17,293 230,343
Liberty Media Corp. Capital
Class A (a) 49,085 334,269
Liberty Media Corp.
Entertainment Class A (a) 196,340 3,161,074
Marvel Entertainment, Inc.
(a) 34,400 1,107,336
News Corp. Class A 1,530,104 16,280,307
Primedia, Inc. 11,729 14,661
Time Warner, Inc. 155,000 1,563,950
Viacom, Inc. Class B (a) 722,500 14,608,950
Walt Disney Co. (The) 8,500 220,150
WPP Group PLC 378,700 2,287,905
--------------
49,203,120
--------------
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
METALS & MINING 0.1%
United States Steel Corp. 35,400 $ 1,305,552
--------------
MULTI-UTILITIES 1.0%
Black Hills Corp. 14,150 357,288
CMS Energy Corp. 112,800 1,156,200
Dominion Resources, Inc. 20,000 725,600
DTE Energy Corp. 26,200 924,860
GDF Suez S.A. 116,100 5,169,679
Sempra Energy 18,600 792,174
Suez Environnement S.A. (a) 117,600 2,261,019
--------------
11,386,820
--------------
MULTILINE RETAIL 1.4%
Kohl's Corp. (a) 89,100 3,130,083
Target Corp. 316,550 12,699,986
--------------
15,830,069
--------------
OFFICE ELECTRONICS 0.0%++
Xerox Corp. 52,300 419,446
--------------
OIL, GAS & CONSUMABLE FUELS 9.5%
Anadarko Petroleum Corp. 134,100 4,733,730
Apache Corp. 97,400 8,018,942
BP PLC, Sponsored ADR (b) 109,400 5,437,180
Chesapeake Energy Corp. 101,700 2,234,349
Chevron Corp. 60,374 4,503,900
ConocoPhillips 63,578 3,307,328
Devon Energy Corp. 207,171 16,751,847
ExxonMobil Corp. 53,200 3,943,184
Hess Corp. 41,400 2,492,694
Marathon Oil Corp. 404,500 11,770,950
Noble Energy, Inc. 49,954 2,588,616
V Occidental Petroleum
Corp. 376,340 20,901,924
Plains Exploration &
Production Co. (a) 3,557 100,307
Spectra Energy Corp. 501,500 9,693,995
Total S.A., Sponsored ADR
(b) 197,200 10,932,768
Williams Cos., Inc. 133,100 2,791,107
--------------
110,202,821
--------------
PAPER & FOREST PRODUCTS 0.2%
MeadWestvaco Corp. 75,005 1,052,320
Weyerhaeuser Co. 24,154 923,166
--------------
1,975,486
--------------
PHARMACEUTICALS 10.1%
Abbott Laboratories 139,677 7,703,187
Bayer A.G 121,300 6,657,392
V Johnson & Johnson 414,850 25,446,899
Merck & Co., Inc. 5,000 154,750
Merck KGaA 53,750 4,759,045
Mylan, Inc. (a) 36,500 312,805
Novartis A.G., ADR (b) 317,100 16,168,929
Roche Holdings A.G.,
Sponsored ADR (b) 88,900 6,728,103
Schering-Plough Corp. 924,800 13,400,352
Shire, Ltd. 354,450 4,685,561
Teva Pharmaceutical
Industries, Ltd.,
Sponsored ADR (b) 117,998 5,059,754
V Wyeth 821,650 26,440,697
--------------
117,517,474
--------------
PROFESSIONAL SERVICES 0.0% ++
On Assignment, Inc. (a) 14,800 96,200
--------------
REAL ESTATE INVESTMENT TRUSTS 0.7%
Friedman, Billings, Ramsey
Group, Inc. Class A (a) 23,100 14,553
HCP, Inc. 90,946 2,722,014
UDR, Inc. 283,170 5,595,439
--------------
8,332,006
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.3%
St. Joe Co. (The) (a) 119,300 3,688,756
--------------
ROAD & RAIL 1.1%
Celadon Group, Inc. (a) 110,474 1,180,967
CSX Corp. 42,100 1,924,812
East Japan Railway Co. 815 5,791,451
Guangshen Railway Co., Ltd.
Class H 3,956,200 1,515,638
Norfolk Southern Corp. 8,050 482,517
Union Pacific Corp. 36,400 2,430,428
--------------
13,325,813
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 2.0%
Applied Micro Circuits
Corp. (a) 54,262 277,279
Cirrus Logic, Inc. (a) 131,291 753,611
Intel Corp. 248,920 3,982,720
NVIDIA Corp. (a) 21,899 191,835
Skyworks Solutions, Inc.
(a) 48,778 347,787
Texas Instruments, Inc. 904,100 17,684,196
--------------
23,237,428
--------------
SOFTWARE 1.5%
Adobe Systems, Inc. (a) 56,100 1,494,504
Blackboard, Inc. (a) 39,039 955,675
Compuware Corp. (a) 91,472 583,591
i2 Technologies, Inc. (a) 114,152 1,626,666
Macrovision Solutions Corp.
(a) 13,855 153,513
Microsoft Corp. 555,133 12,396,120
MSC.Software Corp. (a) 2,700 23,220
</Table>
16 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
<Table>
<Caption>
SHARES VALUE
COMMON STOCKS (CONTINUED)
SOFTWARE (CONTINUED)
Oracle Corp. (a) 22,500 $ 411,525
TIBCO Software, Inc. (a) 36,300 186,945
--------------
17,831,759
--------------
SPECIALTY RETAIL 2.1%
Circuit City Stores, Inc. 15,900 4,134
Home Depot, Inc. (The) 423,103 9,981,000
Lowe's Cos., Inc. 590,750 12,819,275
PEP Boys-Manny, Moe & Jack 220,955 1,065,003
--------------
23,869,412
--------------
WIRELESS TELECOMMUNICATION SERVICES 2.0%
NTT DoCoMo, Inc. 3,245 5,148,379
Sprint Nextel Corp. 105,141 329,091
Vodafone Group PLC, ADR (b) 940,350 18,120,545
--------------
23,598,015
--------------
Total Common Stocks
(Cost $1,410,961,331) 1,132,766,117
--------------
CONVERTIBLE PREFERRED STOCK 0.0%++
- ---------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE 0.0%++
Six Flags, Inc.
7.25% 101,600 304,800
--------------
Total Convertible Preferred
Stock
(Cost $2,279,079) 304,800
--------------
<Caption>
NUMBER OF
WARRANTS
WARRANTS 0.0%++
- ---------------------------------------------------------------
MARINE 0.0%++
American Commercial Lines,
Inc.
Strike Price $12.00
Expire 1/12/09 (a)(c) 6,765 320,932
--------------
Total Warrants
(Cost $3,173,826) 320,932
--------------
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BOND 0.0%++
CORPORATE BOND 0.0%++
- ---------------------------------------------------------------
MARINE 0.0%++
American Commercial Lines
LLC
11.25%, due 1/1/09
(c)(d)(e)(f) $ 5,511,870 $ 37,419
--------------
Total Long-Term Bond
(Cost $0) 37,419
--------------
SHORT-TERM INVESTMENT 3.8%
- ---------------------------------------------------------------
REPURCHASE AGREEMENT 3.8%
State Street Bank & Trust
Co.
0.10%, dated 10/31/08
due 11/3/08 Proceeds at
Maturity $44,494,557
(Collateralized by
various Federal Home Loan
Bank Securities with
rates between 2.673%-
3.625% and maturity dates
between 3/4/09-7/1/11 and
a Federal National
Mortgage Association
Security with a rate of
4.875% and a maturity
date of 4/15/09 with a
Principal Amount of
$44,905,000 and Market
Value of
$45,387,683) 44,494,187 44,494,187
--------------
Total Short-Term Investment
(Cost $44,494,187) 44,494,187
--------------
Total Investments
(Cost $1,460,908,423) (g) 101.2% 1,177,923,455
Liabilities in Excess of
Cash and Other Assets (1.2) (13,479,778)
----- ------------
Net Assets 100.0% $1,164,443,677
===== ============
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) Non-income producing security.
(b) ADR--American Depositary Receipt.
(c) Fair valued security. The total market
value of these securities at October 31,
2008 is $358,351, which represents less
than one-tenth of a percent of the Fund's
net assets.
(d) Illiquid security. The total market value
of this security at October 31, 2008 is
$37,419, which represents less than one-
tenth of a percent of the Fund's net
assets.
(e) Escrow Reserve-Reserve account for
disputed claims.
(f) Issue in default.
(g) At October 31, 2008, cost is
$1,481,476,119 for federal income tax
purposes and net unrealized depreciation
is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 73,070,939
Gross unrealized depreciation (376,623,603)
-------------
Net unrealized depreciation $(303,552,664)
=============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
17
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $1,460,908,423) $1,177,923,455
Cash denominated in foreign
currency
(identified cost $67) 68
Receivables:
Investment securities sold 9,288,512
Dividends and interest 1,472,303
Fund shares sold 1,211,841
Other assets 77,978
--------------
Total assets 1,189,974,157
--------------
LIABILITIES:
Payables:
Investment securities purchased 22,044,746
Fund shares redeemed 1,473,512
Manager (See Note 3) 659,975
Transfer agent (See Note 3) 602,722
NYLIFE Distributors (See Note 3) 396,593
Shareholder communication 218,679
Professional fees 86,669
Custodian 33,638
Trustees 4,662
Accrued expenses 9,284
--------------
Total liabilities 25,530,480
--------------
Net assets $1,164,443,677
==============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 514,226
Additional paid-in capital 1,561,714,278
--------------
1,562,228,504
Accumulated undistributed net
investment income 10,781,818
Accumulated net realized loss on
investments and foreign currency
transactions (125,534,893)
Net unrealized depreciation on
investments (282,984,968)
Net unrealized depreciation on
translation of other assets and
liabilities in foreign
currencies (46,784)
--------------
Net assets $1,164,443,677
==============
INVESTOR CLASS
Net assets applicable to
outstanding shares $ 72,709,322
==============
Shares of beneficial interest
outstanding 3,156,273
==============
Net asset value per share
outstanding $ 23.04
Maximum sales charge (5.50% of
offering price) 1.34
--------------
Maximum offering price per share
outstanding $ 24.38
==============
CLASS A
Net assets applicable to
outstanding shares $ 291,812,494
==============
Shares of beneficial interest
outstanding 12,663,104
==============
Net asset value per share
outstanding $ 23.04
Maximum sales charge (5.50% of
offering price) 1.34
--------------
Maximum offering price per share
outstanding $ 24.38
==============
CLASS B
Net assets applicable to
outstanding shares $ 189,014,550
==============
Shares of beneficial interest
outstanding 8,848,043
==============
Net asset value and offering price
per share
outstanding $ 21.36
==============
CLASS C
Net assets applicable to
outstanding shares $ 178,672,337
==============
Shares of beneficial interest
outstanding 8,362,403
==============
Net asset value and offering price
per share
outstanding $ 21.37
==============
CLASS I
Net assets applicable to
outstanding shares $ 425,265,930
==============
Shares of beneficial interest
outstanding 18,090,504
==============
Net asset value and offering price
per share
outstanding $ 23.51
==============
CLASS R1
Net assets applicable to
outstanding shares $ 232,252
==============
Shares of beneficial interest
outstanding 10,000
==============
Net asset value and offering price
per share
outstanding $ 23.23
==============
CLASS R2
Net assets applicable to
outstanding shares $ 6,426,880
==============
Shares of beneficial interest
outstanding 278,755
==============
Net asset value and offering price
per share
outstanding $ 23.06
==============
CLASS R3
Net assets applicable to
outstanding shares $ 309,912
==============
Shares of beneficial interest
outstanding 13,495
==============
Net asset value and offering price
per share
outstanding $ 22.97
==============
</Table>
18 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Dividends $ 32,760,568
Interest 1,345,339
Income from securities
loaned--net 614,440
-------------
Total income 34,720,347
-------------
EXPENSES:
Manager (See Note 3) 11,655,365
Distribution--Class B (See Note
3) 2,219,753
Distribution--Class C (See Note
3) 2,021,812
Distribution--Class R3 (See Note
3) 855
Transfer agent--Investor Class
(See Note 3) 166,099
Transfer agent--Class A (See Note
3) 974,709
Transfer agent--Classes B and C
(See Note 3) 1,503,247
Transfer agent --Classes I, R1,
R2 and R3 (See Note 3) 753,135
Distribution/Service--Investor
Class (See Note 3) 140,923
Distribution/Service--Class A
(See Note 3) 1,201,988
Service--Class B (See Note 3) 739,918
Service--Class C (See Note 3) 673,937
Distribution/Service--Class R2
(See Note 3) 20,343
Distribution/Service--Class R3
(See Note 3) 855
Shareholder communication 392,697
Professional fees 209,062
Recordkeeping (a) 142,461
Registration 137,233
Trustees 57,556
Custodian 43,385
Shareholder service--Class R1
(See Note 3) 7,000
Shareholder service--Class R2
(See Note 3) 8,137
Shareholder service--Class R3
(See Note 3) 342
Miscellaneous 83,439
-------------
Total expenses before waiver 23,154,251
Expense waiver from Manager (See
Note 3) (120,535)
-------------
Net expenses 23,033,716
-------------
Net investment income 11,686,631
-------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized loss on:
Security transactions $(121,542,896)
Foreign currency transactions (306,188)
-------------
Net realized loss on investments
and foreign currency transactions (121,849,084)
-------------
Net change in unrealized
appreciation on:
Security transactions (582,683,113)
Translation of other assets and
liabilities in foreign
currencies (46,784)
-------------
Net change in unrealized
appreciation on investments and
foreign currency transactions (582,729,897)
-------------
Net realized and unrealized loss on
investments and foreign currency
transactions (704,578,981)
-------------
Net decrease in net assets
resulting from operations $(692,892,350)
=============
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
19
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 2008 AND OCTOBER 31, 2007
<Table>
<Caption>
2008 2007
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 11,686,631 $ 9,785,479
Net realized gain (loss)
on investments and
foreign currency
transactions (121,849,084) 206,185,245
Net change in unrealized
appreciation
(depreciation) on
investments and
foreign currency
transactions (582,729,897) 34,411,705
-------------------------------
Net increase (decrease)
in net assets
resulting from
operations (692,892,350) 250,382,429
-------------------------------
Dividends and distributions to
shareholders:
From net investment income:
Class A (3,806,297) (1,298,699)
Class I (4,002,781) (1,862,014)
Class R1 (99,389) (69,530)
Class R2 (49,463) (16,990)
Class R3 (1,139) (6)
-------------------------------
(7,959,069) (3,247,239)
-------------------------------
From net realized gain on investments:
Class A (70,672,548) (41,719,679)
Class B (43,873,928) (29,677,567)
Class C (38,749,093) (20,958,071)
Class I (48,317,817) (27,940,195)
Class R1 (1,357,529) (1,243,856)
Class R2 (943,174) (458,643)
Class R3 (28,767) (817)
-------------------------------
(203,942,856) (121,998,828)
-------------------------------
Total dividends and
distributions to
shareholders (211,901,925) (125,246,067)
-------------------------------
Capital share transactions:
Net proceeds from sale of
shares $ 521,256,181 $ 430,483,762
Net asset value of shares
issued to shareholders
in reinvestment of
dividends and
distributions 187,112,652 111,185,137
Cost of shares redeemed (455,569,781) (354,712,645)
-------------------------------
Increase in net assets
derived from capital
share transactions 252,799,052 186,956,254
-------------------------------
Net increase (decrease)
in net assets (651,995,223) 312,092,616
NET ASSETS:
Beginning of year 1,816,438,900 1,504,346,284
-------------------------------
End of year $1,164,443,677 $1,816,438,900
===============================
Accumulated undistributed
net investment income at
end of year $ 10,781,818 $ 7,182,362
===============================
</Table>
20 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
This page intentionally left blank
mainstayinvestments.com 21
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
INVESTOR CLASS
--------------
FEBRUARY 28,
2008** CLASS A
THROUGH --------------------------------------------------------
OCTOBER 31, YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
2008 2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 32.90 $ 41.39 $ 38.55 $ 35.03 $ 32.08 $ 28.04
------- -------- -------- -------- -------- --------
Net investment income
(loss) (a) 0.17 0.31 0.31 0.11 0.10 (b) (0.01)
Net realized and
unrealized gain (loss)
on investments (10.02) (13.88) 5.68 5.54 4.16 4.05
Net realized and
unrealized loss on
foreign currency
transactions (0.01) (0.01) -- -- -- --
------- -------- -------- -------- -------- --------
Total from investment
operations (9.86) (13.58) 5.99 5.65 4.26 4.04
------- -------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income -- (0.22) (0.09) -- -- --
From net realized gain
on investments -- (4.55) (3.06) (2.13) (1.31) --
------- -------- -------- -------- -------- --------
Total dividends and
distributions -- (4.77) (3.15) (2.13) (1.31) --
------- -------- -------- -------- -------- --------
Net asset value at end of
period $ 23.04 $ 23.04 $ 41.39 $ 38.55 $ 35.03 $ 32.08
======= ======== ======== ======== ======== ========
Total investment return
(c)(d) (29.97%)(e) (36.80%) 16.61% 16.80% 13.51% 14.41%
Ratios (to average
net assets)/
Supplemental Data:
Net investment income
(loss) 0.81%++ 0.96% 0.79% 0.28% 0.29%(b) (0.05%)
Net expenses 1.35%++ 1.23% 1.27% 1.35% 1.35% 1.35%
Expenses (before
reimbursement) 1.35%++ 1.25% 1.27% 1.33% 1.37% 1.38%
Portfolio turnover rate 96% 96% 76% 100% 56% 64%
Net assets at end of
period (in 000's) $72,709 $291,812 $647,374 $524,523 $358,214 $268,513
</Table>
<Table>
<Caption>
CLASS C
--------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 38.79 $ 36.49 $ 33.50 $ 30.96 $ 27.26
-------- -------- -------- -------- --------
Net investment income
(loss) (a) 0.04 0.01 (0.16) (0.15) (b) (0.24)
Net realized and
unrealized gain (loss)
on investments (12.90) 5.35 5.28 4.00 3.94
Net realized and
unrealized loss on
foreign currency
transactions (0.01) -- -- -- --
-------- -------- -------- -------- --------
Total from investment
operations (12.87) 5.36 5.12 3.85 3.70
-------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income -- -- -- -- --
From net realized gain
on investments (4.55) (3.06) (2.13) (1.31) --
-------- -------- -------- -------- --------
Total dividends and
distributions (4.55) (3.06) (2.13) (1.31) --
-------- -------- -------- -------- --------
Net asset value at end of
period $ 21.37 $ 38.79 $ 36.49 $ 33.50 $ 30.96
======== ======== ======== ======== ========
Total investment return
(c)(d) (37.30%) 15.73% 15.94% 12.64% 13.57%
Ratios (to average
net assets)/
Supplemental Data:
Net investment income
(loss) 0.13% 0.04% (0.46%) (0.46%)(b) (0.80%)
Net expenses 2.07% 2.02% 2.10% 2.10% 2.10%
Expenses (before
reimbursement) 2.07% 2.02% 2.08% 2.12% 2.13%
Portfolio turnover rate 96% 76% 100% 56% 64%
Net assets at end of
period (in 000's) $178,672 $331,430 $245,458 $181,398 $138,044
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income (loss) and the ratio of net investment income (loss)
includes $0.04 per share and 0.11%, respectively as a result of a special one
time dividend from Microsoft Corp.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(d) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
(e) Total return is not annualized.
</Table>
22 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS B
--------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
2008 2007 2006 2005 2004
$ 38.79 $ 36.49 $ 33.50 $ 30.96 $ 27.26
-------- -------- -------- -------- --------
0.04 0.02 (0.15) (0.15)(b) (0.24)
(12.91) 5.34 5.27 4.00 3.94
(0.01) -- -- -- --
-------- -------- -------- -------- --------
(12.88) 5.36 5.12 3.85 3.70
-------- -------- -------- -------- --------
-- -- -- -- --
(4.55) (3.06) (2.13) (1.31) --
-------- -------- -------- -------- --------
(4.55) (3.06) (2.13) (1.31) --
-------- -------- -------- -------- --------
$ 21.36 $ 38.79 $ 36.49 $ 33.50 $ 30.96
======== ======== ======== ======== ========
(37.33%) 15.73% 15.94% 12.64% 13.57%
0.13% 0.06% (0.45%) (0.46%)(b) (0.80%)
2.07% 2.02% 2.10% 2.10% 2.10%
2.07% 2.02% 2.08% 2.12% 2.13%
96% 76% 100% 56% 64%
$189,015 $378,342 $354,543 $387,772 $313,765
</Table>
<Table>
<Caption>
CLASS I
--------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
2008 2007 2006 2005 2004
$ 42.13 $ 39.15 $ 35.50 $ 32.37 $ 28.19
-------- -------- -------- -------- --------
0.39 0.45 0.23 0.24 (b) 0.09
(14.12) 5.78 5.62 4.20 4.09
(0.00)++ -- -- -- --
-------- -------- -------- -------- --------
(13.73) 6.23 5.85 4.44 4.18
-------- -------- -------- -------- --------
(0.34) (0.19) (0.07) -- --
(4.55) (3.06) (2.13) (1.31) --
-------- -------- -------- -------- --------
(4.89) (3.25) (2.20) (1.31) --
-------- -------- -------- -------- --------
$ 23.51 $ 42.13 $ 39.15 $ 35.50 $ 32.37
======== ======== ======== ======== ========
(36.59%) 16.99% 17.21% 13.96% 14.83%
1.22% 1.15% 0.61% 0.69%(b) 0.31%
0.96% 0.92% 1.03% 0.95% 0.99%
0.96% 0.92% 1.01% 0.97% 1.02%
96% 76% 100% 56% 64%
$425,266 $438,054 $358,423 $320,099 $274,975
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
23
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R1
-------------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
-------------------------------------------------------
2008 2007 2006 2005 2004
Net asset value at
beginning of period $ 41.69 $ 38.78 $ 35.19 $ 32.13 $30.38
------- ------- ------- ------- ------
Net investment income
(loss) (a) 0.42 0.42 0.19 0.16(b) 0.05
Net realized and
unrealized gain (loss)
on investments (14.03) 5.71 5.57 4.21 1.70
Net realized and
unrealized loss on
foreign currency
transactions (0.00)++ -- -- -- --
------- ------- ------- ------- ------
Total from investment
operations (13.61) 6.13 5.76 4.37 1.75
------- ------- ------- ------- ------
Less dividends and
distributions:
From net investment
income (0.30) (0.16) (0.04) -- --
From net realized gain
on investments (4.55) (3.06) (2.13) (1.31) --
------- ------- ------- ------- ------
Total dividends and
distributions (4.85) (3.22) (2.17) (1.31) --
------- ------- ------- ------- ------
Net asset value at end of
period $ 23.23 $ 41.69 $ 38.78 $ 35.19 $32.13
======= ======= ======= ======= ======
Total investment return
(c)(d) (36.67%) 16.89% 17.08% 13.84% 5.76%(e)
Ratios (to average net
assets)/
Supplemental Data:
Net investment income
(loss) 1.24% 1.08% 0.51% 0.59%(b) 0.21%++
Net expenses 1.01% 1.02% 1.13% 1.05% 1.09%++
Expenses (before
reimbursement) 1.01% 1.02% 1.11% 1.07% 1.12%++
Portfolio turnover rate 96% 76% 100% 56% 64%
Net assets at end of
period (in 000's) $ 232 $12,424 $15,583 $13,379 $ 34
</Table>
<Table>
<Caption>
CLASS R3
-------------------------------------
APRIL 28,
2006**
YEAR ENDED OCTOBER THROUGH
31, OCTOBER 31,
-------------------------------------
2008 2007 2006
Net asset value at
beginning of period $ 41.31 $38.49 $37.46
------- ------ ------
Net investment income
(loss) (a) 0.19 0.17 (0.02)
Net realized and
unrealized gain (loss)
on investments (13.82) 5.73 1.05
Net realized and
unrealized loss on
foreign currency
transactions (0.00)++ -- --
------- ------ ------
Total from investment
operations (13.63) 5.90 1.03
------- ------ ------
Less dividends and
distributions:
From net investment
income (0.16) (0.02) --
From net realized gain
on investments (4.55) (3.06) --
------- ------ ------
Total dividends and
distributions (4.71) (3.08) --
------- ------ ------
Net asset value at end of
period $ 22.97 $41.31 $38.49
======= ====== ======
Total investment return
(c)(d) (36.96%) 16.37% 2.75% (e)
Ratios (to average
net assets)/
Supplemental Data:
Net investment income
(loss) 0.61% 0.42% (0.10%)++
Net expenses 1.56% 1.52% 1.72% ++
Expenses (before
reimbursement) 1.56% 1.52% 1.73% ++
Portfolio turnover rate 96% 76% 100%
Net assets at end of
period (in 000's) $ 310 $ 256 $ 10
</Table>
<Table>
** Commencement of operations.
++ Annualized.
++ Less than one cent per share.
(a) Per share data based on average shares outstanding during the period.
(b) Net investment income (loss) and the ratio of net investment income (loss)
includes $0.04 per share and 0.11%, respectively as a result of a special one
time dividend from Microsoft Corp.
(c) Total return is calculated exclusive of sales charges and assumes the
reinvestment of dividends and distributions. Class I, Class R1, Class R2 and
Class R3 shares are not subject to sales charges.
(d) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
(e) Total return is not annualized.
</Table>
24 MainStay MAP Fund The notes to the financial statements are an integral
part of, and should be read in conjunction with, the financial statements.
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS R2
----------------------------------------------------
JANUARY 2,
2004**
THROUGH
YEAR ENDED OCTOBER 31, OCTOBER 31,
----------------------------------------------------
2008 2007 2006 2005 2004
$ 41.40 $38.54 $35.03 $32.07 $30.38
------- ------ ------ ------ ------
0.28 0.32 0.07 0.07(b) (0.01)
(13.86) 5.68 5.57 4.20 1.70
(0.00)++ -- -- -- --
------- ------ ------ ------ ------
(13.58) 6.00 5.64 4.27 1.69
------- ------ ------ ------ ------
(0.21) (0.08) -- -- --
(4.55) 3.06 (2.13) (1.31) --
------- ------ ------ ------ ------
(4.76) (3.14) (2.13) (1.31) --
------- ------ ------ ------ ------
$ 23.06 $41.40 $38.54 $35.03 $32.07
======= ====== ====== ====== ======
(36.78%) 16.61% 16.80% 13.54% 5.56%(e)
0.89% 0.81% 0.17% 0.34%(b) (0.04%)++
1.30% 1.27% 1.38% 1.30% 1.34%++
1.30% 1.27% 1.36% 1.32% 1.37%++
96% 76% 100% 56% 64%
$ 6,427 $8,560 $5,806 $2,122 $ 4
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
25
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay MAP Fund (the "Fund"), a diversified fund.
The Fund currently offers eight classes of shares. Class A shares, Class B
shares, Class C shares and Class I shares commenced on June 9, 1999. Class R1
shares and Class R2 shares commenced on January 2, 2004. Class R3 shares
commenced on April 28, 2006. Investor Class shares commenced on February 28,
2008. Investor Class and Class A shares are offered at net asset value per share
plus an initial sales charge. No sales charge applies on investments of $1
million or more (and certain other qualified purchases) in Investor Class and
Class A shares, but a contingent deferred sales charge is imposed on certain
redemptions of such shares within one year of the date of purchase. Class B
shares and Class C shares are offered without an initial sales charge, although
a declining contingent deferred sales charge may be imposed on redemptions made
within six years of purchase of Class B shares and a 1% contingent deferred
sales charge may be imposed on redemptions made within one year of purchase of
Class C shares. Class I, Class R1, Class R2 and Class R3 shares are not subject
to a sales charge. Depending upon eligibility, Class B shares convert to either
Investor Class or Class A shares eight years after the date they were purchased.
Additionally, depending upon eligibility, Investor Class shares may convert to
Class A shares and Class A shares may convert to Investor Class shares. The
eight classes of shares have the same voting (except for issues that relate
solely to one class), dividend, liquidation and other rights and bear the same
conditions except that Class B and Class C shares are subject to higher
distribution fee rates than Investor Class, Class A, Class R2 and Class R3
shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act.
Class I and Class R1 shares are not subject to a distribution or service fee.
Class R1, Class R2 and Class R3 shares are authorized to pay to the Manager, as
defined in Note 3(A), its affiliates, or third-party service providers, as
compensation for services rendered to shareholders of Class R1, Class R2 or
Class R3 shares, a shareholder service fee.
The Fund's investment objective is to seek long-term appreciation of capital.
The Fund also seeks to earn income, but this is a secondary objective.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or broker selected by the Fund's Manager (as defined in Note 3(A))
in consultation with the Fund's Subadvisor, if any, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques, if
such prices are deemed by the Fund's Manager, in consultation with the Fund's
Subadvisor, if any, to be representative of market values, at the regular close
of trading of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("valuation date").
Equity securities are valued at the latest quoted sales prices as of the close
of trading on the New York Stock Exchange on each valuation date. Securities
that are not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Prices normally are taken from the principal market
in which each security trades. Investments in other mutual funds are valued at
their net asset values as of the close of the New York Stock Exchange on the
date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a
26 MainStay MAP Fund
security the market price of which is not available from an independent pricing
source or, if so provided, does not, in the opinion of the Fund's Manager or
Subadvisor ,as defined in Note 3(A), reflect the security's market value; and
(vi) a security where the trading on that security's principal market is
temporarily closed at a time when, under normal conditions, it would be open. At
October 31, 2008, the Fund held securities with a value of $358,351 that were
valued in such a manner.
Certain events may occur between the time that foreign markets close, on which
securities held by the Fund principally trade, and the time at which the Fund's
NAV is calculated. These events may include, but are not limited to, situations
relating to a single issue in a market sector, significant fluctuations in U.S.
or foreign markets, natural disasters, armed conflicts, governmental actions or
other developments not tied directly to the securities markets. Should the
Manager or Subadvisor, as defined in Note 3 (A), conclude that such events may
have affected the accuracy of the last price reported on the local foreign
market, the Manager or Subadvisor may, pursuant to procedures adopted by the
Fund's Board of Trustees, adjust the value of the local price to reflect the
impact on the price of such securities as a result of such events. Additionally,
international equity securities are also fair valued whenever the movement of a
particular index exceeds certain thresholds. In such cases, the securities are
fair valued by applying factors provided by a third party vendor in accordance
with the Fund's policies and procedures.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes. These foreign income taxes are generally withheld at the
source.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income and distributions of net realized capital and
currency gains, if any, annually. All dividends and distributions are reinvested
in shares of the Fund, at net asset value, unless the shareholder elects
otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method. Income from payment-in-kind securities is recorded daily based on the
effective interest method of accrual.
Investment income and realized and unrealized gains and losses on investments of
the Fund are allocated to separate classes of shares pro rata based upon their
relative net assets on the date the income is earned or realized and unrealized
gains and losses are incurred.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
mainstayinvestments.com 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(I) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. Markston
International LLC and Institutional Capital LLC (the "Subadvisors"), each
registered investment advisers, act as subadvisors to the Fund and manage a
portion of the Fund's assets, as designated by NYLIM from time to time, subject
to the oversight of NYLIM. Each Subadvisor is responsible for the day-to-day
portfolio management of the Fund with respect to its allocated portion of the
Fund's assets. Pursuant to the terms of Amended and Restated Subadvisory
Agreements ("Subadvisory Agreements"), between NYLIM and the Subadvisors, NYLIM
pays for the services of the Subadvisors.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of the Fund's average daily
net assets as follows: 0.75% on assets up to $1.0 billion and 0.70% on assets in
excess of $1.0 billion.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008 (February 28, 2008 for Investor Class shares), NYLIM
entered into a written expense limitation agreement under which it has agreed to
waive a portion of the Fund's management fee or reimburse the expenses of the
appropriate class of the Fund so that the total ordinary operating expenses of a
class (total ordinary operating expenses excludes taxes, interest, litigation,
extraordinary expenses, brokerage and other transaction expenses relating to the
purchase or sale of portfolio investments, and the fees and expenses of any
other funds in which the Fund invests) do not exceed the following percentages
of average daily net
28 MainStay MAP Fund
assets: Investor Class, 1.45%; Class A, 1.19%; Class B, 2.20%; Class C, 2.20%;
Class I, 0.98%; Class R1, 1.08%; Class R2, 1.33% and Class R3, 1.58%. This
expense limitation may be modified or terminated only with the approval of the
Board of Trustees. NYLIM may recoup the amount of certain management fee waivers
or expense reimbursements from the Fund pursuant to the agreement if such action
does not cause the Fund to exceed the existing expense limitation and the
recoupment is made within three years after the year in which NYLIM incurred the
expense.
For the year ended October 31, 2008, NYLIM earned fees from the Fund in the
amount of $11,655,365 and waived its fees in the amount of $120,535.
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2011 TOTAL
$120,535 $120,535
- --------------------------------------------------------------
</Table>
Between August 1, 2007 to April 1, 2008, NYLIM had a written expense limitation
agreement under which it had agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the appropriate class of the Fund so that the
class' total ordinary operating expenses did not exceed the following
percentages of average daily net assets for each class: Class A, 1.35%; Class B,
2.10%; Class C, 2.10%; Class I, 0.98%; Class R1, 1.08%; Class R2, 1.33% and
Class R3, 1.58%.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
these services provided to the Fund by the Manager amounted to $142,461 for the
period from November 1, 2007 to July 31, 2008.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of
the Fund, has a Distribution Agreement with NYLIFE Distributors LLC (the
"Distributor"), an indirect wholly-owned subsidiary of New York Life. The Fund,
with respect to Investor Class, Class A, Class B, Class C, Class R2 and Class R3
shares, has adopted distribution plans (the "Plans") in accordance with the
provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor
receives a monthly distribution fee from the Fund at an annual rate of 0.25% of
the average daily net assets of the Fund's Investor Class, Class A and Class R2
shares, which is an expense of the Investor Class, Class A and Class R2 shares
of the Fund, for distribution or service activities as designated by the
Distributor. Pursuant to the Class B and Class C Plans, the Fund pays the
Distributor a monthly distribution fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Plans provide that the
Class B and Class C shares of the Fund also incur a service fee at the annual
rate of 0.25% of the average daily net asset value of the Class B and Class C
shares of the Fund. Pursuant to the Class R3 Plan, the Distributor receives a
monthly distribution fee from the Fund at the annual rate of 0.50% of the
average daily net assets of the Fund's Class R3 shares, which is an expense of
the Class R3 shares of the Fund for distribution and service activities as
designated by the Distributor. Class I and Class R1 shares are not subject to a
distribution or service fee.
The Plans provide that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
In accordance with the Shareholder Services Plans for the Class R1, Class R2 and
Class R3 shares, the Manager has agreed to provide, through its affiliates or
independent third parties, various shareholder and administrative support
services to shareholders of the Class R1, Class R2 and Class R3 shares. For its
services, the Manager is entitled to a Shareholder Service Fee accrued daily and
paid monthly at an annual rate of 0.10% of the average daily net assets
attributable to the Class R1, Class R2 and Class R3 shares.
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of
sales charges retained on sales of Investor Class and Class A shares were
$36,370 and $121,334, respectively, for the year ended October 31, 2008. The
Fund was also advised that the Distributor retained contingent deferred sales
charges on redemptions of Investor Class, Class A, Class B and Class C shares of
$100, $2,843, $407,547 and $34,559, respectively, for the year ended October 31,
2008.
(D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
mainstayinvestments.com 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund for the year ended October 31, 2008 amounted
to $3,397,190.
(E) SMALL ACCOUNT FEES. Shareholders with small accounts adversely impact the
cost of providing transfer agency services. In an effort to reduce total
transfer agency expenses, the Fund has implemented a small account fee on
certain types of accounts. Shareholders with an account balance of less than
$1,000 are charged an annual per account fee of $20 (assessed semi-annually).
These fees are included in transfer agent fees on the Statement of Operations.
(F) CAPITAL. At October 31, 2008, New York Life and its affiliates held
beneficially shares of the Fund with the following values and percentages of net
assets as follows:
<Table>
Class A $ 242 0.0%++
- --------------------------------------------------------
Class C 116 0.0 ++
- --------------------------------------------------------
Class I 51,640,229 12.1
- --------------------------------------------------------
Class R1 1,044 0.4
- --------------------------------------------------------
Class R2 1,032 0.0 ++
- --------------------------------------------------------
Class R3 7,535 2.4
- --------------------------------------------------------
</Table>
++ Less than one-tenth of a percent.
(G) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the year ended October 31, 2008,
these fees, which are included in professional fees shown on the Statement of
Operations, were $57,242.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$10,781,818 $(104,967,197) $-- $(303,599,448) $(397,784,827)
- -----------------------------------------------------------------------------------
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals and Real Estate Investment Trust (REIT)
basis adjustments.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$(128,106) $128,107 $(1)
- ------------------------------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to foreign currency gain
(loss) distribution redesignation and prior year adjustments, return at capital
distribution and capital gain distribution from Real Estate Investment Trust
(REIT).
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $104,967,197 were available as shown in the table below, to the extent
provided by the regulations to offset future realized gains of the Fund through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains so offset
will not be distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS
CAPITAL LOSS AMOUNTS
AVAILABLE THROUGH (000'S)
2016 $104,967
- --------------------------------------------------------------
</Table>
The tax character of distributions paid during the years ended October 31, 2008
and October 31, 2007, shown in the Statement of Changes in Net Assets, was as
follows:
<Table>
<Caption>
2008 2007
Distributions paid from:
Ordinary Income $110,629,307 $ 32,717,761
Long-Term Capital Gains 101,272,618 92,528,306
- -------------------------------------------------------
$211,901,925 $125,246,067
- -------------------------------------------------------
</Table>
NOTE 5--FOREIGN CURRENCY TRANSACTIONS:
As of October 31, 2008, the Fund held the following foreign currency:
<Table>
<Caption>
CURRENCY COST VALUE
Euro EUR 53 $67 $68
- -----------------------------------------------
</Table>
NOTE 6--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
30 MainStay MAP Fund
NOTE 7--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fees was 0.06% of the average commitment
amount. Such commitment fees are allocated among the funds based upon net assets
and other factors. Interest on any revolving credit loan is charged based upon
the Federal Funds Advances rate. There were no borrowings made or outstanding
with respect to the Fund on the line of credit during the year ended October 31,
2008.
NOTE 8--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of securities, other
than short-term securities, were $1,577,892 and $1,458,103, respectively.
NOTE 9--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
INVESTOR CLASS SHARES AMOUNT
Period ended October 31,
2008 (a):
Shares sold 897,296 $ 29,561,418
Shares redeemed (482,117) (14,451,525)
------------------------
Net increase in shares
outstanding before
conversion 415,179 15,109,893
Shares converted into
Investor Class (See Note
1) 2,954,573 94,098,927
Shares converted from
Investor Class (See Note
1) (213,479) (6,263,283)
------------------------
Net increase 3,156,273 $102,945,537
========================
</Table>
(a) Investor Class shares were first offered on February 28, 2008.
<Table>
<Caption>
CLASS A SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 2,976,260 $ 96,954,579
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,867,434 66,146,501
Shares redeemed (5,678,084) (179,833,104)
--------------------------
Net decrease in shares
outstanding before
conversion (834,390) (16,732,024)
Shares converted into Class
A (See Note 1) 626,064 19,786,342
Shares converted from Class
A (See Note 1) (2,771,181) (88,305,403)
--------------------------
Net decrease (2,979,507) $ (85,251,085)
==========================
Year ended October 31, 2007:
Shares sold 4,359,405 $ 169,214,898
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,024,909 37,603,750
Shares redeemed (3,775,750) (146,593,571)
--------------------------
Net increase in shares
outstanding before
conversion 1,608,564 60,225,077
Shares converted from Class
B (See Note 1) 426,682 16,642,541
--------------------------
Net increase 2,035,246 $ 76,867,618
==========================
</Table>
<Table>
<Caption>
CLASS B SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 888,786 $ 26,763,964
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,200,918 39,522,170
Shares redeemed (2,354,379) (68,981,699)
-------------------------
Net decrease in shares
outstanding before
conversion (264,675) (2,696,565)
Shares converted from Class
B (See Note 1) (641,021) (19,316,583)
-------------------------
Net decrease (905,696) $(22,012,148)
=========================
Year ended October 31, 2007:
Shares sold 1,759,164 $ 48,661,701
Shares issued to
shareholders in
reinvestment of dividends
and distributions 771,747 26,648,460
Shares redeemed (2,040,281) (59,264,672)
-------------------------
Net increase in shares
outstanding before
conversion 490,630 16,045,489
Shares reacquired upon
conversion into Class A
(See Note 1) (453,852) (16,642,541)
-------------------------
Net increase (decrease) 36,778 $ (597,052)
=========================
</Table>
mainstayinvestments.com 31
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
CLASS C SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 1,335,542 $ 41,010,006
Shares issued to
shareholders in
reinvestment of dividends
and distributions 835,379 27,492,349
Shares redeemed (2,352,365) (67,939,051)
-------------------------
Net increase (decrease) (181,444) $ 563,304
=========================
Year ended October 31, 2007:
Shares sold 2,471,505 $ 90,127,177
Shares issued to
shareholders in
reinvestment of dividends
and distributions 460,408 15,897,904
Shares redeemed (1,115,603) (40,777,745)
-------------------------
Net increase 1,816,310 $ 65,247,336
=========================
</Table>
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 9,737,786 $ 322,047,346
Shares issued to
shareholders in
reinvestment of dividends
and distributions 1,424,327 51,472,172
Shares redeemed (3,468,738) (110,296,295)
--------------------------
Net increase 7,693,375 $ 263,223,223
==========================
Year ended October 31, 2007:
Shares sold 2,817,298 $ 111,404,594
Shares issued to
shareholders in
reinvestment of dividends
and distributions 783,321 29,245,181
Shares redeemed (2,358,410) (93,512,499)
--------------------------
Net increase 1,242,209 $ 47,137,276
==========================
</Table>
<Table>
<Caption>
CLASS R1 SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 14,598 $ 491,633
Shares issued to
shareholders in
reinvestment of dividends
and distributions 40,802 1,456,918
Shares redeemed (343,416) (11,396,682)
-----------------------
Net decrease (288,016) $ (9,448,131)
=======================
Year ended October 31, 2007:
Shares sold 85,769 $ 3,315,759
Shares issued to
shareholders in
reinvestment of dividends
and distributions 35,541 1,313,386
Shares redeemed (225,108) (8,834,316)
-----------------------
Net decrease (103,798) $ (4,205,171)
=======================
</Table>
<Table>
<Caption>
CLASS R2 SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 130,220 $ 4,181,464
Shares issued to
shareholders in
reinvestment of dividends
and distributions 28,015 992,636
Shares redeemed (86,259) (2,636,049)
----------------------
Net increase 71,976 $ 2,538,051
======================
Year ended October 31, 2007:
Shares sold 190,984 $ 7,511,407
Shares issued to
shareholders in
reinvestment of dividends
and distributions 12,963 475,633
Shares redeemed (147,813) (5,714,273)
----------------------
Net increase 56,134 $ 2,272,767
======================
</Table>
<Table>
<Caption>
CLASS R3 SHARES AMOUNT
Year ended October 31, 2008:
Shares sold 7,519 $245,771
Shares issued to
shareholders in
reinvestment of dividends
and distributions 846 29,906
Shares redeemed (1,055) (35,376)
-----------------
Net increase 7,310 $240,301
=================
Year ended October 31, 2007:
Shares sold 6,289 $248,226
Shares issued to
shareholders in
reinvestment of dividends
and distributions 22 823
Shares redeemed (393) (15,569)
-----------------
Net increase 5,918 $233,480
=================
</Table>
32 MainStay MAP Fund
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
mainstayinvestments.com 33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay MAP Fund ("the Fund"), one of the
funds constituting The MainStay Funds, as of October 31, 2008, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year 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.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay MAP Fund of The MainStay Funds as of October 31, 2008, the results of
its operations for the year then ended, the changes in its net assets for each
of the years in the two-year period then ended, and the financial highlights for
each of the years in the five-year period then ended, in conformity with U.S.
generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
34 MainStay MAP Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay MAP Fund (the "Fund"), which was comprised solely of
Independent Trustees, unanimously approved the Management and Subadvisory
Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM, its affiliates
and Markston International LLC ("Markston"), a subadviser to the Fund, discussed
in greater detail below, and responses to a comprehensive list of questions
encompassing a variety of topics prepared on behalf of the Board by independent
legal counsel to the Board.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM, Markston and
Institutional Capital LLC ("Institutional Capital"), an affiliate of NYLIM that
also serves as a subadviser to the Fund; (ii) the investment performance of the
Fund; (iii) the costs of the services to be provided, and profits to be
realized, by NYLIM, its affiliates and Markston from their relationship with the
Fund; (iv) the extent to which economies of scale may be realized as the Fund
grows, and the extent to which economies of scale may benefit Fund investors;
and (v) the reasonableness of the Fund's management fee and subadvisory fee
levels and overall total ordinary operating expenses, particularly as compared
to similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in prior years. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM, INSTITUTIONAL CAPITAL
AND MARKSTON
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing Institutional Capital, Markston and other subadvisers. The Board
considered NYLIM's performance in fulfilling its responsibilities for overseeing
the Fund's legal and compliance environment, for overseeing the subadvisers'
compliance with the Fund's policies and investment objectives, and for
implementing Board directives as they relate to the Fund. The Board considered
the scope and quality of NYLIM's services provided to the Fund's shareholders
(including services provided through its affiliate, NYLIM Service Company LLC),
such as the more extensive servicing needs of New York Life agents and
reputation as a high-quality provider of shareholder services, which has been
recognized by independent third-parties on numerous occasions. The Board noted
the role that the MainStay Family of Funds historically has played in serving
the investment needs of New York Life Insurance Company policyholders, who often
maintain smaller account balances than other retail investors. The Board
acknowledged that it had approved NYLIM's recommendation to create a new
"Investor Class" of shares designed principally to address the higher
shareholder-servicing costs typically associated with smaller shareholder
accounts. The Board considered the experience of senior personnel at NYLIM
providing
mainstayinvestments.com 35
management and administrative services to the Fund, as well as NYLIM's
reputation and financial condition. The Board also reviewed NYLIM's willingness
to invest in personnel designed to benefit the Fund, and that NYLIM also is
responsible for paying all of the salaries and expenses for the Fund's officers.
In addition, the Board considered the benefits to shareholders of being part of
the MainStay Family of Funds, including the privilege of exchanging investments
between the same class of shares without the imposition of a sales charge, as
described more fully in the Fund's prospectus. Based on these considerations,
the Board concluded, within the context of its overall determinations regarding
the Agreements, that the Fund is likely to continue to benefit from the nature,
extent and quality of these services as a result of NYLIM's experience,
personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
Institutional Capital and Markston provide to the Fund. The Board evaluated each
subadviser's experience in serving as subadviser to the Fund, noting that each
subadviser serves a variety of other investment advisory clients, including
other pooled investment vehicles. It examined each subadviser's track record and
experience in providing investment advisory services to the Fund, the experience
of senior management and administrative personnel at each subadviser, and each
subadviser's overall legal and compliance environment. The Board also reviewed
each subadviser's willingness to invest in personnel designed to benefit the
Fund. In this regard, the Board considered the experience of the Fund's
portfolio managers, the number of accounts managed by the portfolio managers and
each subadviser's method for compensating portfolio managers. Based on these
considerations, the Board concluded, within the context of its overall
determinations regarding the Agreements, that the Fund is likely to benefit from
the nature, extent and quality of these services as a result of each
subadviser's experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM, Institutional Capital and
Markston concerning Fund investment performance, as well as discussions between
the Fund's portfolio managers and the Board that occurred at meetings from time
to time throughout the year and in previous years. In considering the Fund's
investment performance, the Board focused principally on the Fund's long-term
performance track record, as opposed to the Fund's short-term investment
performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM, ITS
AFFILIATES AND MARKSTON
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because Institutional
Capital's and Markston's subadvisory fees for advising the Fund are paid
directly by NYLIM, the Board considered the cost and profitability information
for NYLIM and the subadvisers in the aggregate.
In evaluating the costs and profits of NYLIM, its affiliates and Markston due to
their relationship with the Fund, the Board considered, among other things,
NYLIM's investments in personnel, systems, equipment and other resources
necessary to manage the Fund, and the fact that NYLIM is responsible for paying
each subadviser's subadvisory fee. The Board acknowledged that NYLIM and each
subadviser must be in a position to pay and retain experienced professional
personnel to provide services to the Fund, and that NYLIM's ability to maintain
a strong financial position is important in order for NYLIM to continue to
provide high-quality ongoing services to the Fund and its shareholders. The
Board noted, for example, increased costs borne by NYLIM, its affiliates and
Markston due to new and ongoing regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM, its affiliates and Markston due to their
overall relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. For Markston, which is a subadviser not
affiliated with NYLIM, the Board focused primarily on the profitability of the
relationship among NYLIM, its affiliates and the Funds. While recognizing the
difficulty in evaluating a manager's profitability with respect to the Fund, and
noting that other profitability methodologies may also be reasonable, the Board
concluded that the profitability
36 MainStay MAP Fund
methodology presented by NYLIM to the Board with respect to the Fund was
reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM, its
affiliates and Markston due to their relationship with the Fund. The Board
recognized, for example, the benefits to NYLIM, Institutional Capital and
Markston from legally permitted "soft-dollar" arrangements by which brokers
provide research and other services to NYLIM, Institutional Capital and Markston
in exchange for commissions paid by the Fund with respect to trades on the
Fund's portfolio securities. The Board also considered that, in addition to fees
earned by NYLIM for managing the Fund, NYLIM affiliates also earn revenues from
serving the Fund in various other capacities, including as transfer agent and
distributor. The information provided to the Board indicated that the
profitability to NYLIM and its affiliates arising directly from these other
arrangements was not excessive. The Board noted that, although it assessed the
overall profitability of the Fund to NYLIM, its affiliates and Markston as part
of the annual contract review process, when considering the reasonableness of
the fees to be paid to NYLIM, its affiliates and Markston under the Agreements,
the Board considered the profitability of NYLIM's relationship with the Fund on
a pre-tax basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM, its affiliates and Markston due to their
relationship with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because Institutional Capital' and Markston's subadvisory fees for
advising the Fund are paid directly by NYLIM, the Board primarily considered the
reasonableness of the overall management fee paid by the Fund to NYLIM as
compared with peer funds.
The Board considered information provided by NYLIM, Institutional Capital and
Markston on the fees that NYLIM, Institutional Capital and Markston charge to
other investment advisory clients, including institutional separate accounts and
other funds with similar investment objectives as the Fund. In this regard, the
Board took into account the relative scope of services provided to the Fund as
opposed to NYLIM's, Institutional Capital's and Markston's other investment
advisory clients. The Board also considered comparative data provided by
Strategic Insight on the fees and expense ratios charged by similar mutual funds
managed by other investment advisers. This comparative information assisted the
Board in evaluating the reasonableness of the Fund's management fee when
compared to similar fees charged by NYLIM, Institutional Capital and Markston to
other investment advisory clients, and fees charged by other investment advisers
to mutual funds in the Fund's peer group.
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses, the Board took note of any fee and
expense arrangements that had been negotiated by the Board with NYLIM in recent
years and observed that NYLIM has subsidized the total ordinary operating
expenses of the Fund and Fund share classes through the imposition of expense
limitation arrangements that may be modified only with the prior approval of the
Board.
The Board considered that while the Fund's management fee and total expenses
were higher than peer funds identified by Strategic Insight, NYLIM bears
additional costs associated with managing multiple subadvisers for this Fund.
The Board further considered that the Fund's net investment performance is
measurably higher than peer funds even after accounting for the Fund's fees and
expenses.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
mainstayinvestments.com 37
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The Fund is required by the Internal Revenue Code to advise shareholders within
60 days of the Fund's fiscal year end (October 31, 2008) as to the federal tax
status of dividends paid by the Fund during such fiscal year. Accordingly, the
Fund paid long-term capital gain distributions of $101,272,618.
For the fiscal year ended October 31, 2008, the Fund designates approximately
$31,073,997 pursuant to the Internal Revenue Code as qualified dividend income
eligible for reduced tax rates.
The dividends paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 0.4% to arrive at the amount eligible for qualified
interest income and 21.5% for the corporate dividends received deduction.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
38 MainStay MAP Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
mainstayinvestments.com 39
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
40 MainStay MAP Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 41
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
42 MainStay MAP Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Semiannual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-A014630 (RECYCLE LOGO) MS308-08 MSMP11-12/08
30
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
PRINCIPAL PRESERVATION FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
PRINCIPAL PRESERVATION FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 8
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 9
- ---------------------------------------------
FINANCIAL STATEMENTS 11
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 15
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 20
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 21
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 25
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 25
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 25
- ---------------------------------------------
TRUSTEES AND OFFICERS 26
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND. NOTWITHSTANDING THE PRECEDING STATEMENT,
SHAREHOLDERS OF THE FUND TEMPORARILY WILL BE GUARANTEED TO RECEIVE $1.00 NET
ASSET VALUE FOR UP TO THE NUMBER OF SHARES THAT THEY HELD AS OF SEPTEMBER 19,
2008, SUBJECT TO THE TERMS OF THE U.S. TREASURY'S TEMPORARY GUARANTEE PROGRAM
FOR MONEY MARKET FUNDS, AS DISCUSSED IN NOTE 7.
CLASS I SHARES(2)--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- ---------------------------------------------------
2.94% 3.26% 3.47%
7-DAY CURRENT YIELD: 2.11%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- ----------------------------------------------------------------------------------
Lipper Institutional Money Market Funds(3) Average 3.01% 3.17% 3.40%
Lipper Money Market Funds(3) Average 2.54 2.70 2.95
</Table>
1. On November 11, 2007, McMorgan Principal Preservation Fund was reorganized
into MainStay Principal Preservation Fund Class I shares. Prior to November
11, 2007, performance for MainStay Principal Preservation Fund Class I shares
includes the historical performance of the McMorgan Class shares of the
McMorgan Principal Preservation Fund.
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect change in share price and reinvestment of dividend and
capital-gain distributions. The graphs assume an initial investment of
$10,000. Class I shares are sold with no initial sales charge or contingent
deferred sales charge and have no annual 12b-1 fees and are generally
available to corporate and institutional investors or individual investors
with a minimum initial investment of $5 million. Performance figures reflect
certain fee waivers and/or expense limitations, without which total returns
may have been lower. These fee waivers and/or expense limitations are
contractual and may be modified or terminated only with the approval of the
Board of Trustees. The Manager may recoup the amount of certain management
fee waivers or expense reimbursements from the Fund pursuant to the contract
if such action does not cause the Fund to exceed existing expense limitations
and the recoupment is made within three years after the year in which the
Manager incurred the expense.
2. As of October 31, 2008, MainStay Principal Preservation Fund had an effective
7-day yield of 2.13% for Class I shares. The 7-day current yield was 2.11%
for Class I shares. These yields reflect certain fee waivers and/or expense
limitations. Had these expense limitations not been in effect, the effective
7-day yield would have been 1.94% for Class I shares and the 7-day current
yield would have been 1.92% for Class I shares. The fee waivers and/or
expense limitations are contractual and may be modified or terminated only
with the approval of the Board of Trustees. The current yield reflects the
Fund's earnings better than the Fund's total return.
3. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
mainstayinvestments.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY PRINCIPAL PRESERVATION FUND
- --------The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
CLASS I SHARES $1,000.00 $1,011.10 $1.57 $1,023.60 $1.58
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's Class I annualized expense ratio (0.31%)
multiplied by the average account value over the period, divided by 366 and
multiplied by 184 (to reflect the one-half year period). The table above
represents actual expenses incurred during the one-half year period and does
not take into account the Fund's written expense limitation agreement.
6 MainStay Principal Preservation Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2008
(PORTFOLIO COMPOSITION PIE CHART)
<Table>
Federal Agencies 81.50
Commercial Paper 7.80
Corporate Bonds 6.50
Medium-Term Notes 4.00
Cash and Other Assets, Less Liabilities 0.20
Repurchase Agreement 0.00
</Table>
++ Less than one-tenth of a percent.
See Portfolio of Investments on page 9 for specific holdings within these
categories.
mainstayinvestments.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGER DAVID BADER OF MCMORGAN & COMPANY LLC,
THE FUND'S SUBADVISOR.
HOW DID MAINSTAY PRINCIPAL PRESERVATION FUND PERFORM RELATIVE TO ITS PEERS AND
ITS BENCHMARK DURING THE 12-MONTH REPORTING PERIOD ENDED OCTOBER 31, 2008?
For the seven-day period ended October 31, 2008, MainStay Principal Preservation
Fund Class I shares provided a current yield of 2.11% and an effective yield of
2.13%. For the 12 months ended October 31, 2008, MainStay Principal Preservation
Fund Class I shares returned 2.94%. The Fund underperformed the 3.01% return of
the average Lipper(1) institutional money market fund and outperformed the 2.54%
return of the average Lipper money market fund for the 12 months ended October
31, 2008.
WHAT KEY FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE DURING THE REPORTING
PERIOD?
Declining asset values, weakening economic data, contracting credit availability
and growing concerns of systemic financial collapse were the most significant
factors affecting the money markets during the 12-month reporting period. The
ensuing credit crunch increased spreads(2) for commercial paper issues,
particularly for asset-backed programs. Issuance of asset-backed commercial
paper and debt from structured investment vehicles was particularly constrained.
In response to the deteriorating economic environment, the Federal Open Market
Committee (FOMC) cut the targeted federal funds rate during the 12-month
reporting period from 4.5% to 1.0%, as the Federal Reserve sought to curtail
rapidly declining growth and contain systemic risk in the face of periodic rises
in inflation expectations. In addition, the Federal Reserve, in coordination
with other central banks around the world, utilized several means to inject
unprecedented amounts of liquidity into the credit markets. The Federal Reserve
also supported important financial institutions through capital stock purchases
and guaranteed short-term bank-debt issuance. The Federal Reserve also
introduced facilities to purchase distressed financial assets and purchase high-
quality, direct-issued commercial paper.
The Fund generally performed in-line with its institutional money market fund
peers, as preservation of capital became an increasingly important aspect of the
Fund's investment objective. In the interests of capital preservation, we
reduced the Fund's exposure to corporate credit as issues matured and we
increased the Fund's allocation to government-sponsored agency discount notes.
Throughout the period, the Fund had minimal or zero exposure to commercial paper
issued by asset-backed conduits or structured investment vehicles.
HOW DID THE FUND'S DURATION AND YIELD CURVE STRATEGIES AFFECT THE FUND'S
PERFORMANCE?
The Fund generally maintained a longer-than-neutral maturity profile to reflect
the severity of the credit crunch and the potential for deeper interest-rate
cuts by the FOMC than were priced into the market. The Fund opportunistically
extended its maturity profile at various times in the second and third quarters
of 2008 when money market yields rose above our inflation expectations. The
Fund's higher skew in average days to maturity had a modest but positive impact
on performance.
HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD?
As of October 31, 2008, the Fund held a significant allocation to government-
sponsored agency discount notes across the maturity spectrum. The Fund also held
corporate commercial paper of the highest quality with less than 60 days to
maturity. At the end of the reporting period, the Fund had no exposure to
commercial paper issued by asset-backed conduits or structured investment
vehicles.
AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO
PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND. NOTWITHSTANDING THE PRECEDING STATEMENT, FUND
SHAREHOLDERS WILL BE GUARANTEED TO RECEIVE $1.00 NET ASSET VALUE FOR AMOUNTS
THAT THEY HELD AS OF SEPTEMBER 19, 2008, SUBJECT TO THE TERMS OF THE U.S.
TREASURY'S TEMPORARY GUARANTEE PROGRAM FOR MONEY MARKET FUNDS, AS DISCUSSED IN
NOTE 7.
The Fund's yield typically fluctuates with changes in short-term interest rates.
Not all U.S. government securities are insured or guaranteed by the U.S.
government--some are backed only by the issuing agency, which must rely on its
own resources to repay the debt.
1. See footnote on page 5 for more information on Lipper Inc.
2. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The terms may also refer to the difference in yield between two specific
securities or types of securities at a given time.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
8 MainStay Principal Preservation Fund
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS 99.8%+
- ----------------------------------------------------------------
COMMERCIAL PAPER 7.8%
Brown-Forman Corp.
2.45%, due 11/10/08 (a)(b) $ 3,500,000 $ 3,497,856
Coca-Cola Enterprises
1.30%, due 11/17/08 (a)(b) 3,800,000 3,794,911
FPL Group Capital, Inc.
1.651%, due 11/14/08 (a)(b) 1,000,000 998,556
General Electric Capital
Corp.
2.66%, due 1/9/09 (a) 2,700,000 2,686,234
Hewlett-Packard Co.
1.00%, due 11/3/08 (a)(b) 1,680,000 1,679,692
Private Export Funding Corp.
2.28%, due 11/5/08 (a)(b) 1,200,000 1,199,696
Toyota Motor Credit Corp.
2.53%, due 11/3/08 (a) 1,600,000 1,599,775
-------------
15,456,720
-------------
CORPORATE BONDS 6.5%
Amgen, Inc.
2.889%, due 11/28/08 (c) 4,000,000 3,999,464
Fleet National Bank
5.75%, due 1/15/09 500,000 502,722
HBOS PLC
2.477%, due 3/6/09 (b)(c) 2,000,000 1,999,958
Honeywell International, Inc.
2.879%, due 3/13/09 (c) 1,400,000 1,399,466
Procter & Gamble Co.
2.844%, due 9/9/09 (c) 2,000,000 2,000,000
Target Corp.
5.875%, due 11/1/08 2,000,000 2,000,000
Wells Fargo Financial, Inc.
5.625%, due 2/3/09 1,000,000 1,006,708
-------------
12,908,318
-------------
FEDERAL AGENCIES 81.5%
Federal Home Loan Bank
4.75%, due 12/12/08 500,000 501,185
4.875%, due 11/19/08 500,000 500,805
5.25%, due 11/14/08 500,000 501,575
5.25%, due 12/24/08 3,300,000 3,313,779
Federal Home Loan Bank
(Discount Notes)
1.305%, due 11/21/08 (a) 1,100,000 1,099,175
1.593%, due 12/18/08 (a) 1,027,000 1,024,855
1.709%, due 1/5/09 (a) 3,160,000 3,150,269
1.958%, due 1/15/09 (a) 815,000 811,689
2.344%, due 4/20/09 (a) 1,100,000 1,088,053
2.47%, due 1/2/09 (a) 775,000 771,703
2.52%, due 11/19/08 (a) 2,150,000 2,147,291
2.53%, due 1/7/09 (a) 1,655,000 1,647,207
2.542%, due 5/12/09 (a) 1,378,000 1,359,318
2.60%, due 4/14/09 (a) 3,000,000 2,964,467
2.611%, due 1/7/09 (a) 1,330,000 1,323,564
2.626%, due 12/10/08 (a) 780,000 777,761
2.637%, due 4/13/09 (a) 4,700,000 4,644,954
2.819%, due 4/6/09 (a) 7,000,000 6,914,490
2.82%, due 4/6/09 (a) 1,265,000 1,249,542
2.84%, due 2/25/09 (a) 980,000 971,158
2.842%, due 4/6/09 (a) 4,000,000 3,950,739
2.952%, due 3/17/09 (a) 4,000,000 3,956,178
3.134%, due 2/3/09 (a) 2,000,000 1,983,811
3.135%, due 2/2/09 (a) 3,200,000 3,174,373
3.367%, due 3/25/09 (a) 3,045,000 3,004,806
Federal Home Loan Mortgage
Corporation
3.875%, due 1/12/09 15,000,000 15,029,700
Federal Home Loan Mortgage
Corporation (Discount
Notes)
0.876%, due 11/5/08 (a) 1,535,000 1,534,812
1.396%, due 11/17/08 (a) 3,800,000 3,797,511
2.12%, due 3/16/09 (a) 10,000,000 9,902,388
2.27%, due 3/30/09 (a) 970,000 960,886
2.27%, due 4/14/09 (a) 2,025,000 2,004,059
2.42%, due 11/3/08 (a) 1,085,000 1,084,854
2.467%, due 2/9/09 (a) 1,150,000 1,142,199
2.48%, due 11/7/08 (a) 5,000,000 4,997,933
2.512%, due 1/6/09 (a) 4,045,000 4,026,452
2.513%, due 12/1/08 (a) 960,000 957,952
2.54%, due 12/30/08 (a) 2,120,000 2,111,175
2.603%, due 1/5/09 (a) 3,500,000 3,483,551
2.64%, due 12/22/08 (a) 2,000,000 1,992,520
2.722%, due 12/9/08 (a) 2,370,000 2,363,121
Federal National Mortgage
Association
3.85%, due 4/14/09 2,000,000 2,007,080
4.00%, due 1/26/09 6,000,000 6,029,928
Federal National Mortgage
Association (Discount
Notes)
0.803%, due 11/10/08 (a) 7,000,000 6,998,425
1.126%, due 11/12/08 (a) 7,150,000 7,147,378
1.139%, due 11/17/08 (a) 5,000,000 4,997,333
1.169%, due 11/25/08 (a) 2,695,000 2,692,844
1.391%, due 12/16/08 (a) 1,835,000 1,831,789
1.433%, due 12/8/08 (a) 2,000,000 1,997,011
2.087%, due 12/17/08 (a) 3,000,000 2,991,950
2.222%, due 2/9/09 (a) 1,760,000 1,749,245
2.246%, due 1/21/09 (a) 2,500,000 2,487,456
2.48%, due 12/3/08 (a) 1,065,000 1,062,652
2.485%, due 12/31/08 (a) 1,030,000 1,025,734
2.56%, due 12/10/08 (a) 530,000 528,530
</Table>
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 9
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL AMORTIZED
AMOUNT COST
SHORT-TERM INVESTMENTS (CONTINUED)
FEDERAL AGENCIES (CONTINUED)
Federal National Mortgage Association
(Discount Notes) (continued)
2.588%, due 7/2/09 (a) $ 525,000 $ 516,042
2.65%, due 2/4/09 (a) 570,000 566,014
2.702%, due 6/15/09 (a) 380,000 373,702
2.745%, due 5/1/09 (a) 2,390,000 2,357,015
2.798%, due 1/8/09 (a) 1,125,000 1,119,369
2.80%, due 2/11/09 (a) 195,000 193,453
2.848%, due 3/16/09 (a) 1,490,000 1,474,355
2.888%, due 2/17/09 (a) 4,100,000 4,064,945
-------------
162,434,110
-------------
MEDIUM TERM NOTES 4.0%
Boeing Capital Corp.
Series 1
6.50%, due 11/17/08 2,000,000 2,002,882
Caterpillar Financial
Services Corp.
Series F
3.75%, due 5/15/09 2,000,000 2,007,052
International Business
Machines Corp.
4.375%, due 6/1/09 3,950,000 3,980,296
-------------
7,990,230
-------------
REPURCHASE AGREEMENT 0.0%++
State Street Bank and Trust
Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$12,845 (Collateralized by
a Federal Home Loan Bank
Security with a rate of
3.351% and a maturity date
of 1/23/09, with a
Principal Amount of $15,000
and a Market Value of
$15,000) 12,845 12,845
-------------
12,845
-------------
Total Short-Term Investments
(Amortized Cost
$198,802,223) (d) 99.8% 198,802,223
Cash and Other Assets,
Less Liabilities 0.2 482,003
----- ------------
Net Assets 100.0% $ 199,284,226
===== ============
</Table>
<Table>
++ Less than one-tenth of a percent.
(a) Interest rate presented is yield to
maturity.
(b) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(c) Floating rate. Rate shown is the rate
in effect at October 31, 2008.
(d) The cost stated also represents the
aggregate cost for federal income tax
purposes.
</Table>
The table below sets forth the diversification of the Principal Preservation
Fund investments by industry.
INDUSTRY DIVERSIFICATION (UNAUDITED)
<Table>
<Caption>
AMORTIZED
COST PERCENT(+)
Banks $ 2,502,680 1.3%
Beverages 7,292,767 3.7
Biotechnology 3,999,464 2.0
Computers 5,659,988 2.8
Cosmetics & Personal Care 2,000,000 1.0
Diversified Financial Services 3,692,943 1.9
Electric 998,556 0.5
Federal Agencies 162,434,110 81.5
Finance--Auto Loans 1,599,775 0.8
Finance--Leasing Companies 2,002,882 1.0
Finance--Other Services 1,199,696 0.6
Finance--Commercial 2,007,051 1.0
Miscellaneous--Manufacturing 1,399,466 0.7
Repurchase Agreement 12,845 0.0++
Retail 2,000,000 1.0
------------ -----
198,802,223 99.8
Cash and Other Assets,
Less Liabilities 482,003 0.2
------------ -----
Net Assets $199,284,226 100.0%
============ =====
</Table>
<Table>
+ Percentages indicated are based on Fund
net assets.
++ Less than one-tenth of a percent.
</Table>
10 MainStay Principal Preservation Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(amortized cost $198,802,223) $198,802,223
Receivables:
Interest 575,996
Fund shares sold 19,075
Prepaid insurance guarantee (See
Note 7) 11,895
Other assets 23,852
------------
Total assets 199,433,041
------------
LIABILITIES:
Payables:
Fund shares redeemed 50,656
Professional fees 29,247
Shareholder communication 21,621
Transfer agent (See Note 3) 17,024
Custodian 14,067
Manager (See Note 3) 8,871
Trustees 554
Accrued expenses 2,111
Dividend payable 4,664
------------
Total liabilities 148,815
------------
Net assets $199,284,226
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 1,992,967
Additional paid-in capital 197,286,524
------------
199,279,491
Accumulated undistributed net
investment income 4,735
------------
Net assets $199,284,226
============
CLASS I
Net assets applicable to
outstanding shares $199,284,226
============
Shares of beneficial interest
outstanding 199,296,737
============
Net asset value and offering price
per share outstanding $ 1.00
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 11
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Interest $6,149,054
----------
EXPENSES:
Manager (See Note 3) 489,698
Transfer agent (See Note 3) 82,514
Professional fees 55,543
Recordkeeping (a) 34,843
Shareholder communication 24,067
Custodian 19,254
Registration 14,592
Administration (See Note 3) 7,228
Trustees 6,649
Insurance guarantee (See Note 7) 6,444
Miscellaneous 13,052
----------
Total expenses before waiver 753,884
Expense waiver from Manager (See
Note 3) (173,564)
----------
Net expenses 580,320
----------
Net investment income 5,568,734
----------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 260,226
----------
Net increase in net assets resulting
from
operations $5,828,960
==========
</Table>
(a) Effective August 1, 2008, the pricing and recordkeeping services fee is
included in the Manager fee.
12 MainStay Principal Preservation Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED PERIOD ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, JUNE 30,
2008 (A) 2007 (B) 2007
INCREASE IN NET ASSETS:
Operations:
Net investment
income $ 5,568,734 $ 3,195,821 $ 8,657,388
Net realized gain
(loss) on
investments 260,226 (252,190) 1,618
Net increase from
payment by
affiliate due to
the disposal of
investments
purchased in
violation of
investment
restrictions -- -- 14
------------------------------------------
Net increase in
net assets
resulting from
operations 5,828,960 2,943,631 8,659,020
------------------------------------------
Dividends to shareholders:
From net
investment income (5,571,288) (3,196,423) (8,657,388)
Return of capital -- (747) --
------------------------------------------
Total dividends to
shareholders (5,571,288) (3,197,170) (8,657,388)
------------------------------------------
Capital share transactions:
Net proceeds from
sale of shares $ 376,550,447 $ 53,059,317 $ 174,955,166
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends 5,415,744 3,139,301 8,398,913
Cost of shares
redeemed (381,611,693) (39,352,577) (148,042,375)
------------------------------------------
Increase in net
assets derived
from capital
share
transactions 354,498 16,846,041 35,311,704
------------------------------------------
Net increase in
net assets 612,170 16,592,502 35,313,336
NET ASSETS:
Beginning of period 198,672,056 182,079,554 146,766,218
------------------------------------------
End of period $ 199,284,226 $198,672,056 $ 182,079,554
==========================================
Accumulated
undistributed net
investment income
at end of period $ 4,735 $ -- $ --
==========================================
</Table>
(a) Effective November 27, 2007, shareholders of the McMorgan Principal
Preservation Fund Class McMorgan shares became owners of Class I shares of
the MainStay Principal Preservation Fund. Additionally, the accounting and
performance history of the McMorgan Principal Preservation Fund was
redesignated as that of Class I shares of MainStay Principal Preservation
Fund.
(b) The Fund changed its fiscal year end from June 30 to October 31.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com 13
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS I
------------------------------------------------------------------------------
PERIOD
YEAR ENDED ENDED
OCTOBER 31, OCTOBER 31, YEAR ENDED JUNE 30,
------------------------------------------------------------------------------
2008(A) 2007*** 2007 2006 2005 2004
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- --------
Net investment income 0.03 0.02 0.05 0.04 0.02 0.01
Net realized and
unrealized gain (loss)
on investments 0.00 ++ (0.00)++ 0.00 ++ (0.00)++ -- 0.00 ++
-------- -------- -------- -------- -------- --------
Total from investment
operations 0.03 0.02 0.05 0.04 0.02 0.01
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.03) (0.02) (0.05) (0.04) (0.02) (0.01)
Return of capital -- (0.00)++ -- -- -- --
From net realized gain
on investments -- -- -- -- (0.00)++ (0.00)++
-------- -------- -------- -------- -------- --------
Total dividends and
distributions (0.03) (0.02) (0.05) (0.04) (0.02) (0.01)
-------- -------- -------- -------- -------- --------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ========
Total investment return 2.94% 1.69%(b) 5.20%(c) 4.01% 1.92% 0.87%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 2.91% 4.97%++ 5.08% 3.93% 1.90% 0.86%
Net expenses 0.30% 0.30%++ 0.30% 0.30% 0.30% 0.30%
Expenses (before
waiver/reimbursement) 0.39% 0.49%++ 0.46% 0.50% 0.49% 0.46%
Net assets at end of
period (in 000's) $199,284 $198,672 $182,080 $146,766 $147,215 $133,382
</Table>
<Table>
*** The McMorgan Principal Preservation Fund changed its fiscal year end from June
30 to October 31.
++ Annualized.
++ Less than one cent per share.
(a) Effective November 27, 2007, shareholders of the McMorgan Principal
Preservation Fund Class McMorgan shares became owners of Class I shares of the
MainStay Principal Preservation Fund. Additionally, the accounting and
performance history of the McMorgan Principal Preservation Fund was
redesignated as that of Class I shares of MainStay Principal Preservation
Fund.
(b) Total return is not annualized.
(c) The loss resulting from a compliance violation did not have an effect on total
return.
</Table>
14 MainStay Principal Preservation Fund The notes to the financial
statements are an integral part of, and should be read in conjunction with, the
financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Principal Preservation Fund (the "Fund"), a diversified fund.
The Fund currently offers one class of shares. Class I shares commenced on
November 27, 2007. Class I shares are offered at net asset value without
imposition of a front-end sales charge or a contingent deferred sales charge.
The Fund's investment objective is to maximize current income consistent with
maintaining liquidity and preserving capital.
The financial statements of the Fund reflect the historical results of McMorgan
Principal Preservation Fund, a series of McMorgan Funds (the "McMorgan Trust"),
prior to its reorganization. (See Note 9). Upon the completion of the
reorganization, the Class I shares of the Fund assumed the performance,
financial and other historical information of the McMorgan Principal
Preservation Fund.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) VALUATION OF FUND SHARES. The Fund seeks to maintain a net asset value of
$1.00 per share, although there is no assurance that it will be able to do so on
a continuous basis, and it has adopted certain investment, portfolio and
dividend and distribution policies designed to enable it to do as such. An
investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. The Fund is participating
in the U.S. Treasury Department's Temporary Money Market Fund Guarantee Program
the details of which are disclosed in Note 7.
(B) SECURITIES VALUATION. Securities are valued at their amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between such cost and the value on maturity date.
(C) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions under the Interpretation based on factors, including, but not
limited to, ongoing analyses of tax laws and regulations and interpretations
thereof.
(D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. Dividends of net investment income are
declared daily and the Fund pays them monthly and declares and pays
distributions of net realized capital gains, if any, annually. All dividends and
distributions are reinvested in shares of the Fund, at net asset value, unless
the shareholder elects otherwise. Dividends and distributions to shareholders
are determined in accordance with federal income tax regulations and may differ
from generally accepted accounting principles in the United States of America.
(E) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily and discounts and premiums on securities purchased for the Fund
are accreted and amortized, respectively, on the straight-line method.
(F) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. The expenses
borne by the Fund, including those of related parties to the Fund, are shown in
the Statement of Operations.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the
mainstayinvestments.com 15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
(H) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(I) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. McMorgan & Co.
LLC ("McMorgan" or "Subadvisor"), a registered investment adviser and an
indirect wholly-owned subsidiary of New York Life, serves as subadvisor to the
Fund and is responsible for the day-to-day portfolio management of the Fund.
Pursuant to the terms of an Amended and Restated Subadvisory Agreement
("Subadvisory Agreement") between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of 0.25% of the Fund's
average daily net assets.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008, NYLIM entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the Fund so that the Fund's total ordinary
operating expenses (total ordinary operating expenses excludes taxes, interest,
litigation, extraordinary expenses, brokerage, other transaction expenses
relating to the purchase or sale of portfolio investments, and the fees and
expenses of any other funds in which the Fund invests) do not exceed 0.30% of
the Fund's average daily net assets. This expense limitation may be modified or
terminated only with the approval of the Board of Trustees. NYLIM may recoup the
amount of certain management fee waivers or expense reimbursements from the Fund
pursuant to the agreement if such action does not cause the Fund to exceed the
existing expense limitation and the recoupment is made within three years after
the year in which NYLIM incurred the expense. NYLIM has separately agreed that
for a period of two years commencing November 27, 2007, NYLIM will, by waiving,
assuming or reimbursing expenses, or otherwise, limit the expenses of Class I
shares of the Fund so that the total ordinary operating expenses of Class I
shares do not exceed the annual rate of 0.30% of the average daily net assets
attributable to such Class I shares. From time to time, the Manager may limit
expenses of the Fund to the extent it deems appropriate to enhance the yield of
the Fund, or a particular class of the Fund, during periods when expenses have a
significant impact on the yield of the Fund, or a particular class of the Fund,
as applicable, because of low interest rates. This expense limitation policy is
voluntary and in addition to any contractual arrangements that may be in place
with respect to the Fund and described in the Fund's prospectus. It may be
revised or terminated by the Manager at any time without notice.
Prior to April 1, 2008, the limitation for Class I shares was the same as in the
April 1, 2008 agreement.
For the period November 1, 2007 through November 27, 2007, McMorgan earned fees
in the amount of $36,763 and waived fees in the amount of $16,533. For the
period November 28, 2007 through October 31, 2008, NYLIM earned fees in the
amount of $452,935 and waived fees in the amount of $157,031. NYLIM is not
entitled to recoup reimbursements paid by McMorgan to the McMorgan Principal
Preservation Fund.
16 MainStay Principal Preservation Fund
As of October 31, 2008, the amounts of waived fees that are subject to possible
recoupment by the Manager, and the related expiration dates are as follows:
<Table>
<Caption>
OCTOBER 31,
2011(A) TOTAL
$157,031 $157,031
</Table>
(a) The expense limitation agreement became effective in 2008 and the
recoupments will start to expire in 2011.
Prior to the reorganization discussed in Note 9, the Fund had a different
management agreement in place with McMorgan & Co. LLC, the manager of the
predecessor fund.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a monthly fee for certain pricing
and recordkeeping services provided under an Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of the next $80 million of average monthly net assets and 1/100 of 1% of
any amount in excess of $100 million of average monthly net assets. Fees for
these services provided to the Fund by the Manager amounted to $34,843 for the
period from November 28, 2007 through July 31, 2008. From November 1, 2007 to
November 27, 2007, there was a different agreement in place with the McMorgan
Trust and the fees for this period amounted to $281.
From time to time, the Manager may limit expenses of the Fund to the extent it
deems appropriate to enhance the yield of the Fund, or a particular class of the
Fund, during periods when expenses have a significant impact on the yield of the
Fund, or a particular class of the Fund, as applicable, because of low interest
rates. This expense limitation policy is voluntary and in addition to any
contractual arrangements that may be in place with respect to the Fund and
described in the Fund's prospectus. It may be revised or terminated by the
Manager at any time without notice.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the period November 1, 2007 through
November 27, 2007, amounted to $2,575 paid by the McMorgan Principal
Preservation Fund and for the period November 28, 2007, through October 31,
2008, amounted to $79,939 paid by the Fund.
(C) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. For the period November 28, 2007,
through October 31, 2008, these fees, which are included in professional fees
shown on the Statement of Operations, were $6,766.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED OTHER UNREALIZED TOTAL
ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$9,399 $-- $(4,664) $-- $4,735
</Table>
The other temporary differences are primarily due to distribution payable.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED
NET INVESTMENT GAIN (LOSS) ON ADDITIONAL
INCOME (LOSS) INVESTMENTS PAID-IN CAPITAL
$7,289 $(8,036) $747
</Table>
The reclassifications for the Fund are primarily due to distribution
redesignations.
The Fund utilized $252,190 of capital loss carryforwards during the year ended
October 31, 2008.
The tax character of distributions paid during the periods ended October 31,
2008, October 31, 2007 and June 30,
mainstayinvestments.com 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2007 shown in the Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
OCTOBER 31, OCTOBER 31, JUNE 30,
2008 2007 2007
Distributions paid
from:
Ordinary Income $5,571,288 $3,196,423 $8,657,388
Return of Capital -- 747 --
- -----------------------------------------------------------
$5,571,288 $3,197,170 $8,657,388
- -----------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 6--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 376,550,447 $ 376,550,447
Shares issued to
shareholders in
reinvestment of
dividends 5,415,744 5,415,744
Shares redeemed (381,611,693) (381,611,693)
----------------------------
Net increase 354,498 $ 354,498
============================
MCMORGAN CLASS
Four months ended October
31, 2007:
Shares sold 53,059,317 $ 53,059,317
Shares issued to
shareholders in
reinvestment of
dividends 3,139,302 3,139,301
Shares redeemed (39,352,577) (39,352,577)
----------------------------
Net increase 16,846,042 $ 16,846,041
============================
Year ended June 30, 2007:
Shares sold 174,955,166 $ 174,955,166
Shares issued to
shareholders in
reinvestment of
dividends 8,398,622 8,398,913
Shares redeemed (148,042,375) (148,042,375)
----------------------------
Net increase 35,311,413 $ 35,311,704
============================
</Table>
NOTE 7--MONEY MARKET GUARANTEE PROGRAM
At a meeting held on October 3, 2008, the Fund's Board of Trustees approved the
Fund's participation in the U.S. Treasury Department's Temporary Money Market
Fund Guarantee Program (the "Program"). The Program seeks to guarantee the net
asset value of certain shares of participating money market funds as of
September 19, 2008. To the extent that funds are available in the Program, any
shares held by an investor in the Fund as of the close of business September 19,
2008 are insured against loss under the Program in the event that the Fund
liquidates and the per share value at the time of liquidation is less than $1
per share. Initially, the Program ran through December 18, 2008. On November 24,
2008, the Treasury Department announced that it would extend the Program through
at least April 30, 2009. At a meeting held on December 3, 2008, the Fund's Board
of Trustees approved the Fund's continued participation in this extension of the
Program.
The Program applies only to shareholders of record of the Fund on September 19,
2008. The number of shares covered by the program will be the lesser of (a) the
number of shares owned by the shareholder on September 19, 2008, or (b) the
number of shares owned by the shareholder on the date on which a guarantee is
triggered under the Program. Any increase in the number of shares a shareholder
holds in the Fund after the close of business on September 19, 2008 will not be
guaranteed. If a shareholder closes his/her account with the Fund or a broker-
dealer, any future investment in the Fund will not be guaranteed. It is possible
that eligible shareholders would not receive $1.00 per share in the event that a
guarantee payment is triggered under the Program if claims made by the Fund and
any other participating money market funds exceed the amount of funds available
under the Program.
If, during the time the Program is in effect, a shareholder transfers his or her
Fund account from one brokerage firm (the carrying firm) to another (the
receiving firm), the shareholder could lose the benefit of the guarantee upon
closure of the account with the carrying firm or upon transfer of the shares to
the receiving firm.
Participation in the initial three months of the Program required a payment to
the U.S. Department of the Treasury in the amount of 0.01% based on the net
asset value of the Fund as of September 19, 2008. Under the extension offered by
the U.S. Treasury on November 24, 2008, the guarantee remains in effect through
April 30, 2009 for an additional payment of 0.015% based upon the net asset
value of the Fund as of September 19, 2008. This expense is borne by the Fund
without regard to any expense limitation currently in effect for the Fund.
More information about the Program is available at http://www.ustreas.gov.
NOTE 8--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for
18 MainStay Principal Preservation Fund
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. The changes to current generally accepted accounting principles
from the application of this Statement relate to the definition of fair value,
the methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
NOTE 9-- REORGANIZATION:
Shareholders of McMorgan Principal Preservation Fund approved an agreement and a
plan of reorganization on November 20, 2007, where the Class I shares of the
Fund would acquire the assets, including the investments, and assume the
identified liabilities of McMorgan Principal Preservation Fund, a series of the
McMorgan Trust. This reorganization was completed on November 27, 2007. The
aggregate net assets of the Fund immediately before the acquisition were $0 and
the combined net assets after the acquisition was $201,501,727.
The acquisition was accomplished by a tax-free exchange of the following:
<Table>
<Caption>
SHARES VALUE
McMorgan Principal
Preservation Fund Class
McMorgan 201,501,727 $201,501,727
- -------------------------------------------------------
</Table>
In exchange for the McMorgan Principal Preservation Fund shares and net assets,
the Fund issued 210,501,727 of Class I shares.
McMorgan Principal Preservation Fund net assets after adjustments for any
permanent book-to-tax differences at the acquisition date were as follows, which
include the following amounts of capital stock, accumulated net realized loss
and undistributed net investment income.
<Table>
<Caption>
ACCUMULATED UNDISTRIBUTED
TOTAL NET CAPITAL NET REALIZED NET INVESTMENT
ASSETS PAID-IN LOSS INCOME
McMorgan
Principal
Preservation
Fund $201,501,727 $201,753,564 $(253,186) $1,349
- --------------------------------------------------------------------------
</Table>
mainstayinvestments.com 19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Principal Preservation Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2008, and the related statements of operations and changes in net assets, and
the financial highlights for the year 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 audit. The statements of changes in net assets
and the financial highlights for each of the years or periods presented through
October 31, 2007, were audited by other auditors, whose report dated December
14, 2007, expressed an unqualified opinion thereon.
We conducted our audit 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Principal Preservation Fund of The MainStay Funds as of October 31,
2008, and the results of its operations, the changes in its net assets and the
financial highlights for the year then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
20 MainStay Principal Preservation Fund
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Principal Preservation Fund (the "Fund"), which was
comprised solely of Independent Trustees, unanimously approved the Management
and Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and McMorgan &
Company LLC ("McMorgan"), a wholly-owned subsidiary of New York Life Insurance
Company, an affiliate of NYLIM, that serves as subadviser to the Fund; (ii) the
investment performance of the Fund; (iii) the costs of the services to be
provided, and profits to be realized, by NYLIM and its affiliates from NYLIM's
relationship with the Fund; (iv) the extent to which economies of scale may be
realized as the Fund grows, and the extent to which economies of scale may
benefit Fund investors; and (v) the reasonableness of the Fund's management fee
level and overall total ordinary operating expenses, particularly as compared to
similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in the prior year. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MCMORGAN
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing McMorgan and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing McMorgan's compliance with the Fund's
policies and investment objectives, and for implementing Board directives as
they relate to the Fund. The Board considered the scope and quality of NYLIM's
services provided to the Fund's shareholders (including services provided
through its affiliate, NYLIM Service Company LLC), such as the more extensive
servicing needs of New
mainstayinvestments.com 21
York Life agents and reputation as a high-quality provider of shareholder
services, which has been recognized by independent third-parties on numerous
occasions. The Board noted the role that the MainStay Family of Funds
historically has played in serving the investment needs of New York Life
Insurance Company policyholders, who often maintain smaller account balances
than other retail investors. The Board acknowledged that it had approved NYLIM's
recommendation to create a new "Investor Class" of shares designed principally
to address the higher shareholder-servicing costs typically associated with
smaller shareholder accounts. The Board considered the experience of senior
personnel at NYLIM providing management and administrative services to the Fund,
as well as NYLIM's reputation and financial condition. The Board also reviewed
NYLIM's willingness to invest in personnel designed to benefit the Fund, and
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
McMorgan provides to the Fund. The Board evaluated McMorgan's experience in
serving as subadviser to the Fund, noting that McMorgan serves a variety of
other investment advisory clients, including other pooled investment vehicles.
It examined McMorgan's track record and experience in providing investment
advisory services to the Fund, the experience of senior management and
administrative personnel at McMorgan, and McMorgan's overall legal and
compliance environment. The Board also reviewed McMorgan's willingness to invest
in personnel designed to benefit the Fund. In this regard, the Board considered
the experience of the Fund's portfolio managers, the number of accounts managed
by the portfolio managers and McMorgan's method for compensating portfolio
managers. Based on these considerations, the Board concluded, within the context
of its overall determinations regarding the Agreements, that the Fund is likely
to benefit from the nature, extent and quality of these services as a result of
McMorgan's experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and McMorgan concerning Fund
investment performance, as well as discussions between the Fund's portfolio
managers and the Board that occurred at meetings from time to time throughout
the year and in previous years. The Board considered specific actions that
McMorgan had taken, or had agreed with the Board to take, to improve investment
performance, and any results of those actions. In considering the Fund's
investment performance, the Board focused principally on the Fund's long-term
performance track record, as opposed to the Fund's short-term investment
performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because McMorgan is an
affiliate of NYLIM whose subadvisory fee for advising the Fund is paid directly
by NYLIM, the Board considered the cost and profitability information for NYLIM
and McMorgan in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying McMorgan's
subadvisory fee. The Board acknowledged that NYLIM and McMorgan must be in a
position to pay and retain experienced professional personnel to provide
services to the Fund, and that
22 MainStay Principal Preservation Fund
NYLIM's ability to maintain a strong financial position is important in order
for NYLIM to continue to provide high-quality ongoing services to the Fund and
its shareholders. The Board noted, for example, increased costs borne by NYLIM
and its affiliates due to new and ongoing regulatory and compliance
requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and McMorgan from legally permitted "soft-dollar"
arrangements by which brokers provide research and other services to NYLIM and
McMorgan in exchange for commissions paid by the Fund with respect to trades on
the Fund's portfolio securities. The Board also considered that, in addition to
fees earned by NYLIM for managing the Fund, NYLIM affiliates also earn revenues
from serving the Fund in various other capacities, including as transfer agent
and distributor. The information provided to the Board indicated that the
profitability to NYLIM and its affiliates arising directly from these other
arrangements was not excessive. The Board noted that, although it assessed the
overall profitability of the Fund to NYLIM and its affiliates as part of the
annual contract review process, when considering the reasonableness of the fees
to be paid to NYLIM and its affiliates under the Agreements, the Board
considered the profitability of NYLIM's relationship with the Fund on a pre-tax
basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because McMorgan is an affiliate of NYLIM whose subadvisory fee for
advising the Fund is paid directly by NYLIM, the Board primarily considered the
reasonableness of the overall management fee paid by the Fund to NYLIM as
compared with peer funds.
The Board considered information provided by NYLIM and McMorgan on the fees that
NYLIM and McMorgan charge to other investment advisory clients, including
institutional separate accounts and other funds with similar investment
objectives as the Fund. In this regard, the Board took into account the relative
scope of services provided to the Fund as opposed to NYLIM's and McMorgan's
other investment advisory clients. The Board also considered comparative data
provided by Strategic Insight on the fees and expense ratios charged by similar
mutual funds managed by other investment advisers. This comparative information
assisted the Board in evaluating the reasonableness of the Fund's management fee
when compared to similar fees charged by NYLIM and McMorgan to other investment
advisory clients, and fees charged by other investment advisers to mutual funds
in the Fund's peer group.
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses,
mainstayinvestments.com 23
the Board took note of any fee and expense arrangements that had been negotiated
by the Board with NYLIM in recent years and observed that NYLIM has subsidized
the total ordinary operating expenses of the Fund and Fund share classes through
the imposition of expense limitation arrangements that may be modified only with
the prior approval of the Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
24 MainStay Principal Preservation Fund
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2008,
should be multiplied by 100.0% to arrive at the amount eligible for qualified
interest income.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's
website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request (i) by calling 800-MAINSTAY (624-6782);
(ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the
SEC's website at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
The Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q
is available without charge on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330.
mainstayinvestments.com 25
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
26 MainStay Principal Preservation Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 27
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
28 MainStay Principal Preservation Fund
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 29
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
<Table>
<Caption>
-----------------------------------------------------
Not FDIC insured. No bank guarantee. May lose value.
</Table>
NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO 14502 (RECYCLE LOGO) MS308-08 MSPP11-12/08
D2
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
INSTITUTIONAL BOND FUND
Message from the President
and
Annual Report
October 31, 2008
MESSAGE FROM
THE PRESIDENT
Most investors are aware of the difficulties that affected the markets from
November 1, 2007, through October 31, 2008. Yet many wonder how so much economic
turmoil could occur in so short a period
of time.
Home ownership, an important part of the American dream, seemed more attainable
than ever when interest rates fell to unprecedented lows just a few years ago.
At the time, many lenders relaxed their standards to make mortgages more
available, even to those with little hope of making mortgage payments if
interest rates increased. In a few short years, delinquencies and foreclosures
began to rise. Securities structured with troubled mortgages began to falter,
and many financial institutions that owned them faced massive write-downs, major
liquidity issues or even bankruptcy.
The Federal Reserve, the U.S. Treasury, Congress, and the president all stepped
up to the challenge. During the 12 months ended October 31, 2008, the Federal
Open Market Committee progressively lowered the targeted federal funds rate from
4.50% to 1.00%. A variety of other programs and facilities were instituted to
maintain market liquidity, recapitalize troubled firms and restore investor
confidence. Several financial companies required assistance, and many changed
hands or altered their business profiles.
The U.S. stock market, which was weak in the first half of the reporting period,
declined precipitously in the second. As a group, international stocks declined
even more.
Bond investors saw mixed results. Although U.S. Treasury securities and high-
grade short-term credits advanced, bond sectors with higher risk or longer
maturities were generally weak. High-yield securities and emerging-market debt
were particularly hard hit. In the second half of the reporting period, the
government's efforts to resuscitate troubled mortgage lenders and maintain
orderly markets came as welcome relief.
At MainStay, our portfolio managers remained focused on making the best of a
difficult situation. Using time-tested investment strategies and prudent day-to-
day portfolio management techniques, they maintained the long-term perspective
that has guided our Funds for decades. In doing so, our portfolio managers paid
close attention to the marketplace and positioned the Funds in their care, as
appropriate within their investment guidelines, for what may lie ahead. Of
course, past performance is no guarantee of future results. And in light of
recent events, many investors are hoping that the markets will soon recover.
While no individual can change the markets, each of us can take steps to improve
our environment. At MainStay, we are pleased to offer you the opportunity to
receive shareholder reports and prospectuses online. This eco-friendly program
provides easy access, space-free storage, and protection against damaged
documents. There can be no doubt that, over the longer term, moving toward
electronic delivery will benefit the environment, but we believe that this
program will also, ultimately, benefit our shareholders, when potential cost
savings are realized by the Funds. To sign up for eDelivery, visit us at:
www.mainstayinvestments.com/eDelivery.
As we look to the future, we hope that you will maintain a long-term perspective
and appropriate diversification to help manage risk. We want to thank you for
entrusting your investments to MainStay Funds, and we hope that you will
continue to do so for many years to come.
Sincerely,
/s/ STEPHEN P. FISHER
Stephen P. Fisher
President
Not part of the Annual Report
(MAINSTAY INVESTMENTS LOGO)
MAINSTAY
INSTITUTIONAL BOND FUND
MainStay Funds
Annual Report
October 31, 2008
TABLE OF CONTENTS
<Table>
ANNUAL REPORT
- ---------------------------------------------
INVESTMENT AND PERFORMANCE COMPARISON 5
- ---------------------------------------------
PORTFOLIO MANAGEMENT DISCUSSION AND
ANALYSIS 8
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS 10
- ---------------------------------------------
FINANCIAL STATEMENTS 15
- ---------------------------------------------
NOTES TO FINANCIAL STATEMENTS 19
- ---------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 25
- ---------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF
MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT 26
- ---------------------------------------------
FEDERAL INCOME TAX INFORMATION 30
- ---------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES AND
PROXY VOTING RECORD 30
- ---------------------------------------------
SHAREHOLDER REPORTS AND QUARTERLY
PORTFOLIO DISCLOSURE 30
- ---------------------------------------------
TRUSTEES AND OFFICERS 31
INVESTMENT AND PERFORMANCE COMPARISON(1)
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL
VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT
TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT
MAINSTAYINVESTMENTS.COM.
CLASS I SHARES--NO SALES CHARGE
- --------------------------------------------------------------------------------
<Table>
<Caption>
AVERAGE ANNUAL ONE FIVE TEN
TOTAL RETURNS YEAR YEARS YEARS
- -----------------------------------------
(4.00%) 1.92% 3.78%
</Table>
(PERFORMANCE GRAPH)
<Table>
<Caption>
BENCHMARK PERFORMANCE ONE FIVE TEN
YEAR YEARS YEARS
- -------------------------------------------------------------------------------------------------
Barclays Capital Intermediate U.S. Government/Credit Index(2) 0.98 % 3.16% 4.83 %
Average Lipper short-intermediate investment grade debt fund(3) (4.10) 1.45 3.61
</Table>
1. On November 27, 2007, McMorgan Intermediate Fixed Income Fund and McMorgan
Fixed Income Fund were reorganized into MainStay Institutional Bond Fund
Class I shares. Performance figures for Class I shares reflect the historical
performance of the McMorgan Class shares of the McMorgan Intermediate Fixed
Income Fund (a predecessor to the Fund, which was subject to a different fee
structure, and for which McMorgan & Co. LLC served as investment advisor).
Absent expense limitations and/or fee waivers/reimbursements, performance
would have been lower.
Performance tables and graphs do not reflect the deduction of taxes that a
shareholder would pay on distributions or Fund-share redemptions. Total
returns reflect change in share price and reinvestment of dividend and
capital-gain distributions. The graphs assume an initial investment of
$10,000. (Effective September 15, 2008, Class A shares have a $15,000 minimum
initial investment with no minimum subsequent purchase amount for investors
that, in the aggregate, have assets of $100,000 or more invested in any share
classes of any of the MainStay Funds.) Class I shares are sold with no
initial sales charge or contingent deferred sales charge and have no annual
12b-1 fees and are generally available to corporate and institutional
investors or individual investors with a minimum initial investment of $5
million. Performance figures reflect certain fee waivers and/or expense
limitations, without which total returns may have been lower. These fee
waivers and/or expense limitations are contractual and may be modified or
terminated only with the approval of the Board of Trustees. The Manager may
recoup the amount of certain management fee waivers or expense reimbursements
from the Fund pursuant to the contract if such action does not cause the Fund
to exceed existing expense limitations and the recoupment is made within
three years after the year in which the Manager incurred the expense.
2. Barclays Capital has recently completed its acquisition of Lehman Brothers'
North American Investment Banking and Capital Markets businesses and, as part
of the transaction, has changed the name of the index from "Lehman
Brothers(R)" to "Barclays Capital." The Barclays Capital Intermediate U.S.
Government/Credit Index is an unmanaged index that consists of all publicly
issued bonds of the U.S. government and agencies, as well as investment grade
corporate bonds with less than 10 years to maturity. Results assume
reinvestment of all income and capital gains. The Barclays Capital
Intermediate U.S. Government/Credit Index is considered to be the Fund's
broad-based securities market index for comparison purposes. An investment
cannot be made directly in an index.
3. Lipper Inc. is an independent monitor of fund performance. Results are based
on average total returns of similar funds with all dividend and capital-gain
distributions reinvested.
mainstayinvestments.com 5
COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY INSTITUTIONAL BOND FUND
The example below is intended to describe the fees and expenses borne by
shareholders during the six-month period from May 1, 2008, to October 31, 2008,
and the impact of those costs on your investment.
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including redemption fees, exchange fees, and sales charges (loads) on
purchases (as applicable), and (2) ongoing costs, including management fees,
distribution and/or service (12b-1) fees, and other Fund expenses (as
applicable). 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 is based on an
investment of $1,000 made at the beginning of the six-month period and held for
the entire period from May 1, 2008, to October 31, 2008.
This example illustrates your Fund's ongoing costs in two ways:
- - ACTUAL EXPENSES
The second and third data columns in the table below provide information about
actual account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid during the six-months ended October 31, 2008. 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 under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
- - HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fourth and fifth data columns in the table below provide information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio 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 balances or
expenses you paid for the six-month period shown. You may use this information
to compare the ongoing costs of investing in the Fund with the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of the other
Funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as
redemption fees, if applicable, exchange fees, or sales charges (loads).
Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT
ENDING ACCOUNT VALUE (BASED
VALUE (BASED ON HYPOTHETICAL
BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES
ACCOUNT RETURNS AND PAID RETURN AND PAID
VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING
SHARE CLASS 5/1/08 10/31/08 PERIOD(1) 10/31/08 PERIOD(1)
CLASS I SHARES $1,000.00 $932.10 $2.62 $1,022.40 $2.75
- --------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's Class I annualized expense ratio (0.54%)
multiplied by the average account value over the period, divided by 366 and
multiplied by 184 (to reflect the one-half year period). The table above
represents actual expenses incurred during the one-half year period and does
not take into account the Fund's written expense limitation agreement.
6 MainStay Institutional Bond Fund
PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2008
(PORTFOLIO COMPOSITION PIE CHART)
See Portfolio of Investments on page 10 for specific holdings within these
categories.
TOP TEN ISSUERS AS OF OCTOBER 31, 2008 (EXCLUDING SHORT-TERM INVESTMENTS)
<Table>
1. Federal National Mortgage Association
(Mortgage Pass-Through Securities),
5.50%-6.50%, due 9/1/33-3/1/38
2. Federal Home Loan Bank, 3.375%-3.625%,
due 10/20/10-10/18/13
3. Federal National Mortgage Association,
2.875%-5.00%, due 7/12/10-10/15/15
4. Federal Home Loan Mortgage Corporation,
4.125%-5.50%, due 9/27/13-12/1/38
5. United States Treasury Notes,
2.125%-3.50%,
due 1/31/10-5/31/13
6. United States Treasury Inflation Indexed
Bond, 1.375%, due 7/15/18
7. Freddie Mac (Collateralized Mortgage
Obligations), 5.00%-6.00%, due
8/15/28-4/15/31
8. Greenwich Capital Commercial Funding
Corp., 5.224%-5.317%, due
6/10/36-4/10/37
9. Citigroup, Inc., 5.00%-6.50%, due
4/11/13-9/15/14
10. Chase Issuance Trust, 5.76%, due 5/15/15
</Table>
mainstayinvestments.com 7
PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS
QUESTIONS ANSWERED BY PORTFOLIO MANAGER ADAM BLANKMAN, CFA, OF MCMORGAN &
COMPANY LLC, THE FUND'S SUBADVISOR.
HOW DID MAINSTAY INSTITUTIONAL BOND FUND PERFORM RELATIVE TO ITS PEERS AND ITS
BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2008?
MainStay Institutional Bond Fund Class I shares returned -4.00% for the 12
months ended October 31, 2008. The Fund outperformed the -4.10% return of the
average Lipper(1) short-intermediate investment-grade debt fund and
underperformed the 0.98% return of the Barclays Capital Intermediate U.S.
Government/Credit Index(2) for the 12 months ended October 31, 2008. The
Barclays Capital Intermediate U.S. Government/Credit Index is the Fund's broad-
based securities-market index.
WHAT KEY FACTORS AFFECTED THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
The Fund's underperformance of the Barclays Capital Intermediate U.S.
Government/Credit Index was primarily due to the Fund's exposure to commercial
mortgage-backed securities and select Alt-A residential mortgage-backed
securities.(3) The Fund's commercial mortgage-backed securities and nonagency
mortgage-backed security holdings were all rated AAA and possessed strong credit
fundamentals. Nevertheless, some of these Fund holdings experienced significant
spread(4) widening. This occurred as the credit crunch forced many leveraged
investors to liquidate large positions of similar securities to meet margin
calls. In addition, overweight exposure in select corporate bonds adversely
affected the Fund's performance relative to the Barclays Capital Intermediate
U.S. Government/Credit Index, particularly during the last three months of the
reporting period.
HOW DID THE FUND'S DURATION STRATEGY AFFECT ITS PERFORMANCE?
During the reporting period, the Fund's duration was generally neutral to the
Barclays Capital Intermediate U.S. Government/Credit Index and, as a result, had
little impact on the Fund's relative performance.
DURING THE REPORTING PERIOD, HOW DID YOU POSITION THE FUND'S INVESTMENTS IN
LIGHT OF THE TURMOIL IN THE FINANCIAL MARKETS?
Throughout the financial crisis, we remained diligent in applying our investment
process, which focuses on the fundamental value of the securities we consider
for the Fund. We determined that the Fund's commercial and residential mortgage-
backed securities holdings had very strong credit fundamentals and that the risk
of principal loss or credit downgrades was low. Accordingly, the Fund maintained
an allocation to AAA-rated super-senior commercial mortgage-backed securities as
they reached historically attractive spreads.
We also sought to capitalize on the government's explicit show of support for
certain financial institutions that were believed to be vital to the stability
of the overall financial system. For example, we took advantage of attractive
yields on securities supported by the government-sponsored enterprises and the
nation's largest banks, while reducing the Fund's emphasis on bonds from
financial institutions that did not have a track record of receiving
governmental support.
The Fund may invest in derivatives, which may increase the volatility of the
Fund's net asset value and may result in a loss to the Fund. The values of debt
securities fluctuate depending on various factors, including interest rates,
issuer creditworthiness, market conditions and maturities. The Fund may
experience a portfolio turnover of more than 100% and may generate taxable
short-term capital gains.
The principal risk of mortgage dollar rolls is that the security the Fund
receives at the end of the transaction may be worth less than the security the
Fund sold to the same counterparty at the beginning of the transaction. The
principal risk of mortgage-related and asset-backed securities is that the
underlying debt may be prepaid ahead of schedule if interest rates fall, thereby
reducing the value of the Fund's investments. If interest rates rise, there may
be less of the underlying debt prepaid, which would cause the average bond
maturity to rise and increase the potential for the Fund to lose money. Delayed
delivery transactions create interest-rate risks for the Fund and also involve
credit risks in the event of a counterparty default. The principal risk of
forward commitments and when-issued securities is that the security may be worth
less when it is issued or received than the price the Fund agreed to pay when it
made the commitment. The principal risks of "to be announced securities"
transactions are increased credit risk and increased overall investment
exposure.
1. See footnote on page 5 for more information on Lipper Inc.
2. See footnote on page 5 for more information on the Barclays Capital
Intermediate U.S. Government/Credit Index.
3. Alt-A is a mortgage-risk classification between prime and subprime. Alt-A
mortgages typically carry higher rates than prime mortgages, and they
generally carry additional risk because of higher loan-to-value ratios,
higher debt-to-equity ratios, or incomplete income documentation.
4. The terms "spread" and "yield spread" may refer to the difference in yield
between a security or type of security and comparable U.S. Treasury issues.
The terms may also refer to the difference in yield between two specific
securities or types of securities at a given time.
8 MainStay Institutional Bond Fund
WHAT OTHER FACTORS AFFECTED THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD?
The greatest-positive contributor to the Fund's relative performance came from
our decision to maintain an underweight exposure to corporate bonds prior to
April 2008. As previously noted, the most significant negative contribution to
the Fund's performance came from exposure to commercial mortgage-backed
securities and select residential mortgage-backed securities.
DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING
PERIOD?
In early November 2007, the Fund liquidated all of its holdings of Residential
Capital bonds. This action was prompted by concerns about potential default risk
given the company's weakening asset quality and deteriorating liquidity. The
Fund's position in Residential Capital bonds had a negative impact on
performance while the securities were held by the Fund.
HOW DID THE FUND'S WEIGHTINGS CHANGE DURING THE REPORTING PERIOD?
We actively managed the Fund throughout the reporting period. We increased the
Fund's allocation to Treasury securities in November 2007 to reflect our view
that Federal Open Market Committee moves would lower short-term interest rates
enough to help combat the liquidity squeeze in the global capital markets. We
reduced the Fund's allocation
to corporate bonds, in particular financial credits,
in November and December 2007. Our decision reflected heightened pressures on
asset quality, capital and liquidity among market-sensitive issuers.
As the credit crunch persisted, we increased the Fund's exposure to commercial
mortgage-backed securities in February 2008 to take advantage of significantly
wider spreads in high-quality assets. We also increased the Fund's exposure to
corporate bonds in early April 2008, based on historically attractive spreads
and our expectation that the Federal Reserve's aggressive liquidity actions
would eventually restore stability to the credit markets.
We reduced the Fund's allocation to Treasury securities in February and April
2008. The move was triggered by our belief that Treasury securities were not
attractively valued and that financial conditions would begin to stabilize and
provide more attractive opportunities in non-Treasury fixed-income sectors.
Finally, we lowered the Fund's exposure to certain commercial mortgage-backed
securities in August and September 2008, as we anticipated more prolonged
pressures on the commercial real estate market and adverse near-term
supply/demand dynamics for these securities.
The opinions expressed are those of the portfolio manager as of the date of this
report and are subject to change. There is no guarantee that any forecasts made
will come to pass. This material does not constitute investment advice and is
not intended as an endorsement of any specific investment.
mainstayinvestments.com 9
PORTFOLIO OF INVESTMENTS+++ OCTOBER 31, 2008
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
LONG-TERM BONDS 97.4%+
ASSET-BACKED SECURITIES 1.9%
- ----------------------------------------------------------------
CREDIT CARDS 1.9%
V Chase Issuance Trust
Series 2008-A6, Class A
5.76%, due 5/15/15 (a) $ 6,100,000 $ 5,107,467
-------------
HOME EQUITY 0.0%++
Credit-Based Asset Servicing
and Securitization LLC
Series 2006-CB4, Class AV1
3.30%, due 5/25/36 (a) 3,303 3,280
Morgan Stanley ABS Capital I
Series 2006-HE5, Class A2A
3.33%, due 8/25/36 (a) 1,145 1,140
Ownit Mortgage Loan Asset
Backed Certificates
Series 2006-3, Class A2A
3.32%, due 3/25/37 (a) 5,099 5,068
-------------
9,488
-------------
Total Asset-Backed Securities
(Cost $6,110,821) 5,116,955
-------------
CORPORATE BONDS 27.4%
- ----------------------------------------------------------------
AGRICULTURE 1.5%
Cargill, Inc.
6.00%, due 11/27/17 (b) 1,935,000 1,556,661
Philip Morris International,
Inc.
5.65%, due 5/16/18 2,825,000 2,416,660
-------------
3,973,321
-------------
AUTO PARTS & EQUIPMENT 0.6%
Johnson Controls, Inc.
5.25%, due 1/15/11 1,660,000 1,546,916
-------------
BANKS 1.7%
Bank of America Corp.
5.42%, due 3/15/17 970,000 737,261
5.75%, due 8/15/16 955,000 785,505
Bank One Corp.
5.90%, due 11/15/11 1,505,000 1,474,606
Capital One Financial Corp.
6.15%, due 9/1/16 675,000 409,427
Wells Fargo Bank N.A.
4.75%, due 2/9/15 1,330,000 1,170,645
-------------
4,577,444
-------------
BEVERAGES 1.2%
Bottling Group LLC
6.95%, due 3/15/14 1,945,000 1,987,773
Dr. Pepper Snapple Group,
Inc.
6.82%, due 5/1/18 (b) 1,405,000 1,230,115
-------------
3,217,888
-------------
COMMERCIAL SERVICES 0.0%++
Equifax, Inc.
7.00%, due 7/1/37 5,000 3,173
-------------
DIVERSIFIED FINANCIAL SERVICES 11.2%
American Express Co.
7.00%, due 3/19/18 1,325,000 1,020,669
Bear Stearns Cos., Inc. (The)
5.30%, due 10/30/15 1,500,000 1,277,350
5.70%, due 11/15/14 1,200,000 1,059,865
V Citigroup, Inc.
5.00%, due 9/15/14 1,355,000 1,071,077
5.50%, due 4/11/13 3,585,000 3,279,307
6.50%, due 8/19/13 870,000 824,724
FIA Card Services N.A.
7.125%, due 11/15/12 (b) 945,000 921,313
General Electric Capital
Corp.
4.625%, due 9/15/09 125,000 124,650
Goldman Sachs Group, Inc.
(The)
6.15%, due 4/1/18 805,000 666,856
HSBC Finance Corp.
4.75%, due 5/15/09 115,000 113,593
6.375%, due 10/15/11 1,505,000 1,387,872
6.75%, due 5/15/11 535,000 504,813
7.00%, due 5/15/12 285,000 266,590
International Lease Finance
Corp.
5.625%, due 9/20/13 2,860,000 1,830,326
5.75%, due 6/15/11 1,480,000 1,014,109
5.875%, due 5/1/13 320,000 205,767
6.375%, due 3/25/13 1,380,000 902,452
Jefferies Group, Inc.
5.50%, due 3/15/16 800,000 614,185
7.75%, due 3/15/12 840,000 799,908
John Deere Capital Corp.
4.90%, due 9/9/13 2,900,000 2,656,322
5.65%, due 7/25/11 1,135,000 1,120,643
JPMorgan Chase & Co.
5.125%, due 9/15/14 2,140,000 1,904,741
Lehman Brothers Holdings,
Inc.
3.60%, due 3/13/09 (c) 15,000 1,950
5.625%, due 1/24/13 (c) 2,560,000 332,800
</Table>
+ Percentages indicated are based on Fund net assets.
V Among the Fund's 10 largest issuers, as of October 31, 2008,
excluding short-term investments. May be subject to change daily.
10 MainStay Institutional Bond Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
CORPORATE BONDS (CONTINUED)
- ----------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES (CONTINUED)
MBNA Corp.
7.50%, due 3/15/12 $ 240,000 $ 237,716
Morgan Stanley
4.75%, due 4/1/14 1,495,000 1,063,298
National Rural Utilities
Cooperative
Finance Corp.
5.75%, due 11/1/08 80,000 80,000
10.375%, due 11/1/18 2,235,000 2,369,252
Textron Financial Corp.
5.40%, due 4/28/13 4,180,000 2,835,064
-------------
30,487,212
-------------
ELECTRIC 2.3%
FirstEnergy Corp.
Series B
6.45%, due 11/15/11 1,680,000 1,582,540
MidAmerican Energy Holdings
Co.
5.875%, due 10/1/12 2,590,000 2,452,220
6.125%, due 4/1/36 2,000 1,472
Nisource Finance Corp.
6.40%, due 3/15/18 1,725,000 1,250,068
Virginia Electric and Power
Co.
5.10%, due 11/30/12 1,160,000 1,057,464
-------------
6,343,764
-------------
INSURANCE 2.4%
Assurant, Inc.
5.625%, due 2/15/14 615,000 560,438
Hartford Financial Services
Group, Inc.
6.00%, due 1/15/19 1,200,000 832,093
MetLife, Inc.
5.50%, due 6/15/14 1,260,000 1,108,401
6.125%, due 12/1/11 1,520,000 1,472,228
Prudential Financial, Inc.
4.50%, due 7/15/13 1,185,000 973,891
St. Paul Travelers Cos., Inc.
(The)
6.25%, due 6/20/16 1,830,000 1,651,374
-------------
6,598,425
-------------
MEDIA 1.4%
Comcast Cable Holdings LLC
9.80%, due 2/1/12 1,905,000 1,927,315
Cox Communications, Inc.
6.75%, due 3/15/11 864,000 840,192
7.125%, due 10/1/12 975,000 931,213
-------------
3,698,720
-------------
OIL & GAS 1.9%
Devon Financing Corp. LLC
6.875%, due 9/30/11 865,000 859,090
Devon OEI Operating, Inc.
7.25%, due 10/1/11 645,000 646,807
Enterprise Products
Operating, L.P.
6.30%, due 9/15/17 1,660,000 1,356,617
Valero Energy Corp.
6.125%, due 6/15/17 800,000 658,774
XTO Energy, Inc.
4.90%, due 2/1/14 1,050,000 858,591
6.25%, due 8/1/17 898,000 756,358
-------------
5,136,237
-------------
PIPELINES 0.3%
Kinder Morgan Energy
Partners, L.P.
6.00%, due 2/1/17 875,000 699,115
-------------
REAL ESTATE INVESTMENT TRUSTS 1.3%
ERP Operating, L.P.
5.75%, due 6/15/17 875,000 596,270
iStar Financial, Inc.
Series B
4.875%, due 1/15/09 50,000 41,500
ProLogis
5.50%, due 4/1/12 2,300,000 1,493,767
Realty Income Corp.
5.95%, due 9/15/16 1,825,000 1,411,499
-------------
3,543,036
-------------
RETAIL 1.2%
Best Buy Co., Inc.
6.75%, due 7/15/13 (b) 1,620,000 1,525,421
CVS Caremark Corp.
5.75%, due 6/1/17 2,275,000 1,836,044
-------------
3,361,465
-------------
TRANSPORTATION 0.4%
Burlington Northern Santa Fe
5.65%, due 5/1/17 1,155,000 1,010,714
-------------
Total Corporate Bonds
(Cost $89,722,618) 74,197,430
-------------
MORTGAGE-BACKED SECURITIES 9.9%
- ----------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) 9.9%
Bear Stearns Commercial
Mortgage Securities
Series 2006-722, Class A4
5.631%, due 4/12/38 2,075,000 1,649,470
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
11
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
MORTGAGE-BACKED SECURITIES (CONTINUED)
- ----------------------------------------------------------------
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (CONTINUED)
Commercial Mortgage
Pass-Through Certificate
Series 2006-C8, Class A2B
5.248%, due 12/10/46 $ 4,775,000 $ 4,232,492
Countrywide Alternative Loan
Trust Series 2005-76, Class
2A1
3.66%, due 2/25/36 (a) 3,503,531 2,067,083
V Greenwich Capital
Commercial
Funding Corp.
Series 2005-GG5, Class A5
5.224%, due 4/10/37 (a) 2,960,000 2,385,128
Series 2004-GG1, Class A7
5.317%, due 6/10/36 (a) 3,275,000 2,813,601
GS Mortgage Securities Corp.
Series 2005-GG4, Class A4
4.761%, due 7/10/39 (a) 2,628,125 2,085,691
Series 2004-GG2, Class A6
5.396%, due 8/10/38 (a) 2,400,000 2,032,041
GS Mortgage Securities Corp.
II
Series 2007-GG10, Class A4
5.993%, due 8/10/45 1,455,000 1,094,385
Harborview Mortgage Loan
Trust Series 2005-11, Class
2A1A
4.59%, due 8/19/45 (a) 97,640 56,864
JP Morgan Mortgage Trust
Series 2007-S3, Class 1A96
6.00%, due 7/25/37 1,050,382 818,641
Series 2007-S3, Class 1A97
6.00%, due 7/25/37 2,310,840 1,801,011
LB-UBS Commercial Mortgage
Trust Series 2007-C2, Class
A3
5.43%, due 2/15/40 4,305,000 3,182,049
WaMu Mortgage Pass-Through
Certificate
Series 2006-AR7, Class 2A
4.059%, due 7/25/46 (a)(d) 4,944,123 2,521,503
-------------
Total Mortgage-Backed
Securities
(Cost $35,780,611) 26,739,959
-------------
U.S. GOVERNMENT & FEDERAL AGENCIES 56.4%
- ----------------------------------------------------------------
FANNIE MAE
(COLLATERALIZED MORTGAGE OBLIGATION) 0.0%++
Series 1991-66, Class J
8.125%, due 6/25/21 1,333 1,444
-------------
FEDERAL FARM CREDIT BANK 1.3%
3.875%, due 10/7/13 3,600,000 3,513,917
-------------
V FEDERAL HOME LOAN BANK
11.9%
3.375%, due 10/20/10 20,645,000 20,689,389
3.625%, due 10/18/13 12,175,000 11,743,445
-------------
32,432,834
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION 6.1%
4.125%, due 9/27/13 14,975,000 14,898,762
5.50%, due 12/1/38 TBA (e) 1,700,000 1,658,030
-------------
16,556,792
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(MORTGAGE PASS-THROUGH SECURITIES) 0.0%++
5.952%, due 5/1/37 (a) 23,499 23,851
6.00%, due 2/1/11 6,106 6,250
-------------
30,101
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION 11.8%
2.875%, due 10/12/10 19,270,000 19,202,054
3.00%, due 7/12/10 3,645,000 3,637,553
4.375%, due 10/15/15 1,360,000 1,328,765
4.75%, due 12/15/10 135,000 139,584
5.00%, due 10/15/11 7,000,000 7,296,114
-------------
31,604,070
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) 14.6%
5.50%, due 4/1/34 185,389 181,440
5.50%, due 12/1/36 4,130,359 4,037,856
5.50%, due 4/1/37 9,000,955 8,798,864
5.50%, due 9/1/37 56,347 55,082
6.00%, due 8/1/34 23,123 23,158
6.00%, due 1/31/36 TBA (e) 1,500,000 1,499,063
6.00%, due 12/1/36 61,360 61,366
6.00%, due 9/1/37 438,489 438,510
6.00%, due 10/1/37 5,030,664 4,964,623
6.00%, due 11/1/37 251,030 251,042
6.00%, due 1/1/38 38,733 38,731
6.033%, due 10/1/36 (a) 2,062,567 2,097,000
6.088%, due 10/1/36 (a) 1,255,328 1,282,053
6.192%, due 9/1/36 (a) 2,764,540 2,813,573
6.50%, due 9/1/33 3,575,412 3,653,847
6.50%, due 10/1/35 41,948 42,567
6.50%, due 11/1/35 40,596 41,195
6.50%, due 6/1/36 64,987 65,915
6.50%, due 7/1/36 272,939 276,837
6.50%, due 8/1/36 82,196 83,369
6.50%, due 9/1/36 38,976 39,533
6.50%, due 11/1/36 5,255,250 5,330,301
6.50%, due 4/1/37 36,148 36,662
6.50%, due 7/1/37 148,070 150,176
6.50%, due 8/1/37 398,789 404,462
6.50%, due 9/1/37 1,626,325 1,649,459
6.50%, due 10/1/37 41,952 42,549
</Table>
12 MainStay Institutional Bond Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
<Table>
<Caption>
PRINCIPAL
AMOUNT VALUE
U.S. GOVERNMENT & FEDERAL AGENCIES
(CONTINUED)
- ----------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (CONTINUED)
6.50%, due 11/1/37 $ 39,895 $ 40,462
6.50%, due 12/1/37 21,195 21,496
6.50%, due 3/1/38 1,719,644 1,744,103
-------------
40,165,294
-------------
FREDDIE MAC REFERENCE REMIC
(COLLATERALIZED MORTGAGE OBLIGATION) 0.0%++
Series 2113, Class QE
6.00%, due 11/15/27 6,955 6,970
-------------
FREDDIE MAC
(COLLATERALIZED MORTGAGE OBLIGATIONS) 3.1%
5.00%, due 4/15/31 3,680,324 3,705,531
6.00%, due 8/15/28 4,477,444 4,560,986
-------------
8,266,517
-------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITY) 0.0%++
12.50%, due 1/15/14 1,409 1,651
-------------
UNITED STATES TREASURY INFLATION INDEXED BOND 3.5%
1.375%, due 7/15/18 10,962,093 9,374,300
-------------
V UNITED STATES TREASURY
NOTES 4.1%
2.125%, due 1/31/10 5,000,000 5,039,845
2.25%, due 9/30/10 3,665,000 3,699,074
3.50%, due 5/31/13 2,125,000 2,205,185
-------------
10,944,104
-------------
Total U.S. Government &
Federal Agencies (Cost
$153,618,732) 152,897,994
-------------
YANKEE BONDS 1.8% (F)
- ----------------------------------------------------------------
BEVERAGES 0.4%
Diageo Capital PLC
5.75%, due 10/23/17 865,000 743,629
Diageo Finance B.V.
5.30%, due 10/28/15 385,000 334,640
-------------
1,078,269
-------------
HEALTH CARE-PRODUCTS 0.3%
Covidien International
Finance S.A.
6.00%, due 10/15/17 940,000 819,660
-------------
HOLDING COMPANY--DIVERSIFIED 0.3%
EnCana Holdings Finance Corp.
5.80%, due 5/1/14 860,000 760,042
-------------
MINING 0.5%
Rio Tinto Finance USA, Ltd.
6.50%, due 7/15/18 1,720,000 1,334,202
-------------
TELECOMMUNICATIONS 0.3%
Telecom Italia Capital S.A.
6.999%, due 6/4/18 1,225,000 887,954
-------------
Total Yankee Bonds
(Cost $6,001,719) 4,880,127
-------------
Total Long-Term Bonds
(Cost $291,234,501) 263,832,465
-------------
SHORT-TERM INVESTMENTS 3.7%
- ----------------------------------------------------------------
FEDERAL AGENCY 1.2%
Federal Home Loan Mortgage
Corporation (Discount Note)
2.72%, due 1/5/09 (g) 3,200,000 3,184,342
-------------
Total Federal Agency
(Cost $3,184,342) 3,184,342
-------------
REPURCHASE AGREEMENT 2.5%
State Street Bank & Trust Co.
0.10%, dated 10/31/08
due 11/3/08
Proceeds at Maturity
$6,755,737 (Collateralized
by a Federal Home Loan Bank
Security with a rate of
2.673% and a Maturity Date
of 3/4/09, with a
Principal Amount of
6,875,000 and a Market
Value of $6,892,188) 6,755,681 6,755,681
-------------
Total Repurchase Agreement
(Cost $6,755,681) 6,755,681
-------------
Total Short-Term Investments
(Cost $9,940,023) 9,940,023
-------------
Total Investments
(Cost $301,174,524) (h) 101.1% 273,772,488
Liabilities in Excess of
Cash and Other Assets (1.1) (2,932,373)
----- ------------
Net Assets 100.0% $ 270,840,115
===== ============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
13
PORTFOLIO OF INVESTMENTS OCTOBER 31, 2008 (CONTINUED)
<Table>
+++ On a daily basis NYLIM confirms that the
value of the Fund's liquid assets (liquid
portfolio securities and cash) is
sufficient to cover its potential senior
securities (e.g., futures, swaps,
options).)
++ Less than one-tenth of a percent.
(a) Floating rate. Rate shown is the rate in
effect at October 31, 2008.
(b) May be sold to institutional investors
only under Rule 144A or securities
offered pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(c) Issuer in bankruptcy.
(d) Fair valued security. The total market
value of these securities at October 31,
2008 is $2,521,503 which represents 1.0%
of the Fund's net assets.
(e) TBA: Securities purchased on a forward
commitment basis with an approximate
principal amount and maturity date. The
actual principal amount and maturity date
will be determined upon settlement. The
market value of these securities at
October 31, 2008 is $3,157,093, which
represents 1.2% of the Fund's net assets.
All or a portion of these securities were
acquired under a mortgage dollar roll
agreement.
(f) Yankee Bond--dollar-denominated bond
issued in the United States by a foreign
bank or corporation.
(g) Interest rate presented is yield to
maturity.
(h) At October 31, 2008, cost is $301,418,441
for federal income tax purposes and net
unrealized depreciation is as follows:
</Table>
<Table>
Gross unrealized appreciation $ 617,903
Gross unrealized depreciation (28,263,856)
-------------
Net unrealized depreciation $(27,645,953)
=============
</Table>
14 MainStay Institutional Bond Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2008
<Table>
ASSETS:
Investment in securities, at value
(identified cost $301,174,524) $273,772,488
Receivables:
Investment securities sold 9,136,278
Interest 2,201,466
Fund shares sold 4,466
Other assets 19,603
------------
Total assets 285,134,301
------------
LIABILITIES:
Due to custodian 12
Payables:
Investment securities purchased 14,049,083
Manager (See Note 3) 88,187
Transfer agent (See Note 3) 67,459
Professional fees 38,371
Shareholder communication 24,378
Custodian 18,214
Trustees 979
Fund shares redeemed 27
Accrued expenses 2,723
Dividend payable 4,753
------------
Total liabilities 14,294,186
------------
Net assets $270,840,115
============
COMPOSITION OF NET ASSETS:
Share of beneficial interest
outstanding (par value of $.01
per share) unlimited number of
shares authorized $ 291,598
Additional paid-in capital 302,854,554
------------
303,146,152
Accumulated undistributed net
investment income 403,593
Accumulated net realized loss on
investments (5,307,594)
Net unrealized depreciation on
investments (27,402,036)
------------
Net assets $270,840,115
============
CLASS I
Net assets applicable to
outstanding shares $270,840,115
============
Shares of beneficial interest
outstanding 29,159,752
============
Net asset value and offering price
per share outstanding $ 9.29
============
</Table>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
15
STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2008
<Table>
INVESTMENT INCOME:
INCOME:
Interest $ 13,712,687
Income from securities
loaned--net 310,362
------------
Total income 14,023,049
------------
EXPENSES:
Manager (See Note 3) 1,033,252
Transfer agent (See Note 3) 221,882
Professional fees 72,824
Recordkeeping (a) 42,328
Shareholder communication 27,414
Custodian 25,368
Registration 11,012
Trustees 10,426
Administration 7,465
Miscellaneous 17,008
------------
Total expenses before waiver 1,468,979
Expense waiver from Manager (See
Note 3) (5,648)
------------
Net expenses 1,463,331
------------
Net investment income 12,559,718
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments (747,846)
Net change in unrealized
appreciation on investments (27,489,599)
------------
Net realized and unrealized loss on
investments (28,237,445)
------------
Net decrease in net assets
resulting from operations $(15,677,727)
============
</Table>
<Table>
(a) Effective August 1, 2008, the pricing and
recordkeeping services fee is included in
the Manager fee.
</Table>
16 MainStay Institutional Bond Fund The notes to the financial statements
are an integral part of, and should be read in conjunction with, the financial
statements.
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED PERIOD ENDED YEAR ENDED
OCTOBER 31, OCTOBER 31, JUNE 30,
2008 2007 (A) 2007
INCREASE IN NET ASSETS:
Operations:
Net investment
income $ 12,559,718 $ 2,716,910 $ 8,049,148
Net realized gain
(loss) on
investments (747,846) 125,718 589,170
Net change in
unrealized
appreciation
(depreciation) on
investments (27,489,599) 1,475,808 1,325,920
-------------------------------------------
Net increase
(decrease) in net
assets resulting
from operations (15,677,727) 4,318,436 9,964,238
-------------------------------------------
Dividends to shareholders:
From net investment income:
Class I (12,505,313) -- --
Class McMorgan -- (2,644,037) (8,326,686)
Class Z -- -- (1,311)
-------------------------------------------
Total dividends
to shareholders (12,505,313) (2,644,037) (8,327,997)
-------------------------------------------
Capital share transactions:
Net proceeds from
sale of shares 325,692,353 22,756,387 37,395,265
Net asset value
of shares issued
in connection
with the
acquisition of
McMorgan Fixed
Income Fund (b) 73,185,096 -- --
Net asset value
of shares issued
to shareholders
in reinvestment
of dividends 12,410,688 2,598,828 8,162,154
Cost of shares
redeemed (292,376,858) (18,105,512) (26,389,326)
-------------------------------------------
Increase in net
assets derived
from capital
share
transactions 118,911,279 7,249,703 19,168,093
-------------------------------------------
Net increase in
net assets 90,728,239 8,924,102 20,804,334
NET ASSETS:
Beginning of period $ 180,111,876 $171,187,774 $150,383,440
-------------------------------------------
End of period $ 270,840,115 $180,111,876 $171,187,774
===========================================
Accumulated
undistributed net
investment income
at end of period $ 403,593 $ 298,808 $ 217,654
===========================================
</Table>
(a) The McMorgan Intermediate Fixed Income Fund changed its fiscal year end from
June 30 to October 31.
(b) Effective November 27, 2007, shareholders of McMorgan Intermediate Fixed
Income Fund and McMorgan Fixed Income Fund became owners of Class I shares
of MainStay Institutional Bond Fund. Additionally, the accounting and
performance history of the McMorgan Intermediate Fixed Income Fund was
redesignated as that of Class I shares of MainStay Institutional Bond Fund.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements. mainstayinvestments.com
17
FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
<Table>
<Caption>
CLASS I
-------------------------------------------------------------------------------------------------
YEAR PERIOD
ENDED ENDED
OCTOBER 31, OCTOBER 31, YEAR ENDED JUNE 30,
-------------------------------------------------------------------------------------------------
2008 (A) 2007*** 2007 2006 2005 2004
Net asset value at
beginning of period $ 10.11 $ 10.01 $ 9.91 $ 10.36 $ 10.22 $ 10.93
-------- -------- -------- -------- -------- --------
Net investment income 0.43 0.16 0.48 (b) 0.40 (b) 0.34 (b) 0.36
Net realized and
unrealized gain (loss)
on investments (0.81) 0.10 0.12 (0.45) 0.16 (0.43)
-------- -------- -------- -------- -------- --------
Total from investment
operations (0.38) 0.26 0.60 (0.05) 0.50 (0.07)
-------- -------- -------- -------- -------- --------
Less dividends and
distributions:
From net investment
income (0.44) (0.16) (0.50) (0.38) (0.34) (0.36)
From net realized gain
on investments -- -- -- (0.02) (0.02) (0.28)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions (0.44) (0.16) (0.50) (0.40) (0.36) (0.64)
-------- -------- -------- -------- -------- --------
Net asset value at end
of period $ 9.29 $ 10.11 $ 10.01 $ 9.91 $ 10.36 $ 10.22
======== ======== ======== ======== ======== ========
Total investment return
(e) (4.00%) 2.58%(c) 6.11% (0.43%) 4.93% (0.64%)
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 4.32% 4.74%++ 4.77% 4.00% 3.24% 3.39%
Net expenses 0.50% 0.50%++ 0.50% 0.50% 0.50% 0.50%
Expenses (before
waiver/reimburse-
ment) 0.50% 0.63%++ 0.59% 0.62% 0.60% 0.57%
Portfolio turnover rate 302% (d) 83% 332% 262% (d) 286%(d) 226%
Net assets at end of
period (in 000's) $270,840 $180,112 $171,188 $150,355 $163,622 $172,331
</Table>
<Table>
*** The McMorgan Intermediate Fixed Income Fund changed its fiscal year end from
June 30 to October 31.
++ Annualized.
(a) Effective November 27, 2007, shareholders of McMorgan Intermediate Fixed
Income Fund and McMorgan Fixed Income Fund became owners of Class I shares of
MainStay Institutional Bond Fund. Additionally, the accounting and performance
history of the McMorgan Intermediate Fixed Income Fund was redesignated as
that of Class I shares of MainStay Institutional Bond Fund.
(b) Per share data based on average shares outstanding during the period.
(c) Total return is not annualized.
(d) The portfolio turnover rates not including mortgage dollar rolls for the years
ended October 31, 2008, June 30, 2006 and June 30, 2005 were 296%, 93% and
199%, respectively.
(e) Total investment returns may reflect adjustments to conform to generally
accepted accounting principles.
</Table>
18 MainStay Institutional Bond Fund The notes to the financial statements are
an integral part of, and should be read in conjunction with, the financial
statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and is comprised of twenty-one funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to the
MainStay Institutional Bond Fund (the "Fund"), a diversified fund.
The Fund currently offers one class of shares. Class I shares commenced on
November 27, 2007. Class I shares are offered at net asset value without
imposition of a front-end sales charge or a contingent deferred sales charge.
The Fund's investment objective is to seek to maximize total return consistent
with maintaining liquidity and preserving capital.
The financial statements of the Fund reflect the historical results of the
McMorgan Intermediate Fixed Income Fund, a series of McMorgan Funds (the
"McMorgan Trust"), prior to its reorganization. (See Note 10.) Upon completion
of the reorganization, the Class I shares of the Fund assumed the performance,
financial and other historical information of the McMorgan Fixed Income Fund.
The Fund invests in foreign securities, which carry certain risks that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from currency fluctuations, future adverse political and
economic developments and possible imposition of currency exchange blockages or
other foreign governmental laws or restrictions. These risks are likely to be
greater in emerging markets than in developed markets. The ability of issuers of
debt securities held by the Fund to meet their obligations may be affected by
economic and political developments in a specific country, industry or region.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
The Fund prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America and follows the
significant accounting policies described below.
(A) SECURITIES VALUATION. Debt securities are valued at prices supplied by a
pricing agent or broker selected by the Fund's Manager (as defined in Note 3(A))
in consultation with the Fund's Subadvisor, if any, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques, if
such prices are deemed by the Fund's Manager, in consultation with the Fund's
Subadvisor, if any, to be representative of market values, at the regular close
of trading of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the Fund is open for business ("valuation date"). Investments in other
mutual funds are valued at their net asset values as of the close of the New
York Stock Exchange on the date of valuation.
Temporary cash investments acquired over 60 days prior to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments which mature in 60 days or less are valued at amortized cost. The
amortized cost method involves valuing a security at its cost on the date of
purchase and thereafter assuming a constant amortization to maturity of the
difference between the principal amount due at maturity and cost.
Securities for which market quotations are not readily available are valued by
methods deemed in good faith by the Fund's Board of Trustees to represent fair
value. Equity and non-equity securities which may be valued in this manner
include, but are not limited to: (i) a security the trading for which has been
halted or suspended; (ii) a debt security that has recently gone into default
and for which there is not a current market quotation; (iii) a security of an
issuer that has entered into a restructuring; (iv) a security that has been de-
listed from a national exchange; (v) a security the market price of which is not
available from an independent pricing source or, if so provided, does not, in
the opinion of the Fund's Manager or Subadvisor ,as defined in Note 3 (A),
reflect the security's market value; and (vi) a security where the trading on
that security's principal market is temporarily closed at a time when, under
normal conditions, it would be open. At October 31, 2008, the Fund held
$2,521,503 of securities that were valued in such a manner.
(B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute all of the taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no federal income tax provision is required.
In July 2006, the Financial Accounting Standards Board (the "FASB") issued
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes," an
interpretation of FASB Statement No. 109 (the "Interpretation"). The
Interpretation established for all entities, including pass-through entities
such as the Fund, a minimum threshold for financial statement recognition of the
benefit of positions taken in filing tax returns (including whether an entity is
taxable in a particular jurisdiction), and requires certain expanded tax
disclosures. The Interpretation became effective for the Fund's 2008 fiscal
year, and was applied to all open tax years as of the date of effectiveness. The
Manager, as defined in Note 3(A), determined that the adoption of the
Interpretation did not have an impact on the Fund's financial statements upon
adoption. The Manager continually reviews the Fund's tax positions and such
conclusions
mainstayinvestments.com 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
under the Interpretation based on factors, including, but not limited to,
ongoing analyses of tax laws and regulations and interpretations thereof.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions
are recorded on the ex-dividend date. The Fund intends to declare and pay
dividends of net investment income monthly and distributions of net realized
capital and currency gains, if any, annually. All dividends and distributions
are reinvested in shares of the Fund, at net asset value, unless the shareholder
elects otherwise. Dividends and distributions to shareholders are determined in
accordance with federal income tax regulations and may differ from generally
accepted accounting principles in the United States of America.
(D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued as earned
using the effective interest rate method. Discounts and premiums on securities
purchased, other than short-term securities, for the Fund are accreted and
amortized, respectively, on the effective interest rate method over the life of
the respective securities or, in the case of a callable security, over the
period to the first date of call. Discounts and premiums on short-term
securities are accreted and amortized, respectively, on the straight-line
method. Income from payment-in-kind securities is recorded daily based on the
effective interest method of accrual.
(E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred, except where direct allocations of expenses can be made. Expenses
(other than transfer agent expenses and fees incurred under the shareholder
services plans and the distribution plans further discussed in Note 3 (B)) are
allocated to separate classes of shares pro rata based upon their relative net
asset value on the date the expenses are incurred. The expenses borne by the
Fund, including those of related parties to the Fund, are shown in the Statement
of Operations.
(F) USE OF ESTIMATES. In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ from those
estimates.
(G) REPURCHASE AGREEMENTS. When the Fund invests in repurchase agreements, the
Fund's custodian takes possession of the collateral pledged for investments in
such repurchase agreements. The underlying collateral is valued daily on a mark-
to-market basis to determine that the value, including accrued interest, exceeds
the repurchase price. In the event of the seller's default of the obligation to
repurchase, the Fund has the right to liquidate the collateral and apply the
proceeds in satisfaction of the obligation. Under certain circumstances, in the
event of default or bankruptcy by the other party to the agreement, realization
and/or retention of the collateral may be subject to legal proceedings.
(H) MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar roll ("MDR")
transactions in which it sells mortgage-backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDRs are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the Portfolio of Investments and liabilities for such purchase
commitments are included as payables for investments purchased. During the roll
period, the Fund foregoes principal and interest paid on the securities. The
Fund is compensated by the difference between the current sales price and the
forward price for the future as well as by the earnings on the cash proceeds of
the initial sale. MDRs may be renewed without physical delivery of the
securities subject to the contract. The Fund maintains liquid assets from its
portfolio having a value not less than the repurchase price, including accrued
interest. MDR transactions involve certain risks, including the risk that the
MBS returned to the Fund at the end of the roll, while substantially similar,
could be inferior to what was initially sold to the counterparty.
(I) SECURITIES LENDING. In order to realize additional income, the Fund may
engage in securities lending, subject to the limitations set forth in the
Investment Company Act of 1940. In the event the Fund does engage in securities
lending, the Fund will lend through its custodian, State Street Bank and Trust
Company. State Street manages the Fund's cash collateral in accordance with the
Lending Agreement between the Fund and State Street, and indemnifies the Fund's
portfolio against counterparty risk. The loans are collateralized by cash or
securities at least equal at all times to the market value of the securities
loaned. Collateral will consist of U.S. Government securities, cash equivalents
or irrevocable letters of credit. The Fund may bear the risk of delay in
recovery of, or loss of rights in, the securities loaned should the borrower of
the securities experience financial difficulty. The Fund may also record
realized gain or loss on securities deemed sold due to borrower's inability to
return securities on loan. The Fund receives compensation for lending its
securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Fund also continues to
receive interest and dividends on the securities loaned and any gain or loss in
20 MainStay Institutional Bond Fund
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Fund.
In light of current market conditions, the Fund's Board of Trustees and New York
Life Investment Management LLC have determined that it is in the best interest
of the Fund to temporarily stop lending portfolio securities, and to recall all
outstanding loans. As a result, on September 18, 2008, the Fund temporarily
suspended its participation in the securities lending program and initiated a
recall of all securities out on loan. The Fund and NYLIM reserve the right to
reinstitute lending when deemed appropriate.
(J) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities that may arise out of
performance of their duties to the Trust. Additionally, in the normal course of
business, the Fund enters into contracts with third-party service providers that
contain a variety of representations and warranties and which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the Fund
that have not yet occurred. Based on experience, management is of the view that
the risk of loss in connection with these potential indemnification obligations
is remote. However, there can be no assurance that material liabilities related
to such obligations will not arise in the future, which could adversely impact
the Fund.
NOTE 3--FEES AND RELATED PARTY TRANSACTIONS:
(A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("NYLIM" or
"Manager"), a registered investment adviser and an indirect wholly-owned
subsidiary of New York Life Insurance Company ("New York Life"), serves as the
Fund's Manager, pursuant to an Amended and Restated Management Agreement
("Management Agreement"). The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and is responsible for the financial and
accounting records required to be maintained by the Fund. The Manager also pays
the salaries and expenses of all personnel affiliated with the Fund and all the
operational expenses that are not the responsibility of the Fund. McMorgan & Co.
LLC ("McMorgan" or "Subadvisor"), a registered investment adviser and an
indirect wholly-owned subsidiary of New York Life, serves as subadvisor to the
Fund and is responsible for the day-to-day portfolio management of the Fund.
Pursuant to the terms of an Amended and Restated Subadvisory Agreement
("Subadvisory Agreement"), between NYLIM and the Subadvisor, NYLIM pays for the
services of the Subadvisor.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and facilities furnished at an annual rate of 0.35% of the Fund's
average daily net assets.
Additionally, effective August 1, 2008, the Management Agreement of each series
of The MainStay Funds will include a fund accounting fee based on average
monthly assets as follows: 0.05% for the first $20 million, 0.0333% for the next
$80 million and 0.01% for any amount over $100 million.
Effective April 1, 2008, NYLIM entered into a written expense limitation
agreement under which it has agreed to waive a portion of the Fund's management
fee or reimburse the expenses of the Fund so that the Fund's total ordinary
operating expenses (total ordinary operating expenses excludes taxes, interest,
litigation, extraordinary expenses, brokerage and other transaction expenses
relating to the purchase or sale of portfolio investments, and the fees and
expenses of any other funds in which the Fund invests) do not exceed 0.50% of
the average daily net assets of Class I shares of the Fund. NYLIM has separately
agreed that for a period of two years commencing November 27, 2007, NYLIM will,
by waiving, assuming or reimbursing expenses, or otherwise, limit the expenses
of Class I shares of the Fund so that the total ordinary operating expenses of
Class I shares do not exceed the annual rate of 0.50% of the average daily net
assets attributable to Class I shares. Prior to November 27, 2007, the expense
limitation agreement was also 0.50% of average daily net assets.
The April 28, 2008 expense limitation agreement may be modified or terminated
only with the approval of the Board of Trustees. NYLIM may recoup the amount of
certain management fee waivers or expense reimbursements from the Fund pursuant
to the agreement if such action does not cause the Fund to exceed the existing
expense limitation and the recoupment is made within three years after the year
in which NYLIM incurred the expense.
Prior to the reorganization discussed in Note 11, the Fund had a different
management agreement in place with McMorgan, the manager of Intermediate Fixed
Income Fund, the predecessor fund.
For the period November 1, 2007, through November 27, 2007, McMorgan earned fees
in the amount of $65,237 and waived fees in the amount of $5,648. For the period
November 28, 2007, through October 31, 2008, NYLIM earned fees in the amount of
$967,915. NYLIM is not entitled to recoup reimbursements paid by McMorgan.
Effective August 1, 2008, the monthly fee for fund accounting and recordkeeping
services provided is included within the management fee paid by the Fund. Prior
to August 1, 2008, the Fund paid the Manager a fee for certain pricing and
recordkeeping services provided under the Accounting Agreement at the annual
rate of 1/20 of 1% for the first $20 million of average monthly net assets, 1/30
of 1% of
mainstayinvestments.com 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the next $80 million of average monthly net assets and 1/100 of 1% of any amount
in excess of $100 million of average monthly net assets. Fees for these services
provided to the Fund by the Manager amounted to $37,639 for the period November
28, 2007, through July 31, 2008. From November 1, 2007, to November 27, 2007,
there was a different agreement in place with respect to the predecessor Fund
and the fees for this period amounted to $4,689.
State Street Bank and Trust Company, 1 Lincoln Street, Boston, Massachusetts,
02111, provides sub-administration and sub-accounting services to the Fund
pursuant to an agreement with NYLIM. These services include calculating daily
net asset values of the Fund, maintaining general ledger and sub-ledger accounts
for the calculation of the Fund's respective net asset values, and assisting
NYLIM in conducting various aspects of the Fund's administrative operations. For
providing these services to the Fund, State Street Bank and Trust Company is
compensated by NYLIM.
(B) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM
Service Company LLC ("NYLIM Service"), an affiliate of NYLIM, is the Fund's
transfer, dividend disbursing and shareholder servicing agent. NYLIM Service has
entered into an agreement with Boston Financial Data Services pursuant to which
it performs certain services for which NYLIM Service is responsible. Transfer
agent expenses incurred by the Fund, for the period November 1, 2007, through
November 27, 2007, amounted to $1,817 paid by the McMorgan Fixed Income Fund and
for the period November 28, 2007, through October 31, 2008, amounted to $220,065
paid by the Fund.
(C) OTHER. Pursuant to the Management Agreement between the Fund and NYLIM, the
cost of legal services provided to the Fund by the Office of the General Counsel
of NYLIM are payable directly by the Fund. Legal expenses incurred by the Fund
for the period November 28, 2007, through October 31, 2008, these fees, which
are included in professional fees shown on the Statement of Operations, were
$11,158.
NOTE 4--FEDERAL INCOME TAX:
As of October 31, 2008, the components of accumulated gain/(loss) on a tax basis
were as follows:
<Table>
<Caption>
ACCUMULATED
CAPITAL OTHER UNREALIZED TOTAL
ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED
INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS)
$403,593 $(5,063,677) $-- $(27,645,953) $(32,306,037)
</Table>
The difference between book-basis and tax basis unrealized depreciation is
primarily due to wash sale deferrals.
The following table discloses the current year reclassifications between
accumulated undistributed net investment income and accumulated net realized
loss on investments arising from permanent differences; net assets at October
31, 2008 are not affected.
<Table>
<Caption>
ACCUMULATED ACCUMULATED
UNDISTRIBUTED NET REALIZED ADDITIONAL
NET INVESTMENT GAIN (LOSS) ON PAID-IN
INCOME (LOSS) INVESTMENTS CAPITAL
$50,380 $(1,560,580) $1,510,200
---------------------------------------------
</Table>
The reclassifications for the Fund are primarily due to paydown gain (loss).
At October 31, 2008, for federal income tax purposes, capital loss carryforwards
of $5,063,677 were available as shown in the table below, to the extent provided
by the regulations to offset future realized gains of the Fund through the years
indicated. To the extent that these loss carryforwards are used to offset future
capital gains, it is probable that the capital gains so offset will not be
distributed to shareholders.
<Table>
<Caption>
CAPITAL LOSS AMOUNT
AVAILABLE THROUGH (000'S)
2013 $2,101
2014 2,314
2016 649
$5,064
- ----------------------------
</Table>
The tax character of distributions paid during the year ended October 31, 2008,
period ended October 31, 2007 and year ended June 30, 2007, shown in the
Statement of Changes in Net Assets, was as follows:
<Table>
<Caption>
OCTOBER 31, JUNE 30,
2008 2007 2007
Distributions paid
from:
Ordinary Income $12,505,313 $2,644,037 $8,327,997
- ------------------------------------------------------------
</Table>
NOTE 5--CUSTODIAN:
State Street Bank and Trust Company is the custodian of cash and securities of
the Fund. Custodial fees are charged to the Fund based on the market value of
securities in the Fund and the number of certain cash transactions incurred by
the Fund.
NOTE 6--LINE OF CREDIT:
The Fund, and certain affiliated funds, maintain a line of credit of
$160,000,000 with a syndicate of banks in order to secure a source of funds for
temporary purposes to meet unanticipated or excessive shareholder redemption
requests. Effective September 3, 2008, these funds pay a commitment fee, at an
annual rate of 0.08% of the average commitment amount, regardless of usage, to
The Bank of New York Mellon, which serves as agent to the syndicate. Prior to
September 3, 2008, the commitment fee was 0.06% of the average commitment
amount. Such commitment fees
22 MainStay Institutional Bond Fund
are allocated among the funds based upon net assets and other factors. Interest
on any revolving credit loan is charged based upon the Federal Funds Advances
rate. There were no borrowings made or outstanding with respect to the Fund on
the line of credit during the year ended October 31, 2008.
NOTE 7--PURCHASE AND SALES OF SECURITIES (IN 000'S):
During the year ended October 31, 2008, purchases and sales of U.S. Government
securities were $762,536 and $766,640, respectively. Purchases and sales of
securities, other than U.S. Government securities and short-term securities,
were $115,797 and $62,875, respectively.
NOTE 8--CAPITAL SHARE TRANSACTIONS:
<Table>
<Caption>
CLASS I SHARES AMOUNT
Year ended October 31,
2008:
Shares sold 32,018,745 $ 325,692,353
Shares issued in connection
with acquisition of
McMorgan Fixed Income
Fund 7,175,713 73,185,096
Shares issued to
shareholders in
reinvestment of dividends 1,240,184 12,410,688
Shares redeemed (29,082,302) (292,376,858)
---------------------------
Net increase 11,352,340 $ 118,911,279
===========================
</Table>
<Table>
<Caption>
CLASS MCMORGAN SHARES AMOUNT
Four months ended October 31,
2007:
Shares sold 2,255,926 $ 22,756,387
Shares issued to shareholders
in reinvestment of
dividends 258,590 2,598,828
Shares redeemed (1,802,142) (18,105,512)
-------------------------
Net increase 712,374 $ 7,249,703
=========================
Year ended June 30, 2007:
Shares sold 3,707,119 $ 37,389,416
Shares issued in connection
with acquisition of
McMorgan Fixed Income Fund 808,810 8,160,843
Shares redeemed (2,599,725) (26,353,408)
-------------------------
Net increase 1,916,204 $ 19,196,851
=========================
</Table>
NOTE 9--NEW ACCOUNTING PRONOUNCEMENTS:
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of "fair value", sets out a framework for measuring
fair value and requires additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements already required or permitted by
existing standards and is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The changes to current generally accepted accounting principles from the
application of this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. As of October 31, 2008, Management does not believe the
adoption of SFAS No. 157, effective for the Fund for the fiscal year beginning
November 1, 2008, will impact the amounts reported in the Fund's financial
statements. However, additional disclosures may be required about the inputs
used to develop the measurements and the effect of certain measurements reported
in the financial statements for a fiscal period.
In March 2008, FASB issued the Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. SFAS 161 requires enhanced disclosures about the Fund's
derivative and hedging activities, including how such activities are accounted
for and their effect on the Fund's financial position, performance and cash
flows. Management is currently evaluating the impact the adoption of SFAS 161
will have on the Fund's financial statements and related disclosures.
NOTE 10--FUND ACQUISITION:
On November 27, 2007, Class I shares of the Institutional Bond Fund acquired the
assets, including portfolio investments, and assumed the identified liabilities
of McMorgan Intermediate Fixed Income and McMorgan Fixed Income Funds, each a
series of the McMorgan Trust.
These reorganizations were completed after shareholders approved the agreements
and plans of reorganization on November 20, 2007. The aggregate net assets of
the Institutional Bond Fund immediately before the acquisitions were $0 and the
combined net assets after the acquisitions were $257,597,060.
The acquisition was accomplished by a tax-free exchange of the following:
<Table>
<Caption>
SHARES VALUE
McMorgan Fixed Income Fund
Class McMorgan 5,141,806 $ 55,817,386
Class Z 1,599,413 17,367,710
McMorgan Intermediate Fixed
Income Fund 18,081,377 184,411,964
- -------------------------------------------------------
</Table>
In exchange for the McMorgan Intermediate Fixed Income and McMorgan Fixed Income
Fund shares and net assets, the Fund issued 25,257,090 of Class I shares.
mainstayinvestments.com 23
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
McMorgan Intermediate Fixed Income and McMorgan Fixed Income Funds' net assets
after adjustments for any permanent book-to-tax differences at the acquisition
date were as follows, which include the following amounts of capital stock,
unrealized appreciation/ depreciation and accumulated net realized loss:
<Table>
<Caption>
ACCUMULATED ACCUMULATED
TOTAL NET CAPITAL UNREALIZED NET REALIZED NET INVESTMENT
ASSETS PAID-IN APPRECIATION LOSS INCOME
McMorgan Fixed Income Fund $ 73,185,096 $ 74,109,452 $ 617,427 $(1,532,281) $ (9,502)
- ----------------------------------------------------------------------------------------------------------------
McMorgan Intermediate Fixed Income
Fund 184,411,964 186,142,975 1,863,254 (3,583,259) (11,006)
- ----------------------------------------------------------------------------------------------------------------
</Table>
24 MainStay Institutional Bond Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Trustees and Shareholders of
The MainStay Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MainStay Institutional Bond Fund ("the
Fund"), one of the funds constituting The MainStay Funds, as of October 31,
2008, and the related statements of operations and changes in net assets, and
the financial highlights for the year 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 audit. The statements of changes in net assets
and the financial highlights for each of the years or periods presented through
October 31, 2007, were audited by other auditors, whose report dated December
14, 2007, expressed an unqualified opinion thereon.
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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2008, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MainStay Institutional Bond Fund of The MainStay Funds as of October 31, 2008,
and the results of its operations, the changes in its net assets and the
financial highlights for the year then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
December 22, 2008
mainstayinvestments.com 25
BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENT
Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act")
requires that each mutual fund's board of trustees, including a majority of
trustees who are not "interested persons" of the fund, as defined in the 1940
Act ("Independent Trustees"), annually review and approve the fund's investment
advisory Agreement. At its June 16-17, 2008 meeting, the Board of Trustees (the
"Board") of the MainStay Institutional Bond Fund (the "Fund"), which was
comprised solely of Independent Trustees, unanimously approved the Management
and Subadvisory Agreements (the "Agreements") for the Fund for one year.
In reaching its decision to approve the Agreements, the Board considered
information furnished to the Board throughout the year at regular and special
Board meetings, as well as information prepared specifically in connection with
the annual contract review process that took place at various meetings between
December 2007 and June 2008. Information provided to the Board at its meetings
throughout the year included, among other things, detailed investment analytics
reports on the Fund prepared by the Investment Consulting Group at New York Life
Investment Management LLC ("NYLIM"), investment adviser to the Fund. The
structure and format for this regular reporting was developed in consultation
with the Board. The Board also received throughout the year, among other things,
periodic reports on shareholder services, legal and compliance matters,
portfolio turnover, and sales and marketing activity. Information requested by
and provided to the Board specifically in connection with the annual contract
review process included, among other things, a report on the Fund prepared by
Strategic Insight Mutual Fund Research and Consulting, LLC ("Strategic
Insight"), an independent third-party service provider engaged by the Board to
report objectively on the Fund's investment performance, management and
subadvisory fees and ordinary operating expenses. The Board also requested and
received information on the profitability of the Fund to NYLIM and its
affiliates, discussed in greater detail below, and responses to a comprehensive
list of questions encompassing a variety of topics prepared on behalf of the
Board by independent legal counsel to the Board. In addition, the Board
considered information provided to it by NYLIM and independent legal counsel
concerning the Agreements, which were amended and restated to more completely
reflect the services provided to the Fund, but did not result in a material
amendment to the Fund's prior contractual arrangements.
In determining to approve the Agreements for one year, the members of the Board
reviewed and evaluated all of this information and factors they believed to be
relevant and appropriate in light of legal advice furnished to them by
independent legal counsel and through the exercise of their own business
judgment. The broad factors considered by the Board are discussed in greater
detail below, and included, among other things: (i) the nature, extent, and
quality of the services to be provided to the Fund by NYLIM and McMorgan &
Company LLC ("McMorgan"), a wholly-owned subsidiary of New York Life Insurance
Company, an affiliate of NYLIM, that serves as subadviser to the Fund; (ii) the
investment performance of the Fund; (iii) the costs of the services to be
provided, and profits to be realized, by NYLIM and its affiliates from NYLIM's
relationship with the Fund; (iv) the extent to which economies of scale may be
realized as the Fund grows, and the extent to which economies of scale may
benefit Fund investors; and (v) the reasonableness of the Fund's management fee
level and overall total ordinary operating expenses, particularly as compared to
similar portfolios.
While individual members of the Board may have weighed certain factors
differently, the Board's decision to approve the Agreements was based on a
comprehensive consideration of all the information provided to the Board
throughout the year and specifically in connection with the contract review
process. The Board's conclusions with respect to the Agreements were based also
on the Board's consideration of the Agreements in the prior year. In addition to
considering the above-referenced factors, the Board observed that in the
marketplace there are a range of investment options available to shareholders of
the Fund, including a wide variety of mutual funds offered by competitors to the
MainStay Family of Funds, and that the Fund's shareholders, having had the
opportunity to consider alternative investment products and services, have
chosen to invest in the MainStay Family of Funds. A more detailed discussion of
the factors that figured prominently in the Board's decision to approve the
Agreements is provided below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY NYLIM AND MCMORGAN
In considering the approval of the Agreements, the Board examined the nature,
extent and quality of the services that NYLIM provides to the Fund. The Board
evaluated NYLIM's experience in serving as manager of the Fund, noting that
NYLIM manages other mutual funds, serves a variety of other investment advisory
clients, including other pooled investment vehicles, and has experience with
overseeing McMorgan and other subadvisers. The Board considered NYLIM's
performance in fulfilling its responsibilities for overseeing the Fund's legal
and compliance environment, for overseeing McMorgan's compliance with the Fund's
policies and investment objectives, and for implementing Board directives as
they relate to the Fund. The Board considered the scope and quality of NYLIM's
services provided to the Fund's shareholders (including services provided
through its affiliate, NYLIM Service Company LLC), such as the more extensive
servicing needs of New York Life agents and reputation as a high-quality
provider
26 MainStay Institutional Bond Fund
of shareholder services, which has been recognized by independent third-parties
on numerous occasions. The Board noted the role that the MainStay Family of
Funds historically has played in serving the investment needs of New York Life
Insurance Company policyholders, who often maintain smaller account balances
than other retail investors. The Board acknowledged that it had approved NYLIM's
recommendation to create a new "Investor Class" of shares designed principally
to address the higher shareholder-servicing costs typically associated with
smaller shareholder accounts. The Board considered the experience of senior
personnel at NYLIM providing management and administrative services to the Fund,
as well as NYLIM's reputation and financial condition. The Board also reviewed
NYLIM's willingness to invest in personnel designed to benefit the Fund, and
that NYLIM also is responsible for paying all of the salaries and expenses for
the Fund's officers. In addition, the Board considered the benefits to
shareholders of being part of the MainStay Family of Funds, including the
privilege of exchanging investments between the same class of shares without the
imposition of a sales charge, as described more fully in the Fund's prospectus.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund is likely to
continue to benefit from the nature, extent and quality of these services as a
result of NYLIM's experience, personnel, operations and resources.
The Board also examined the nature, extent and quality of the services that
McMorgan provides to the Fund. The Board evaluated McMorgan's experience in
serving as subadviser to the Fund, noting that McMorgan serves a variety of
other investment advisory clients, including other pooled investment vehicles.
It examined McMorgan's track record and experience in providing investment
advisory services to the Fund, the experience of senior management and
administrative personnel at McMorgan, and McMorgan's overall legal and
compliance environment. The Board also reviewed McMorgan's willingness to invest
in personnel designed to benefit the Fund. In this regard, the Board considered
the experience of the Fund's portfolio managers, the number of accounts managed
by the portfolio managers and McMorgan's method for compensating portfolio
managers. Based on these considerations, the Board concluded, within the context
of its overall determinations regarding the Agreements, that the Fund is likely
to benefit from the nature, extent and quality of these services as a result of
McMorgan's experience, personnel, operations and resources.
INVESTMENT PERFORMANCE
In evaluating the Fund's investment performance, the Board considered investment
performance results in light of the Fund's investment objective, strategies and
risks, as disclosed in the Fund's prospectus. The Board particularly considered
the detailed investment analytics reports provided by NYLIM's Investment
Consulting Group on the Fund throughout the year. These reports, which were
prepared by NYLIM in consultation with the Board, include, among other things,
information on the Fund's gross and net returns, the Fund's investment
performance relative to relevant investment categories and Fund benchmarks, the
Fund's risk-adjusted investment performance, and the Fund's investment
performance as compared to similar competitor funds, as appropriate. The Board
also considered information provided by Strategic Insight showing the investment
performance of the Fund as compared to similar mutual funds managed by other
investment advisers.
In considering the Fund's investment performance, the Board gave weight to its
ongoing discussions with senior management at NYLIM and McMorgan concerning Fund
investment performance, as well as discussions between the Fund's portfolio
managers and the Board that occurred at meetings from time to time throughout
the year and in previous years. The Board considered specific actions that
McMorgan had taken, or had agreed with the Board to take, to improve investment
performance, and any results of those actions. In considering the Fund's
investment performance, the Board focused principally on the Fund's long-term
performance track record, as opposed to the Fund's short-term investment
performance.
Based on these considerations, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's investment
performance over time has been satisfactory. The Fund discloses more information
about its performance in the Manager Discussions and Financial Highlights
sections of this Annual Report and in the Fund's prospectus.
COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NYLIM AND ITS
AFFILIATES
The Board considered the costs of the services provided by NYLIM under the
Agreements and the profitability of NYLIM and its affiliates due to their
relationship with the Fund over various time periods. Because McMorgan is an
affiliate of NYLIM whose subadvisory fee for advising the Fund is paid directly
by NYLIM, the Board considered the cost and profitability information for NYLIM
and McMorgan in the aggregate.
In evaluating the costs and profits of NYLIM and its affiliates due to their
relationship with the Fund, the Board considered, among other things, NYLIM's
investments in personnel, systems, equipment and other resources necessary to
manage the Fund, and the fact that NYLIM is responsible for paying McMorgan's
subadvisory fee. The Board acknowledged that NYLIM and McMorgan must be in a
position to pay and retain experienced professional personnel to provide
services to the Fund, and that NYLIM's ability to maintain a strong financial
position is
mainstayinvestments.com 27
important in order for NYLIM to continue to provide high-quality ongoing
services to the Fund and its shareholders. The Board noted, for example,
increased costs borne by NYLIM and its affiliates due to new and ongoing
regulatory and compliance requirements.
The Board also reviewed information from NYLIM regarding the estimated
profitability realized by NYLIM and its affiliates due to their overall
relationship with the Fund. The Board considered information from NYLIM
illustrating the revenues and expenses allocated by NYLIM to the Fund, noting
the difficulty in obtaining reliable comparative data about mutual fund
managers' profitability, since such information generally is not publicly
available and may be impacted by numerous factors, including the structure of a
fund manager's organization, the types of funds it manages, and the manager's
capital structure and costs of capital. While recognizing the difficulty in
evaluating a manager's profitability with respect to the Fund, and noting that
other profitability methodologies may also be reasonable, the Board concluded
that the profitability methodology presented by NYLIM to the Board with respect
to the Fund was reasonable in all material respects.
In considering the costs and profitability of the Fund, the Board also
considered certain fall-out benefits that may be realized by NYLIM and its
affiliates due to their relationship with the Fund. The Board recognized, for
example, the benefits to NYLIM and McMorgan from legally permitted "soft-dollar"
arrangements by which brokers provide research and other services to NYLIM and
McMorgan in exchange for commissions paid by the Fund with respect to trades on
the Fund's portfolio securities. The Board also considered that, in addition to
fees earned by NYLIM for managing the Fund, NYLIM affiliates also earn revenues
from serving the Fund in various other capacities, including as transfer agent
and distributor. The information provided to the Board indicated that the
profitability to NYLIM and its affiliates arising directly from these other
arrangements was not excessive. The Board noted that, although it assessed the
overall profitability of the Fund to NYLIM and its affiliates as part of the
annual contract review process, when considering the reasonableness of the fees
to be paid to NYLIM and its affiliates under the Agreements, the Board
considered the profitability of NYLIM's relationship with the Fund on a pre-tax
basis, and without regard to distribution expenses.
After evaluating the information presented to the Board, the Board concluded,
within the context of its overall determinations regarding the Agreements, that
the profit to be realized by NYLIM and its affiliates due to their relationship
with the Fund is fair and reasonable.
EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS
The Board also considered whether the Fund's expense structure permitted
economies of scale to be shared with Fund investors. The Board reviewed
information from NYLIM and Strategic Insight showing how the Fund's management
fee compared with fees charged for similar services by peer funds as assets
hypothetically increase over time. The Board noted the extent to which the Fund
benefits from economies of scale through expense waivers and reimbursements.
While recognizing that any precise determination of future economies of scale is
necessarily refutable, the Board considered the extent to which NYLIM may
realize a larger profit margin as the Fund's assets grow over time. The Board
also observed that NYLIM subsidizes many of the Fund's overall expenses through
the operation of contractual and voluntary expense limitations that may be
lifted only with prior approval of the Board.
Based on this information, the Board concluded, within the context of its
overall determinations regarding the Agreements, that the Fund's expense
structure appropriately reflects economies of scale for the benefit of Fund
investors. The Board noted, however, that it would continue to evaluate the
reasonableness of the Fund's expense structure as the Fund continues to grow
over time.
MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES
The Board evaluated the reasonableness of the fees to be paid under the
Agreements and the Fund's total ordinary operating expenses. With respect to the
Agreements, because McMorgan is an affiliate of NYLIM whose subadvisory fee for
advising the Fund is paid directly by NYLIM, the Board primarily considered the
reasonableness of the overall management fee paid by the Fund to NYLIM as
compared with peer funds.
The Board considered information provided by NYLIM and McMorgan on the fees that
NYLIM and McMorgan charge to other investment advisory clients, including
institutional separate accounts and other funds with similar investment
objectives as the Fund. In this regard, the Board took into account the relative
scope of services provided to the Fund as opposed to NYLIM's and McMorgan's
other investment advisory clients. The Board also considered comparative data
provided by Strategic Insight on the fees and expense ratios charged by similar
mutual funds managed by other investment advisers. This comparative information
assisted the Board in evaluating the reasonableness of the Fund's management fee
when compared to similar fees charged by NYLIM and McMorgan to other investment
advisory clients, and fees charged by other investment advisers to mutual funds
in the Fund's peer group.
In assessing the reasonableness of the Fund's management and subadvisory fees
and total ordinary operating expenses,
28 MainStay Institutional Bond Fund
the Board took note of any fee and expense arrangements that had been negotiated
by the Board with NYLIM in recent years and observed that NYLIM has subsidized
the total ordinary operating expenses of the Fund and Fund share classes through
the imposition of expense limitation arrangements that may be modified only with
the prior approval of the Board.
Based on these considerations, the Board concluded that the Fund's management
and subadvisory fees and total ordinary operating expenses were within a range
that is competitive and, within the context of the Board's overall conclusions
regarding the Agreements, supports the conclusion that these fees and expenses
are reasonable.
CONCLUSION
On the basis of the information provided to it and its evaluation thereof, the
Board, which consisted entirely of Independent Trustees, unanimously approved
the Agreements for one year.
mainstayinvestments.com 29
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The dividends paid by the Fund during the fiscal year ended October 31, 2008
should be multiplied by 98.2% for qualified interest income.
In January 2009, shareholders will receive an IRS Form 1099-DIV or substitute
Form 1099 the federal tax status of the distributions received by shareholders
in calendar year 2008. The amounts that will be reported on such 1099-DIV will
be the amounts you are to use on your federal income tax return and will differ
from the amounts which we must report for the Fund's fiscal year ended October
31, 2008.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
A description of the policies and procedures that NYLIM uses to vote proxies
related to the Fund's securities is available without charge, upon request, (i)
by visiting the Fund's website at mainstayinvestments.com; and (ii) on the
Securities and Exchange Commission's ("SEC") website at www.sec.gov.
The Fund is required to file with the SEC its proxy voting record for the 12-
month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is
available free of charge upon request by calling 800-MAINSTAY (624-6782);
visiting the Funds' website at mainstayinvestments.com; or on the SEC's website
at www.sec.gov.
SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE
Each Fund is required to file its complete schedule of portfolio holdings with
the SEC for its first and third fiscal quarters on Form N-Q. The Funds' Form N-Q
is available without charge, on the SEC's website at www.sec.gov or by calling
NYLIM at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form
N-Q by visiting the SEC's Public Reference Room in Washington, DC (information
on the operation of the Public Reference Room may be obtained by calling 1-800-
SEC-0330).
30 MainStay Institutional Bond Fund
TRUSTEES AND OFFICERS
The Trustees oversee the Fund, the Manager and the Subadvisor. Each Trustee
serves until his or her successor is elected and qualified or until his or her
resignation, death or removal. The Retirement Policy provides that a Trustee
shall tender his or her resignation upon reaching age 72. A Trustee reaching the
age of 72 may continue for additional one-year periods with the approval of the
Board's Nominating and Governance Committee, except that no Trustee shall serve
on the Board past his or her 75th birthday. Officers serve a term of one year
and are elected annually by the Trustees. The business address of each Trustee
and officer listed below is 51 Madison Avenue, New York, New York 10010.
The Statement of Additional Information applicable to the Fund includes
additional information about the Trustees and is available without charge, upon
request, by calling 800-MAINSTAY (624-6782).
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
--------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE*
JOHN Y. Indefinite; Member of the Board of 73 Trustee, Eclipse Funds
KIM Trustee since Managers and President and since September 2008 (3
9/24/60 September Chief Executive Officer funds); Director, Eclipse
2008 (since April 2008) of New Funds Inc. since September
York Life Investment 2008, (22 funds); Director,
Management LLC and New York ICAP Funds, Inc., since
Life Investment Management September 2008 (4 funds);
Holdings LLC; Member of the Director, MainStay VP
Board of Managers, MacKay Series Fund, Inc., since
Shields LLC (since April September 2008 (23
2008); Chairman of the portfolios)
Board, Institutional
Capital LLC, Madison
Capital LLC, McMorgan &
Company LLC, Chairman and
Chief Executive Officer,
NYLIFE Distributors LLC and
Chairman of the Board of
Managers, NYLCAP Manager,
LLC (since April 2008);
President, Prudential
Retirement, a business unit
of Prudential Financial,
Inc. (2002 to 2007)
- ---------------------------------------------------------------------------------------------------
</Table>
* This Trustee is considered to be an "interested person" of the Trust within
the meaning of the 1940 Act because of his affiliation with New York Life
Insurance Company, New York life Investment Management LLC, MacKay Shields
LLC, Institutional Capital LLC, Markston International, LLC, Winslow
Capital Management, Inc., McMorgan & Company LLC, Standish Mellon Asset
Management Company LLC, NYLIFE Securities Inc. and/or NYLIFE Distributors
LLC, as described in detail above in the column "Principal Occupation(s)
During Past Five Years."
mainstayinvestments.com 31
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES
SUSAN B. Indefinite; Partner, Strategic 73 Chairman since 2005 and
KERLEY Chairman and Management Advisors LLC Trustee since 2000,
8/12/51 Trustee since (since 1990) Eclipse Funds (3 funds);
2007 Chairman since 2005 and
Director since 1990,
Eclipse Funds Inc. (22
funds); Chairman and
Director, ICAP Funds,
Inc., since 2006 (4
funds); Chairman and
Director, MainStay VP
Series Fund, Inc., since
2007 (23 portfolios);
Trustee, Legg Mason
Partners Funds, Inc.,
since 1991 (68 portfolios)
- -------------------------------------------------------------------------------------------------
ALAN R. Indefinite; Retired; Partner, Ernst & 73 Trustee, Eclipse Funds
LATSHAW Trustee and Young LLP (2002 to 2003); since 2007 (3 funds);
3/27/51 Audit Partner, Arthur Andersen Director, Eclipse Funds
Committee LLP (1989 to 2002); Inc. since 2007 (22
Financial Consultant to the Audit funds); Director, ICAP
Expert since and Compliance Committee Funds, Inc., since 2007 (4
2006 (2004 to 2006) funds); Director, MainStay
VP Series Fund, Inc.,
since 2007 (23
portfolios); Trustee,
State Farm Associates
Funds Trusts since 2005 (4
portfolios); Trustee,
State Farm Mutual Fund
Trust since 2005 (16
portfolios); Trustee,
State Farm Variable
Product Trust since 2005
(9 portfolios)
- -------------------------------------------------------------------------------------------------
PETER Indefinite; Independent Consultant; 73 Trustee, Eclipse Funds
MEENAN Trustee since President and Chief since 2002 (3 funds);
12/5/41 2007 Executive Officer, Babson- Director, Eclipse Funds
United, Inc. (financial Inc. since 2002 (22
services firm) (2000 to funds); Director, ICAP
2004); Independent Funds, Inc., since 2006 (4
Consultant (1999 to 2000); funds); Director, MainStay
Head of Global Funds, VP Series Fund, Inc.,
Citicorp (1995 to 1999) since 2007 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Managing Director, ICC 73 Trustee, Eclipse Funds
H. NOLAN, Trustee since Capital Management; since 2007 (3 funds);
JR. 2007 President--Shields/Alli- Director, Eclipse Funds
11/16/46 ance, Alliance Capital Inc. since 2007 (22
Management (1994 to 2004) funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 2006 (23 portfolios)
- -------------------------------------------------------------------------------------------------
RICHARD Indefinite; Chairman (since 1990) and 73 Trustee, Eclipse Funds
S. Trustee since Chief Executive Officer since 2007 (3 funds);
TRUTANIC 1994 (1990 to 1999 and since Director, Eclipse Funds
2/13/52 2004), Somerset & Company Inc. since 2007 (22
(financial advisory firm); funds); Director, ICAP
Managing Director and Funds, Inc., since 2007 (4
Advisor, The Carlyle Group funds); Director, MainStay
(private investment firm) VP Series Fund, Inc.,
(2002 to 2004); Senior since 2007 (23 portfolios)
Managing Director,
Partner, and Member of the
Board, Groupe Arnault S.A.
(private investment firm)
(1999 to 2002)
- -------------------------------------------------------------------------------------------------
</Table>
32 MainStay Institutional Bond Fund
<Table>
<Caption>
TERM OF
OFFICE,
POSITION(S)
HELD NUMBER OF
WITH THE FUNDS IN FUND
NAME AND TRUST AND COMPLEX OTHER
DATE OF LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
BIRTH SERVICE DURING PAST FIVE YEARS TRUSTEE HELD BY TRUSTEE
------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS
ROMAN L. Indefinite; V. Duane Rath Professor of 73 Trustee, Eclipse Funds
WEIL Trustee and Accounting, Graduate since 2007 (3 funds);
5/22/40 Audit School of Business, Director, Eclipse Funds
Committee University of Chicago; Inc. since 2007 (22
Financial President, Roman L. Weil funds); Director, ICAP
expert since Associates, Inc. Funds, Inc., since 2007 (4
2007 (consulting firm); Board funds); Director, MainStay
Member and Chairman of the VP Series Fund, Inc.,
Board, Ygomi LLC since 1994 (23 portfolios)
(information and
communications company)
- -------------------------------------------------------------------------------------------------
JOHN A. Indefinite; Retired. Managing Director 73 Trustee, Eclipse Funds
WEISSER Trustee since of Salomon Brothers, Inc. since 2007 (3 funds);
10/22/41 2007 (1971 to 1995) Director, Eclipse Funds
Inc. since 2007 (22
funds); Director, ICAP
Funds, Inc., since 2007 (4
funds); Director, MainStay
VP Series Fund, Inc.,
since 1997 (23
portfolios); Trustee,
Direxion Funds (30
portfolios) and Direxion
Insurance Trust (3
portfolios), since 2007;
Trustee, Direxion Shares
ETF Trust, since 2008 (8
portfolios)
- -------------------------------------------------------------------------------------------------
</Table>
At a meeting of the Board of Trustees held on June 17, 2008, the following
individuals were appointed to serve as Officers of the Trust.
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
JACK R. Treasurer and Assistant Treasurer, New York Life Investment
BENIN- Principal Management Holdings LLC (since July 2008); Managing
TENDE Financial and Director, New York Life Investment Management LLC
5/12/64 Accounting (since 2007); Treasurer and Principal Financial and
Officer since Accounting Officer, Eclipse Funds, Eclipse Funds Inc.,
2007 MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2007); Vice President, Prudential Investments
(2000 to 2007); Assistant Treasurer, JennisonDryden
Family of Funds, Target Portfolio Trust, The
Prudential Series Fund and American Skandia Trust
(2006 to 2007); Treasurer and Principal Financial
Officer, The Greater China Fund (2007)
- ---------------------------------------------------------------------------------
STEPHEN President President and Chief Operating Officer, NYLIFE
P. FISHER since 2007 Distributors LLC (since January 2008); Senior Managing
2/22/59 Director and Chief Marketing Officer, New York Life
Investment Management LLC (since 2005); Chairman of
the Board, NYLIM Service Company (since January 2008);
Managing Director--Retail Marketing, New York Life
Investment Management LLC (2003 to 2005); President,
Eclipse Funds, Eclipse Funds Inc., MainStay VP Series
Fund, Inc., and ICAP Funds, Inc. (since 2007);
Managing Director, UBS Global Asset Management (1999
to 2003)
- ---------------------------------------------------------------------------------
SCOTT T. Vice Director, New York Life Investment Management LLC
HAR- President-- (including predecessor advisory organizations) (since
RINGTON Administra- 2000); Executive Vice President, New York Life Trust
2/8/59 tion since Company and New York Life Trust Company, FSB (since
2005 2006); Vice President--Administration, Eclipse Funds,
Eclipse Funds Inc. and MainStay VP Series Fund, Inc.
(since 2005) and ICAP Funds, Inc. (since 2006)
- ---------------------------------------------------------------------------------
</Table>
mainstayinvestments.com 33
<Table>
<Caption>
POSITIONS(S)
HELD
WITH THE
NAME AND TRUST
DATE OF AND LENGTH OF PRINCIPAL OCCUPATION(S)
BIRTH SERVICE DURING PAST FIVE YEARS
--------------------------------------------------------------------------------
OFFICERS
ALISON H. Senior Vice Chief Compliance Officer, McMorgan & Company LLC
MICUCCI President and (since March 2008); Senior Managing Director and Chief
12/16/65 Chief Compliance Officer (since 2006) and Managing Director
Compliance and Chief Compliance Officer (2003 to 2006), New York
Officer since Life Investment Management LLC and New York Life
2006 Investment Management Holdings LLC; Senior Managing
Director, Compliance (since 2006) and Managing
Director, Compliance (2003 to 2006), NYLIFE
Distributors LLC; Chief Compliance Officer, NYLCAP
Manager LLC; Senior Vice President and Chief
Compliance Officer, Eclipse Funds, Eclipse Funds Inc.,
MainStay VP Series Fund, Inc., and ICAP Funds, Inc.
(since 2006); Vice President--Compliance, Eclipse
Funds, Eclipse Funds Inc. and MainStay VP Series Fund,
Inc. (2004 to 2006); Deputy Chief Compliance Officer,
New York Life Investment Management LLC (2002 to
2003); Vice President and Compliance Officer, Goldman
Sachs Asset Management (1999 to 2002)
- ---------------------------------------------------------------------------------
MARGUER- Chief Legal Managing Director, Associate General Counsel and
ITE E.H. Officer since Assistant Secretary, New York Life Investment
MORRISON January 2008 Management LLC (since 2004); Managing Director and
3/26/56 and Secretary Secretary, NYLIFE Distributors LLC (since 2004);
since 2004 Secretary, NYLIM Service Company (since January 2008);
Assistant Secretary, New York Life Investment
Management Holdings LLC (since January 2008); Vice
President, Associate General Counsel and Assistant
Secretary, New York Life Insurance Company (since
March 2008); Chief Legal Officer (since January 2008)
and Secretary, Eclipse Funds, Eclipse Funds Inc. and
MainStay VP Series Fund, Inc. (since 2004) and ICAP
Funds, Inc. (since 2006); Chief Legal Officer--Mutual
Funds and Vice President and Corporate Counsel, The
Prudential Insurance Company of America (2000 to 2004)
- ---------------------------------------------------------------------------------
</Table>
34 MainStay Institutional Bond Fund
MAINSTAY FUNDS
MAINSTAY OFFERS A WIDE RANGE OF FUNDS FOR VIRTUALLY ANY INVESTMENT NEED. THE
FULL ARRAY OF MAINSTAY OFFERINGS IS LISTED HERE, WITH INFORMATION ABOUT THE
MANAGER, SUBADVISORS, LEGAL COUNSEL, AND INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
EQUITY FUNDS
MAINSTAY 130/30 CORE FUND
MAINSTAY 130/30 GROWTH FUND
MAINSTAY ALL CAP GROWTH FUND
MAINSTAY CAPITAL APPRECIATION FUND
MAINSTAY COMMON STOCK FUND
MAINSTAY EQUITY INDEX FUND(1)
MAINSTAY GROWTH EQUITY FUND(2)
MAINSTAY ICAP EQUITY FUND
MAINSTAY ICAP SELECT EQUITY FUND
MAINSTAY LARGE CAP GROWTH FUND
MAINSTAY MAP FUND
MAINSTAY MID CAP CORE FUND
MAINSTAY MID CAP GROWTH FUND
MAINSTAY MID CAP VALUE FUND
MAINSTAY S&P 500 INDEX FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY SMALL CAP OPPORTUNITY FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY VALUE FUND
INCOME FUNDS
MAINSTAY 130/30 HIGH YIELD FUND
MAINSTAY CASH RESERVES FUND
MAINSTAY DIVERSIFIED INCOME FUND
MAINSTAY FLOATING RATE FUND
MAINSTAY GOVERNMENT FUND
MAINSTAY HIGH YIELD CORPORATE BOND FUND
MAINSTAY INDEXED BOND FUND
MAINSTAY INSTITUTIONAL BOND FUND
MAINSTAY INTERMEDIATE TERM BOND FUND
MAINSTAY MONEY MARKET FUND
MAINSTAY PRINCIPAL PRESERVATION FUND
MAINSTAY SHORT TERM BOND FUND
MAINSTAY TAX FREE BOND FUND
BLENDED FUNDS
MAINSTAY BALANCED FUND
MAINSTAY CONVERTIBLE FUND
MAINSTAY INCOME MANAGER FUND
MAINSTAY TOTAL RETURN FUND
INTERNATIONAL FUNDS
MAINSTAY 130/30 INTERNATIONAL FUND
MAINSTAY GLOBAL HIGH INCOME FUND
MAINSTAY ICAP GLOBAL FUND
MAINSTAY ICAP INTERNATIONAL FUND
MAINSTAY INTERNATIONAL EQUITY FUND
ASSET ALLOCATION FUNDS
MAINSTAY CONSERVATIVE ALLOCATION FUND
MAINSTAY GROWTH ALLOCATION FUND
MAINSTAY MODERATE ALLOCATION FUND
MAINSTAY MODERATE GROWTH ALLOCATION FUND
RETIREMENT FUNDS
MAINSTAY RETIREMENT 2010 FUND
MAINSTAY RETIREMENT 2020 FUND
MAINSTAY RETIREMENT 2030 FUND
MAINSTAY RETIREMENT 2040 FUND
MAINSTAY RETIREMENT 2050 FUND
MANAGER
NEW YORK LIFE INVESTMENT MANAGEMENT LLC
NEW YORK, NEW YORK
SUBADVISORS
INSTITUTIONAL CAPITAL LLC(3)
CHICAGO, ILLINOIS
MACKAY SHIELDS LLC(3)
NEW YORK, NEW YORK
MARKSTON INTERNATIONAL LLC
WHITE PLAINS, NEW YORK
MCMORGAN & COMPANY LLC(3)
SAN FRANCISCO, CALIFORNIA
STANDISH MELLON ASSET MANAGEMENT COMPANY LLC
BOSTON, MASSACHUSETTS
WINSLOW CAPITAL MANAGEMENT, INC.
MINNEAPOLIS, MINNESOTA
LEGAL COUNSEL
DECHERT LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
PLEASE CONTACT YOUR INVESTMENT PROFESSIONAL OR CALL 800-MAINSTAY (624-6782) FOR
A FREE PROSPECTUS. INVESTORS ARE ASKED TO CONSIDER THE INVESTMENT OBJECTIVES,
RISKS, AND CHARGES AND EXPENSES OF THE INVESTMENT CAREFULLY BEFORE INVESTING.
THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION ABOUT THE INVESTMENT COMPANY.
PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
1. Closed to new investors and new purchases as of January 1, 2002.
2. Offered only to residents of Connecticut, Maryland, New Jersey, and New York.
3. An affiliate of New York Life Investment Management LLC.
Not part of the Annual Report
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Not FDIC insured. No bank guarantee. May lose value.
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NYLIFE DISTRIBUTORS LLC, 169 LACKAWANNA AVENUE,
PARSIPPANY, NEW JERSEY 07054
This report may be distributed only when preceded or accompanied
by a current Fund prospectus.
mainstayinvestments.com The MainStay Funds
(C) 2008 by NYLIFE Distributors LLC. All rights reserved.
SEC File Number: 811-04550
NYLIM-AO14531 (RECYCLE LOGO) MS308-08 MSIST11-12/08
D1
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the Registrant has adopted a
code of ethics (the "Code") that applies to the Registrant's principal executive
officer ("PEO") and principal financial officer ("PFO"). The Code was not
amended during the period covered by the report. A copy of the Code is filed
herewith. The Registrant did not grant any waivers, including implicit waivers,
from any provisions of the Code to the PEO or PFO during the period covered by
this report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees has determined that the Registrant has two audit committee
financial experts serving on its Audit Committee. The Audit Committee financial
experts are Alan R. Latshaw and Roman L. Weil. Messrs. Latshaw and Weil are
"independent" within the meaning of that term under the Investment Company Act
of 1940.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees billed for the fiscal year ended October 31, 2008 for
professional services rendered by KPMG LLP ("KPMG") for the audit of the
Registrant's annual financial statements or services that are normally provided
by KPMG in connection with statutory and regulatory filings or engagements for
that fiscal year were $776,210.
The aggregate fees billed for the fiscal year ended October 31, 2007 for
professional services rendered by KPMG for the audit of the Registrant's annual
financial statements or services that are normally provided by KPMG in
connection with statutory and regulatory filings or engagements for that fiscal
year were $759,091.
(b) Audit-Related Fees
The aggregate fees billed for assurance and related services by KPMG that are
reasonably related to the performance of the audit of the Registrant's financial
statements and are not reported under paragraph (a) of this Item were: (i)
$30,000 for the fiscal year ended October 31, 2008, and (ii) $5,000 for the
fiscal year ended October 31, 2007. These audit-related services include review
of financial highlights for Registrant's registration statements and issuance of
consents to use the auditor's reports.
(c) Tax Fees
The aggregate fees billed for professional services rendered by KPMG for tax
compliance, tax advice, and tax planning were: (i) $112,100 during the fiscal
year ended October 31, 2008, and (ii) $98,450 during the fiscal year ended
October 31, 2007. These services primarily included preparation of federal,
state and local income tax returns and excise tax returns, as well as services
relating to excise tax distribution requirements.
(d) All Other Fees
The aggregate fees billed for products and services provided by KPMG, other than
the services reported in paragraphs (a) through (c) of this Item were: (i) $0
during the fiscal year ended October 31, 2008, and (ii) $0 during the fiscal
year ended October 31, 2007.
(e) Pre-Approval Policies and Procedures
(1) The Registrant's Audit and Compliance Committee has adopted
pre-approval policies and procedures (the "Procedures") to govern the
Committee's pre-approval of (i) all audit services and permissible
non-audit services to be provided to the Registrant by its independent
accountant, and (ii) all permissible non-audit services to be provided
by such independent accountant to the Registrant's investment adviser
and to any entity controlling, controlled by or under common control
with the investment adviser that provides ongoing services to the
Registrant (collectively, the "Service Affiliates") if the services
directly relate to the Registrant's operations and financial
reporting. In accordance with the Procedures, the Audit and Compliance
Committee is responsible for the engagement of the independent
accountant to certify the Registrant's financial statements for each
fiscal year. With respect to the pre-approval of non-audit services
provided to the Registrant and its Service Affiliates, the Procedures
provide that the Audit and Compliance Committee may annually
pre-approve a list of the types of services that may be provided to
the Registrant or its Service Affiliates, or the Audit and Compliance
Committee may pre-approve such services on a project-by-project basis
as they arise. Unless a type of service has received general
pre-approval, it will require specific pre-approval by the Audit and
Compliance Committee if it is to be provided by the independent
accountant. The Procedures also permit the Audit and Compliance
Committee to delegate authority to one or more of its members to
pre-approve any proposed non-audit services that have not been
previously pre-approved by the Audit and Compliance Committee, subject
to the ratification by the full Audit and Compliance Committee no
later than its next scheduled meeting. To date, the Audit and
Compliance Committee has not delegated such authority.
(2) With respect to the services described in paragraphs (b) through (d)
of this Item 4, no amount was approved by the Audit and Compliance
Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X.
(f) There were no hours expended on KPMG's engagement to audit the Registrant's
financial statements for the most recent fiscal year attributable to work
performed by persons other than KPMG's full-time, permanent employees.
(g) All non-audit fees billed by KPMG for services rendered to the Registrant
for the fiscal years ended October 31, 2008 and October 31, 2007 are disclosed
in 4(b)-(d) above.
The aggregate non-audit fees billed by KPMG for services rendered to the
Registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the Registrant were
approximately: (i) $0 for the fiscal year ended October 31, 2008, and (ii)
$33,750 for the fiscal year ended October 31, 2007.
(h) The Registrant's Audit and Compliance Committee has determined that the
non-audit services rendered by KPMG for the fiscal year ended October 31, 2008
to the Registrant's investment adviser and any entity controlling, controlled
by, or under common control with the Registrant's investment adviser that
provides ongoing services to the Registrant that were not required to be
pre-approved by the Audit and Compliance Committee because they did not relate
directly to the operations and financial reporting of the registrant were
compatible with maintaining the respective independence of KPMG during the
relevant time period.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
The Schedule of Investments is included as part of Item 1 of this report.
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.
Since the Registrant's last response to this Item, there have been no material
changes to the procedures by which shareholders may recommend nominees to the
Registrant's Board of Trustees.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the Registrant's Disclosure Controls and
Procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940) (the "Disclosure Controls"), as of a date within 90 days prior to the
filing date (the "Filing Date") of this Form N-CSR (the "Report"), the
Registrant's principal executive officer and principal financial officer have
concluded that the Disclosure Controls are reasonably designed to ensure that
information required to be disclosed by the Registrant in the Report is
recorded, processed, summarized and reported by the Filing Date, including
ensuring that information required to be disclosed in the Report is accumulated
and communicated to the Registrant's management, including the Registrant's
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
(b) There were no changes in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d)) under the Investment Company Act of 1940
that occurred during the second fiscal quarter of the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics
(a)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2 under the Investment Company Act of 1940.
(b) Certifications of principal executive officer and principal financial
officer as required by 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.
THE MAINSTAY FUNDS
By: /s/ Stephen P. Fisher
----------------------------------
Stephen P. Fisher
President
Date: January 8, 2009
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/ Stephen P. Fisher
----------------------------------
Stephen P. Fisher
President
Date: January 8, 2009
By: /s/ Jack R. Benintende
----------------------------------
Jack R. Benintende
Treasurer and Principal Financial
and Accounting Officer
Date: January 8, 2009
EXHIBIT INDEX
(a)(1) Code of Ethics
(a)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2 under the Investment Company Act of
1940.
(b) Certification of principal executive officer and principal financial
officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.