MERRILL LYNCH INVESTMENT PARTNERS INC.
[ARTWORK APPEARS HERE]
ML Principal
Protection L.P.
Monthly Statement September 1998
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[LOGO OF MERRILL LYNCH] Merrill Lynch
ML Principal Protection L.P.
Dear Limited Partner,
The Net Asset Value ("NAV") of ML Principal Protection L.P. (the "Fund")
increased during September. Please see the accompanying summary financial
information for the NAV of your series of Units.
Quarterly Market Summary
During the third quarter of 1998, the Fund's NAV increased through highly
profitable trading in the interest rate, currency, stock index and energy
markets, which offset losses in the metals and agriculture markets.
Fund performance in July was essentially flat. In August and continuing into
September, financial markets in general were characterized by a flight to
quality that resulted from uncertainty over Russia's solvency, continued
weakness in Asia, and concerns that recessionary conditions would spread to the
United States and Europe. These factors, combined with generally less liquid
market conditions, led to a marked widening in bond credit spreads and a broad
sell-off in world-wide equity markets. Managed futures funds exhibited strong
non-correlation to world markets in August and again in September, generating
significant profits on the long side of interest rates and the short side of the
commodity markets.
Interest rate trading was particularly profitable during the quarter in
positions in Eurodollars, German and Japanese bonds, and U.S. Treasury notes and
bonds. The growth rate of the world bond market declined to its lowest level
since 1987 at 7.7%, down 4.0% from the last peak in 1993. Global investors
poured funds into such instruments as U.S. Treasury issues and German Bunds,
staging a major flight to quality. As a result, there was a significant widening
of credit spreads on a global basis. Global fund managers also increased their
already-overweight exposure to U.S. Treasuries to a record high. The impact of
these events was that in September, the yield on the Japanese 5-year bond fell
to .67%, an all-time low, German 10-year Bunds fell to 3.89%, representing
almost a 100-year low, and the 30-year bond in the U.S. dropped to its lowest
level on record.
The Fund profited from its currency trading during the quarter with significant
gains from short Japanese yen and Canadian dollar positions, as well as long
Deutsche mark positions. In the currency markets, Japan's problems spread to
other sectors of the global economy,
causing commodities prices to decline as demand from the Asian economies
weakened, in turn putting pressure on Canada's commodity-sensitive currency. In
Germany, the federal election resulted in a shift to the left, as Chancellor
Helmut Kohl, after sixteen years in office, lost to Gerhard Schroder.
Surprisingly, this promoted a continued strengthening of the Deutsche mark
versus the U.S. dollar.
As U.S. equity markets declined in July and August, the Fund profited from short
positions in the S&P 500/(R)/, most notably during August, when the index
dropped 14.5%. Volatility in September made for a difficult trading environment,
and the Fund incurred modest losses in the stock index sector during September,
but remained profitable for the quarter overall in these markets.
Energy trading also resulted in gains for the quarter. Short heating oil
positions proved profitable for the Fund as the market for heating oil prices
dropped to its lowest level in more than a decade (the previous low was in
1986). Unleaded gas positions also generated strong profits for the Fund.
In the metals markets, gold prices attempted to move higher against a backdrop
of volatility in major equity markets, increasing concerns about emerging
markets, economic chaos in Russia, weakness in the U.S. dollar, and increasing
worries about global economic conditions. However, gold was unable to extend
rallies and build any significant upside momentum resulting in a trendless
environment and resulting losses in gold positions for the Fund.
The agricultural sector generated losses overall for the quarter. Although as
commodity markets collapsed in August, profits were generated on the short side,
in September, the Fund was caught on the long side of the soybean complex
resulting in losses as the U.S. soybean crop increased relative to the USDA's
production estimate as a result of timely rains, which contributed to lower
prices.
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Effective October 1, 1998, Millburn Ridgefield Corporation ("Milburn") is
managing the 7.6% of the Fund's assets allocated to trading as if they were
managing 20% more equity than that allocation. This is a
reduction in the account's leverage, because since May 1, 1998, Millburn has
been managing the Fund's assets allocated to it as if Millburn were managing 50%
more equity than the allocation.
Effective October 1, 1998, Sunrise Capital Management began trading its Expanded
Diversified program on behalf of the Fund with an allocation of 7.2% of the
Fund's traded assets. Sunrise currently manages a total of approximately $235.6
million in this technical, trend-following program and a total of $505.4 million
overall. For the period from January 1993 to September 1998, the Program's worst
monthly rate of return was down 11.8% and the best monthly return was 19.1%. The
Program's annualized standard deviation of return was 20.6%. The Program's worst
peak to valley drawdown was 29.8% from August 1993 to April 1994.
As scheduled, on October 1, 1998, the Fund paid the annual fixed-rate
distribution to all Series A and E Unitholders in the amount of U.S.$3.50. No
discretionary distribution was paid. The October 1, 1998 NAVs of Series A and E
Units were reduced by the amount of the distribution.
Effective September 30, 1998, the Fund's investment with each of Northfield
Trading L.P., Telesis Management, Inc. and Trendstat Capital Management, Inc.
was terminated.
Effective October 1, 1998, the General Partner reduced the Brokerage Commission
payable by the Fund from 8.75% to 7.5% per annum of the Fund's month-end assets
committed to trading. At the same time, the .25% per annum Administrative Fee
will begin to be charged on the basis of the Fund's total assets; not just the
assets allocated to trading. Taken together, the fee changes should result in a
significant reduction in fees charged to the Fund. This reduction is indicative
of the General Partner's continuing efforts to lower fee levels on its funds.
The General Partner has agreed to waive the Administrative Fee to the extent
necessary to ensure that the Fund will in no event pay more under the revised,
than it would have under the existing, fee structure.
As of October 1, 1998, the Fund's assets were allocated as follows:
Trading Advisor % Allocation
- --------------- ------------
Millennium Global Investments Ltd. 7.48
Bridgewater Associates, Inc. 7.40
Dominion Capital Management, Inc. 7.40
Quantitative Financial Strategies, Inc. 7.33
Millburn Ridgefield Corporation 5.80*
Graham Capital Management, L.P. 5.57**
Grinham Managed Futures Pty Ltd. 5.57
Sunrise Capital Partners, L.L.C. 5.49
John W. Henry & Company, Inc. 5.42
ARA Portfolio Management Company, L.L.C. 5.27
Hill Financial Group, Ltd. 4.27
Range Wise, Inc. 3.82
Allied Irish Capital Management Ltd. 3.13***
Fundamental Futures, Inc. 2.37
Cash 23.68****
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100.00
* This advisor is currently managing the Fund's assets allocated to it as if
the advisor were managing 20% more equity than the capital allocation
indicated above.
** This advisor is currently managing the Fund's assets allocated to it as if
the advisor were managing 50% more equity than the capital allocation
indicated above.
*** This advisor is currently managing the Fund's assets allocated to it as if
the advisor were managing 100% more equity than the capital allocation
indicated above.
****Reflects blended allocations of the different series.
1998 Year-to-Date
Gross Total Trading Results*
Through September 30
Agriculture $ (35,532)
Currencies 1,660,839
Energy (1,085,978)
Financial Instruments 7,316,634
Metals (1,482,916)
Stock Indices 514,030
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Total $ 6,887,077
*Before deduction of any fees and charges
The Fund's potential for non-correlation with general equity and debt markets
was exhibited strongly during the third quarter as markets worldwide were turned
upside down because of events in August and the volatility that
continued into September. It is the Fund's ability to trade both the long or the
short side of a variety of markets that makes it a valuable element of
diversification in an investor's overall portfolio for times such as these. We
are extremely pleased with the Fund's performance during the quarter, and
appreciate your continued investment with us.
Sincerely,
John R. Frawley, Jr.
President & Chief Executive Officer
Merrill Lynch Investment Partners Inc.
(General Partner)
FOR THE EXCLUSIVE USE OF INVESTORS IN ML PRINCIPAL PROTECTION L.P. THIS MONTHLY
REPORT IS NOT AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES. AN OFFER CAN ONLY BE MADE BY A CURRENT PROSPECTUS, AS SUPPLEMENTED,
TOGETHER WITH SUMMARY FINANCIAL INFORMATION FOR THE FUND CURRENT WITHIN 60 DAYS.
THESE MATERIALS CONTAIN IMPORTANT INFORMATION ABOUT RISK FACTORS, PERFORMANCE
AND OTHER ASPECTS OF THE FUND AND MUST BE READ CAREFULLY BEFORE INVESTING.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
THIS MONTHLY REPORT MUST NOT BE REPRODUCED OR DISTRIBUTED IN ANY MANNER.
ML Principal Protection L.P.
September 30, 1998
Statement of Changes
in Net Asset Value
(unaudited)
Net Asset Value (868,684.17 Units) at August 31, 1998 $92,765,200
Net Income/(Loss) for September 1998 3,292,479
Redemptions of 24,537.62 Units (2,681,000)
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Net Asset Value (844,146.55 Units) at September 30, 1998 $93,376,679
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Net Asset Value at September 30, 1998:
Series A Units $ 119.77*
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Series B Units $ 114.42*
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Series C Units $ 109.09*
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Series D Units $ 111.99*
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Series E Units $ 115.06*
===========
Series F Units $ 109.27*
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Series G Units $ 108.01*
===========
Series H Units $ 108.26*
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Series K Units $ 110.80
===========
Series L Units $ 107.93
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Series M Units $ 109.45
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Series N Units $ 105.50
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Series O Units $ 105.86
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Series P Units $ 107.96
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* The Net Asset Value per Unit does not include the annual distributions paid to
Unitholders.
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Statement of Income/(Loss)
(unaudited)
September
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Revenues:
Realized Profit/(Loss) $3,105,749
Change in Unrealized Profit/(Loss) 787,740
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Total Trading Results 3,893,489
Interest Income 424,778
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Total Revenues 4,318,267
Expenses:
Brokerage Commissions 547,792
Administrative Fees 15,651
Allocation of New Profit Share 426,391
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Total Expenses 989,834
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Net Income/(Loss) Before Minority Interest 3,328,433
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Minority Interest (35,954)
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Net Income/(Loss) $3,292,479
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To the best of the knowledge and belief of the undersigned the information
contained in this report is accurate and complete.
/s/ Jo Ann Di Dario
Jo Ann Di Dario
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
Please notify the following of any address changes:
Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters
South Tower
World Financial Center
New York, New York 10080-6106
1-800-765-0995