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: 811-08902
Name of Registrant: 1838 Investment Advisors Funds
Address of Registrant: 2701 Renaissance Blvd., 4th Fl.,
King of Prussia, PA 19406
Name and address of agent for service: John J. Kelley,
2701 Renaissance Blvd., 4th Fl.,
King of Prussia, PA 19406
Copies to: Panayotis (Peter) S. Andreou,
113 King Street
Armonk, NY 10504
Registrant's telephone number, including area code: (484) 322-4300
Date of fiscal year end: October 31
Date of reporting period: November 1, 2003 - October 31, 2004
ITEM 1: Reports to Shareholders
1838 INTERNATIONAL EQUITY FUND
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FELLOW SHAREHOLDER:
For the second year in a row, investments in the international equity markets
continued their strong rebound from the equity markets' declines from March 2000
through 2003. During the six and twelve month periods ending October 31, 2004,
the MSCI EAFE Index showed net total returns of 5.74% and 18.84% respectively.
During these periods, the net asset value per share of the 1838 International
Equity Fund (the"Fund") increased by 5.54% and 19.71%, respectively.
PERFORMANCE BY REGION:
Japan was the worst performing region during the six months ending October 31,
with a net loss of 3.45%. The run up in oil prices and strengthening of the yen
caused profit taking in Japanese equities. The Fund's holdings in Japan lost
almost 11% in value, primarily due to positions in the chemicals sector (hit by
both rising oil prices and stronger yen), exporter Canon and disappointing
growth at hospital supply and health services provider Nichii Gakkan.
Underperformance in Japan was offset by absolute and relative strength in
performance in Asia ex-Japan, where the benchmark gained 13.26% and the Fund's
holdings gained 27.20%. Strength in the global economy and in particular in
China and the US caused a surge in exports to these regions from all of Asia and
Australia. Hong Kong listed energy company CNOOC and clothing retailer Esprit
surged close to 42% and 30% respectively, while shares of Australian based BHP
Billiton gained almost 25%, buoyed by rising oil, metals, coal and iron ore
prices. The benchmark for Europe, which represented 64% of the EAFE benchmark,
rose 8.20% during the six months and 22.34% during the twelve months ending
October 31. The Fund showed a small relative gain in Europe during April through
October after a large relative gain during the preceding half year.
Outperformance in Germany, the Netherlands, Finland and Austria was almost
completely offset by relative losses in holdings in the UK and Greece, and due
to our near absence in Italy and Belgium, both strong markets during the period.
The Fund's exposure to Canada in Bank of Nova Scotia and gas producer Encana
made large positive contributions; the emerging markets exposure delivered a
small relative gain, with strength in Mexico (America Movil) countered by
weakness in Israel (Teva Pharmaceuticals).
PERFORMANCE BY SECTOR:
During the second half of the year ending October 31st:
The best performing sector was Utilities with a gain in the benchmark of 16.30%
and a gain of 24.57% in the Fund. Declining bond yields and rising electricity
prices boosted shares of E.ON and Fortum. Runner-up was Energy, driven by record
high oil and gas prices and wide refinery margins; CNOOC, BP, Total and Encana
all made solid contributions and jointly beat the benchmark at 22.44% vs.
14.80%. Materials was the third strongest performing sector, but the Fund's
holdings lagged the benchmark by a wide margin at -0.17% vs. 11.39%. The
culprits were the Fund's holdings in chemicals in Japan: Shin-Etsu Chemical, JSR
and Asahi Kasei all fared poorly due to rising oil prices and temporary
overcapacity in LCD screens related components. The one sector with a negative
benchmark performance was Technology at -0.54% for the Fund and -4.27% for the
index. Accelerating price declines in semiconductors and components caused
weakness in the Nasdaq and technology shares around the world. In the Fund,
solid earnings reports at SAP and Ericsson boosted the relative performance in
Technology.
CONCLUSION:
The price of oil was a major influence during the past six months ending October
31, with crude trading in New York gaining 38.47% to $51.76 a barrel. Although
the price of oil has come off its peak of $55.65 reached on October 27, there is
still a risk of a return to economic conditions experienced during the early
1970's-the so-called stagflation of rising prices together with low economic
growth. In both the current and past periods, oil prices quadrupled over a short
time span. Also, governments around the world are operating with large deficits
to stimulate their economies after a recessionary hangover from a high growth
era. The US finds itself financing a war like it did in Vietnam. Additionally,
China and India are providing cheap goods and labor to the world in the similar
fashion
1
1838 INTERNATIONAL EQUITY FUND
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that Japan and Korea once did. However, it should be noted that the world is a
more globally integrated place today than 30 years ago. Labor, capital and ideas
cross borders much more freely than before. It should also be noted that these
conditions helped set the stage for the bull market that saw the EAFE index rise
from 85.26 in September 1974 to 215.29 by October 1980. The strong performance
over the past two years in the EAFE may yet have legs!
Sincerely,
/S/ Hans van den Berg
Vice President & Portfolio Manager
November 9, 2004
INTERNATIONAL EQUITY FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT*
[Line graph omitted--plot points are as follows:]
1838 International Equity Fund EAFE
8/3/95 10000 10000
Oct-95 9610 9544
Oct-96 10485 10544
Oct-97 12082 11032
Oct-98 12916 12096
Oct-99 16675 14882
Oct-00 17519 14451
Oct-01 13326 10848
Oct-02 11453 9415
Oct-03 14147 11960
Oct-04 $16937 $14213
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED OCTOBER 31, 2004
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FINAL VALUE
SINCE OF A $10,000
1 YEAR 5 YEAR INCEPTION INVESTMENT
----- ----- -------- -----------
FUND 19.71% 0.31% 5.86% $16,937
EAFE 18.84% (0.93)% 3.87% 14,213
* PAST PERFORMANCE OF THE FUND IS NO GUARANTEE OF FUTURE RESULTS. CURRENT
PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE DATA SHOWN. THE
1838 INTERNATIONAL EQUITY FUND COMMENCED OPERATIONS ON AUGUST 3, 1995. THE
VALUES SHOWN REFLECT A HYPOTHETICAL INITIAL INVESTMENT OF $10,000 WITH
DISTRIBUTIONS REINVESTED. RETURNS MAY BE HIGHER DUE TO 1838 INVESTMENT
ADVISORS, LP MAINTENANCE OF THE FUND'S EXPENSE CAP. PLEASE BEAR IN MIND THAT
INVESTING IN FOREIGN SECURITIES INVOLVES SPECIAL RISKS SUCH AS CURRENCY
FLUCTUATION, LESS EXTENSIVE REGULATION OF FOREIGN BROKERS AND POSSIBLE
POLITICAL INSTABILITY. THE EAFE IS AN UNMANAGED INDEX REPRESENTING THE MARKET
VALUE WEIGHTED PRICE OF 1,100 STOCKS OF THE MAJOR STOCK EXCHANGES IN EUROPE,
AUSTRALIA AND THE FAR EAST WITHOUT ANY ASSOCIATED EXPENSES AND THE RETURNS
ASSUME REINVESTMENT OF ALL DISTRIBUTIONS. YOU CANNOT INVEST DIRECTLY IN AN
INDEX. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING. DISTRIBUTED BY
MBIA CAPITAL MANAGEMENT CORPORATION. SEE THE FINANCIAL HIGHLIGHTS ON PAGE 20
FOR MORE DETAILS.
2
1838 INTERNATIONAL EQUITY FUND
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ALLOCATION OF PORTFOLIO NET ASSETS
OCTOBER 31, 2004
[Pie Chart omitted--plot points are as follows:]
Consumer Discretionary 12.00%
Consumer Staples 8.92%
Energy 8.88%
Financials 27.39%
Health Care 7.06%
Industrials 10.03%
Information Technology 7.04%
Materials 6.80%
Other 0.19%
Telecommunication Services 7.59%
Utilities 4.10%
EXPENSE EXAMPLE
OCTOBER 31, 2004
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments, reinvested
dividends, or other distributions; redemption fees; and exchange fees; and (2)
ongoing costs, including management fees; distribution and/or service fees; and
other Fund expenses. This Example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these costs
with the ongoing costs of investing in other mutual funds. The Example is based
on an investment of $1,000 invested at the beginning of the period and held for
the entire period (May 1, 2004 - October 31, 2004).
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. Although the Fund charges no sales load or
transaction fees, you will be assessed fees for outgoing wire transfers,
returned checks and stop payment orders at prevailing rates charged by
MBIA-MISC, the Fund's transfer agent. If you request that a redemption be made
by wire transfer, currently a $15.00 fee is charged by the Fund's transfer
agent. You will be charged a transaction fee equal to 2.00% of the net amount of
the redemption if you redeem your shares within 60 days of purchase. IRA
accounts will be charged a $15.00 annual maintenance fee. To the extent the Fund
invests in shares of other investment companies as part of its investment
strategy, you will indirectly bear your proportionate share of any fees and
expenses charged by the underlying funds in which the Fund invests in
3
1838 INTERNATIONAL EQUITY FUND
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EXPENSE EXAMPLE (Continued)
OCTOBER 31, 2004
addition to the expenses of the Fund. Actual expenses of the underlying funds
are expected to vary among the various underlying funds. These expenses are not
included in the example below. The example below includes, but is not limited
to, management fees, shareholder servicing fees, fund accounting, custody and
transfer agent fees. However, the example below does not include portfolio
trading commissions and related expenses, interest expense and other
extraordinary expenses as determined under generally accepted accounting
principles. You may use the information in this line, together with the amount
you invested, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number in the first
line under the heading entitled "Expenses Paid During Period" to estimate the
expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides 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 balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of 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 SALES
CHARGES (LOADS), REDEMPTION FEES, OR EXCHANGE FEES. THEREFORE, THE SECOND LINE
OF THE TABLE IS USEFUL IN COMPARING ONGOING COSTS ONLY, AND WILL NOT HELP YOU
DETERMINE THE RELATIVE TOTAL COSTS OF OWNING DIFFERENT FUNDS. IN ADDITION, IF
THESE TRANSACTIONAL COSTS WERE INCLUDED, YOUR COSTS WOULD HAVE BEEN HIGHER.
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD
5/1/04 10/31/04 5/1/04 - 10/31/04
- -------------------------------------------------------------------------------------------------------------
Actual $1,000.00 $1,004.10 $6.30
- -------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) 1,000.00 1,018.25 6.34
- -------------------------------------------------------------------------------------------------------------
4
1838 INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS OCTOBER 31, 2004
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VALUE
INDUSTRY SHARES (NOTE 2)
--------- -------- -----------
COMMON STOCK -- 99.70%
Austria -- 2.13%
Erste Bank Der Oester Spark Banks............................... 14,400 $ 639,098
----------
AUSTRALIA -- 1.92%
BHP Billiton Ltd. Metal & Mining...................... 55,730 576,541
----------
CANADA -- 3.04%
Bank of Nova Scotia Banks............................... 15,600 506,464
Encana Corporation Oil & Gas........................... 8,200 406,050
----------
912,514
----------
DENMARK -- 1.62%
Danske Bank A/S Banks............................... 17,500 487,584
----------
FINLAND -- 1.60%
Fortum OYJ Electric-Intergrated................ 31,400 479,308
----------
FRANCE -- 8.34%
AXA, Inc. Insurance........................... 22,400 480,692
BNP Paribas Banks............................... 6,258 424,692
Essilor International Health Care Equipment & Supplies.... 8,000 541,384
LVMH Moet-Hennessy L. Vuitton SA Consumer Durables & Apparel......... 5,500 375,700
Total SA (B Shares) Oil & Gas........................... 3,300 684,235
----------
2,506,703
----------
GERMANY -- 10.97%
Continental AG Automobiles & Components............ 12,700 691,435
Deutsche Bank AG Banks............................... 4,700 357,522
E. ON AG Electric Utilites................... 9,245 752,646
Puma AG Consumer Durables & Apparel......... 2,460 613,801
SAP AG Software............................ 2,400 407,687
Siemens AG Industrial Conglomerate............. 6,330 470,885
----------
3,293,976
----------
GREECE -- 1.34%
Coca-Cola Hellenic Bottling SA Beverages........................... 18,200 403,759
----------
HONG KONG -- 4.05%
CNOOC Ltd. Oil & Gas........................... 1,263,800 649,485
Esprit Holdings Ltd. Retailing........................... 105,994 566,507
----------
1,215,992
----------
See notes to financial statements.
5
1838 INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS-- CONTINUED OCTOBER 31, 2004
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VALUE
INDUSTRY SHARES (NOTE 2)
--------- -------- -----------
INDIA -- 1.88%
ICICI Bank Ltd. - Sponsored ADR Banks............................... 35,890 $ 565,626
----------
IRELAND -- 4.67%
Allied Irish Bank PLC. Banks............................... 21,000 365,434
Anglo Irish Bank Corp. Banks............................... 34,660 656,930
CRH PLC Construction Materials.............. 16,000 381,004
----------
1,403,368
----------
ISRAEL -- 0.96%
TEVA Pharmaceutical Ind. - ADR Pharmaceuticals..................... 11,100 288,600
----------
JAPAN -- 18.70%
Canon Inc. Office Electronics.................. 8,900 438,337
Daiwa Securities Group Diversified Financial Services...... 53,000 324,419
Hoya Corp. Health Care Equipment & Services.... 4,100 420,077
JSR Corp. Chemicals........................... 19,000 344,967
KDDI Corp. Wireless Telecommunication Services 75 360,203
Kobe Steel Ltd. Construction Materials.............. 257,000 358,188
Kubota Corporation Machinery ......................... 113,000 513,975
Omron Corp. Electronic Equipment & Instruments.. 19,100 432,578
Sharp Corp. Household Durables.................. 28,000 386,025
SMC Corp. Machinery ......................... 3,100 331,340
Sumitomo Realty & Dev. Co., Ltd. Real Estate......................... 35,000 383,982
Terumo Corp. Health Care Equipment and Services.. 15,400 382,861
Toray Industries Inc. Industrial Materials................ 81,000 377,578
Toyota Motor Corp. Automobiles & Components............ 14,500 563,942
----------
5,618,472
----------
MEXICO -- 2.42%
America Movil SA (L Shares) - ADR Wireless Telecommunication Services. 16,500 726,000
----------
NETHERLANDS -- 5.18%
ING Groep NV Diversified Financial Services...... 26,234 692,447
Koninklijke Numico NV Food Products .................... 13,800 463,784
Reed Elsevier NV Media............................... 30,600 400,925
----------
1,557,156
----------
See notes to financial statements.
6
1838 INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS-- CONTINUED OCTOBER 31, 2004
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VALUE
INDUSTRY SHARES (NOTE 2)
--------- -------- -----------
NORWAY -- 1.63%
Telenor ASA Telecommunication Services.......... 61,500 $ 488,298
----------
Singapore -- 2.79%
DBS Group Holdings Ltd. Banks............................... 44,855 420,200
Keppel Corp. Ltd. Capital Goods....................... 86,900 417,475
----------
837,675
----------
Spain -- 3.03%
Banco Popular Espanol SA Banks............................... 7,900 446,988
Grupo Ferrovial SA Construction & Engineering.......... 10,500 463,605
----------
910,593
----------
Sweden -- 2.62%
Ericsson (LM) Tel - Sponsored ADR* Wireless Telecommunication Services. 14,300 413,413
Getinge AB (B Shares) Health Care Equipment & Services.... 33,600 374,349
----------
787,762
----------
Switzerland -- 4.38%
Nestle SA - Sponsored ADR Food Products....................... 7,000 415,100
Novartis AG - Registered Shares Pharmaceuticals..................... 11,170 530,864
SGS SA Commercial Services................. 583 370,243
----------
1,316,207
----------
United Kingdom -- 16.43%
Barclays PLC Banks............................... 56,634 553,616
BP PLC Oil & Gas........................... 95,972 927,606
Capita Group PLC Commercial Services & Supplies...... 68,700 443,094
HSBC Holdings PLC Banks............................... 27,200 438,330
Reckitt Benckiser PLC Household Products.................. 14,805 405,009
Royal Bank of Scotland Group PLC Banks............................... 16,093 474,449
Sabmiller PLC Brewery............................. 35,090 505,362
Tesco PLC Food & Drug Retailing............... 92,003 484,238
Vodafone Airtouch PLC Wireless Telecommunication Services. 274,730 703,487
----------
4,935,191
----------
TOTAL COMMON STOCK (Cost $23,075,054)........................................... 29,950,423
----------
See notes to financial statements.
7
1838 INTERNATIONAL EQUITY FUND
SCHEDULE OF INVESTMENTS-- CONTINUED OCTOBER 31, 2004
- ------------------------------------------------------------------------------------------------------------------
VALUE
SHARES (NOTE 2)
-------- -----------
SHORT-TERM INVESTMENT -- 0.19%
Evergreen Institutional Money Market Fund - I Shares (Cost $55,840)............ 55,840 $ 55,840
-----------
TOTAL INVESTMENTS (Cost $23,130,894)+ -- 99.89%.................................. $30,006,263
OTHER ASSETS AND LIABILITIES, NET-- 0.11% .................................... 34,000
-----------
NET ASSETS -- 100.00%.............................................................. $30,040,263
===========
MARKET SECTOR DIVERSIFICATION
As a Percentage of Total Investments
Consumer Discretionary -- 12.00% Information Technology -- 7.04%
Consumer Staples -- 8.92% Materials -- 6.80%
Energy -- 8.88% Other -- 0.19%
Financials -- 27.39% Telecommunication Services -- 7.59%
Health Care -- 7.06% Utilities -- 4.10%
Industrials -- 10.03%
* Non-income producing securities
ADR -- American Depositary Receipt
See notes to financial statements.
8
1838 FIXED INCOME FUND
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TO THE SHAREHOLDER:
Fiscal year 2004 introduced several macroeconomic concerns that have not yet
been resolved. Globally, industrial production in China is currently growing at
an unsustainable rate of over 16% and is expected to slow to below 10% to
prevent a hyperinflationary environment. This impact is expected to be
significant since exports directed to China account for over 25% of export
growth in the US and Germany and over 40% of export growth in Japan and Korea.1
World GDP remained productive at about 4%, but as the rate of growth in China
slows and historically high oil prices weigh on capital project profitability,
estimates for future growth are revising downward.
Closer to home, the US economic environment is equally cloudy. Corporate
profitability remains tethered to an already strapped consumer and an average of
the past five recovery cycles indicates that there is a 6.5 million job
shortfall for the current recovery2. Also, the personal savings rate as a
percentage of income is at an historic low, energy prices are high, the current
account deficit is widening and the housing sector is proving to be the
consumer's new asset to lever. Couple these macroeconomic pressures with the
continuing war in Iraq and a presidential election and it is no wonder that
investors have had many reasons to be concerned though October 2004.
- ---------------------
1 "Global Rebalancing: Now or Never?" Roach, Stephen. Morgan Stanley
Research, p4, October 2004.
2 "Global Rebalancing: Now or Never?" Roach, Stephen. Morgan Stanley
Research, p8, October 2004.
FIXED INCOME FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT*
[Line graph omitted--plot points are as follows:]
1838 Fixed Income Fund Lehman Aggregate
9/2/97 10000 10000
Oct-97 10270 10295
Oct-98 10913 11257
Oct-99 10999 11316
Oct-00 11696 12142
Oct-01 13375 13910
Oct-02 13892 14729
Oct-03 14679 15452
Oct-04 $15359 $16307
AVERAGE ANNUAL TOTAL RETURNS
FOR THE PERIODS ENDED OCTOBER 31, 2004
- --------------------------------------------------------------------------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEAR INCEPTION $10,000 INVESTMENT
----- ----- -------- ----------------
FUND 4.63% 6.91% 6.17% $15,359
LEHMAN AGGREGATE 5.54% 7.58% 7.06% 16,307
* PAST PERFORMANCE OF THE FUND IS NO GUARANTEE OF FUTURE RESULTS. CURRENT
PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE DATA SHOWN. THE
1838 FIXED INCOME FUND COMMENCED OPERATIONS ON SEPTEMBER 2, 1997. THE
VALUES SHOWN REFLECT A HYPOTHETICAL INITIAL INVESTMENT OF $10,000 WITH
DISTRIBUTIONS REINVESTED. RETURNS ARE HIGHER DUE TO 1838 INVESTMENT
ADVISORS, LP MAINTENANCE OF THE FUND'S EXPENSE CAP. THE LEHMAN AGGREGATE
INDEX IS AN UNMANAGED INDEX WHICH CONSISTS OF BOND ISSUES SPREAD OVER THE
INVESTMENT GRADE BOND UNIVERSE AND DOES NOT HAVE ANY ASSOCIATED EXPENSES
AND THE RETURNS ASSUME REINVESTMENT OF ALL INTEREST INCOME. YOU CANNOT
INVEST IN AN INDEX. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
DISTRIBUTED BY MBIA CAPITAL MANAGEMENT CORPORATION. SEE THE FINANCIAL
HIGHLIGHTS ON PAGE 21 FOR MORE DETAILS.
9
1838 FIXED INCOME FUND
- --------------------------------------------------------------------------------
This concern is no better quantified by the fact that since May 2004, treasury
rates are lower six months AFTER the beginning of an interest rate tightening
cycle than they were at the beginning. The Federal Reserve increased the
overnight lending rate from 1.0% to 1.75% and yet, defiantly resilient treasury
yields have gone lower by over 0.5% in the 10 year and 30 year maturities.
Historically, this inverse relationship between rising lending rates and falling
treasury rates has not existed for as long as it has in this current period.
TABLE 1. Treasury Rates.
- --------------------------------------------------------------------------
TSY MATURITY 10/31/2003 5/28/2004 10/29/2004
- --------------------------------------------------------------------------
2 YEAR 1.82 2.53 2.55
3 YEAR 2.24 3.06 2.76
5 YEAR 3.24 3.79 3.28
10 YEAR 4.29 4.65 4.02
30 YEAR 5.13 5.35 4.79
Yet all this macroeconomic gloom has meant nothing but positive returns during
the period for the fixed income investor. So rejoice! For now, interest rates
are low, inflation is "benign", productivity is high and corporate America has
wrung its excess financing and operating costs. The need for higher yields in a
low interest rate environment has also translated into a strong technical
investor demand for any type of "spread" product. Agency, treasury, mortgage and
asset-backed fixed income instruments are all providing returns in excess of
similar maturity treasuries calendar YTD through October, 2004.
Higher prices in all sectors of the fixed income market translated to positive
returns fiscal YTD for the 1838 Fixed Income Fund (the "Fund") and the Lehman
Aggregate Bond Index (the "Index"). The Fund returned 4.63% (net of fees and
expenses) and the Index returned 5.54%. Returns are positive, yet they lagged
the Index. Why did this happen?
As the Federal Reserve began to increase the overnight lending rate in June from
1.0% to 1.25% we moved the Fund's duration to a position shorter than the Index
in anticipation of higher rates. Further, we knew the Federal Reserve was not
done in 2004 since they were looking to move to a "neutral" rate through a
series of "gradual" Fed Funds rate moves. The Fed continued to move but the
anomaly of lower interest rates in a rising lending rate environment
materialized. This explains the Fund's underperformance versus the benchmark.
Fortunately, this underperformance was mitigated somewhat by the Fund's
overweight in "spread" product.
10
1838 FIXED INCOME FUND
- --------------------------------------------------------------------------------
The Fund's exposure, based on long-term market value, compared to the Index at
October 31, 2004 was as follows:
1838 FIXED LEHMAN AGGREGATE
INCOME FUND BOND INDEX
------------- ---------------
Corporate Bonds....... 40% 25%
Mortgage-Backed....... 32% 35%
Asset-Backed.......... 12% 4%
Agencies.............. 10% 11%
Treasuries............ 6% 25%
OUTLOOK:
Once some of the macroeconomic uncertainty (like China, the US election, the war
in Iraq and oil prices) is removed from the global picture, we would conclude
that lower treasury yields in a higher lending rate environment will be
unsustainable. The question that no one can answer is, when? For this reason, we
believe that maintaining a short duration for the Fund versus the Index is the
correct, long-term strategy that will eventually lead to excess returns versus
the Index.
With respect to the "spread" sectors in the fixed income market, we believe that
most of the good news has already been priced in. But the additional yield
compensation for overweighting these sectors will be necessary to achieve the
appropriate yield versus the Index. So since we believe that there is more
downside risk than upside potential to these sectors, we are positioning the
portfolio towards a higher overall credit quality. In the absence of a
drastically different credit environment, we expect the Fund to have very little
exposure to the longer-dated, lower credit- quality assets in 2005.
Sincerely,
/S/ Clifford D. Corso
Vice President & Portfolio Manager
November 17, 2004
11
1838 FIXED INCOME FUND
- --------------------------------------------------------------------------------
ALLOCATION OF PORTFOLIO
OCTOBER 31, 2004
- --------------------------------------------------------------------------------
[Pie Chart omitted--plot points are as follows:]
Treasury 6.84%
Agencies 9.49%
Credit 39.54%
Mortgages 32.02%
Asset Backed 10.01%
CMBS 1.7%
CMO 0.41%
- --------------------------------------------------------------------------------
EXPENSE EXAMPLE
OCTOBER 31, 2004
- --------------------------------------------------------------------------------
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments, reinvested
dividends, or other distributions; redemption fees; and exchange fees; and (2)
ongoing costs, including management fees; distribution and/or service fees; and
other Fund expenses. This Example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare these costs
with the ongoing costs of investing in other mutual funds. The Example is based
on an investment of $1,000 invested at the beginning of the period and held for
the entire period (May 1, 2004 - October 31, 2004).
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. Although the Fund charges no sales load or
transaction fees, you will be assessed fees for outgoing wire transfers,
returned checks and stop payment orders at prevailing rates charged by
MBIA-MISC, the Fund's transfer agent. If you request that a redemption be made
by wire transfer, currently a $15.00 fee is charged by the Fund's transfer
agent. IRA accounts will be charged a $15.00 annual maintenance fee. To the
extent the Fund invests in shares of other investment companies as part of its
investment strategy, you will indirectly bear your proportionate share of any
fees and expenses charged by the underlying funds in which the Fund invests in
addition to the expenses of the
12
1838 FIXED INCOME FUND
- --------------------------------------------------------------------------------
EXPENSE EXAMPLE (Continued)
OCTOBER 31, 2004
- --------------------------------------------------------------------------------
Fund. Actual expenses of the underlying funds are expected to vary among the
various underlying funds. These expenses are not included in the example below.
The example below includes, but is not limited to, management fees, shareholder
servicing fees, fund accounting, custody and transfer agent fees. However, the
example below does not include portfolio trading commissions and related
expenses, interest expense and other extraordinary expenses as determined under
generally accepted accounting principles. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. Simply divide your account value by $1,000 (for example,
an $8,600 account value divided by $1,000 = 8.6), then multiply the result by
the number in the first line under the heading entitled "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides 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 balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of 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 SALES
CHARGES (LOADS), REDEMPTION FEES, OR EXCHANGE FEES. THEREFORE, THE SECOND LINE
OF THE TABLE IS USEFUL IN COMPARING ONGOING COSTS ONLY, AND WILL NOT HELP YOU
DETERMINE THE RELATIVE TOTAL COSTS OF OWNING DIFFERENT FUNDS. IN ADDITION, IF
THESE TRANSACTIONAL COSTS WERE INCLUDED, YOUR COSTS WOULD HAVE BEEN HIGHER.
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD
5/1/04 10/31/04 5/1/04 - 10/31/04
- -----------------------------------------------------------------------------------------------------------
Actual $1,000.00 $1,034.30 $3.07
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) 1,000.00 1,022.12 3.05
- -----------------------------------------------------------------------------------------------------------
13
1838 FIXED INCOME FUND
SCHEDULE OF INVESTMENTS OCTOBER 31, 2004
- -----------------------------------------------------------------------------------------------------------------
MOODY'S/S&P PRINCIPAL VALUE
RATING AMOUNT (NOTE 2)
------------ -------- -----------
CORPORATE BONDS -- 37.93%
FINANCIAL -- 13.47%
Chubb Corp., 3.95%, 04/01/08................................... A2/A $ 400,000 $ 402,122
Credit Suisse FB USA Inc., 3.875%, 01/15/09.................... Aa3/A+ 365,000 366,192
Ford Motor Credit Co., 7.00%, 10/01/13......................... A3/BBB- 185,000 195,370
GE Global Insurance Holding, 7.00%, 02/15/26................... A1/A- 365,000 399,665
General Motors Acceptance Corp., 4.375%, 12/10/07.............. A3/BBB- 475,000 475,300
Goldman Sachs Group Inc., 6.125%, 02/15/33..................... Aa3/A+ 205,000 209,039
New York Life Insurance Co., 5.875%, 05/15/33, 144A............ Aa3/AA- 200,000 204,697
Washington Mutual Inc., 4.375%, 01/15/08....................... A3/A- 370,000 379,661
-------------
2,632,046
-------------
INDUSTRIAL & MISCELLANEOUS -- 15.19%
BAE Systems 2001 Asset Trust, 6.664%, 09/15/13, 144A*.......... Aaa/AAA 251,106 279,443
Centex Corp., 4.75%, 01/15/08.................................. Baa2/BBB 380,000 391,383
Ford Motor Co., 7.45%, 07/16/31................................ Baa1/BBB- 85,000 82,780
International Paper Co., 5.85%, 10/30/12....................... Baa2/BBB 345,000 368,337
Reed Elsevier Capital, 6.125%, 08/01/06........................ A3/A- 335,000 352,036
SAB Miller PLC, 6.625%, 08/15/33, 144A......................... Baa1/BBB+ 350,000 393,875
Tyco International Group, 6.125%, 01/15/09..................... Baa3/BBB 340,000 370,949
United Mexican States, 4.625%, 10/08/08........................ Baa2/BBB- 380,000 386,460
Weyerhaeuser Co., 6.00%, 08/01/06.............................. Baa2/BBB 325,000 341,848
-------------
2,967,111
-------------
TELECOMMUNICATIONS & MULTIMEDIA -- 9.27%
AT&T Wireless Services Inc., 7.50%, 05/01/07................... Baa2/A 190,000 209,438
AOL Time Warner, 6.125%, 04/15/06.............................. Baa1/BBB+ 180,000 188,171
AOL Time Warner, 7.625%, 04/15/31.............................. Baa1/BBB+ 235,000 278,430
British Telecom PLC, 8.375%, 12/15/10.......................... Baa1/A- 175,000 212,355
Comcast Corp., 7.05%, 03/15/33................................. Baa3/BBB 35,000 39,533
Deutsche Telekom International Finance, 7.75%, 06/15/05........ Baa1/BBB+ 195,000 201,685
France Telecom, 7.75%, 03/01/11................................ Baa2/BBB+ 280,000 336,287
GTE North Inc., 6.73%, 02/15/28................................ A1/A+ 340,000 344,566
-------------
1,810,465
-------------
TOTAL CORPORATE BONDS (Cost $7,220,868)................................................. 7,409,622
-------------
ASSET BACKED SECURITIES -- 11.72%
Bear Stearns Commercial Mortgage Sec., Ser. 1999-WF2, Cl. A2,
7.08%, 06/15/09.............................................. Aaa/AAA 285,000 322,478
Carmax Auto Owner Trust, Ser. 2004-1, Cl. A3, 2.66%, 05/15/08.. Aaa/AAA 425,000 424,007
See notes to financial statements.
14
1838 FIXED INCOME FUND
SCHEDULE OF INVESTMENTS-- CONTINUED OCTOBER 31, 2004
- -----------------------------------------------------------------------------------------------------------------
MOODY'S/S&P PRINCIPAL VALUE
RATING AMOUNT (NOTE 2)
------------ -------- ---------
Drivetime Auto Owner Trust, Ser. 2004-A, Cl. A3,
2.419%, 08/15/08, 144A...................................... Aaa/AAA $ 410,000 $ 405,103
Franklin Auto Trust, Ser. 2003-1, Cl. A4, 2.27%, 05/20/11...... Aaa/AAA 380,000 374,863
FHLMC Structured Pass Through Sec., Ser. H005,
Cl. A2, 2.55%, 08/15/07...................................... Aaa/AAA 84,529 84,107
Long Beach Auto Receivables Trust, Ser. 2003-A, Cl. A3,
2.021%, 07/15/07............................................. Aaa/AAA 340,931 340,301
TF Auto Receivables Owner Trust, Ser. 2002-1, Cl. A3,
3.00%, 05/12/09, 144A........................................ Aaa/AAA 242,884 243,340
Textron Financial Corp. Receivables Trust, Ser. 2000-B, Cl. A3,
6.99%, 03/15/06, 144A........................................ Aaa/AAA 95,397 95,369
-------------
TOTAL ASSET BACKED SECURITIES (Cost $2,257,723)......................................... 2,289,568
-------------
MORTAGE BACKED SECURITIES -- 30.97%
FGCI, Pool # E92496, 5.50%, 11/01/17........................... Aaa/AAA 16,794 17,409
FGCI, Pool # B13342, 5.50%, 04/01/19........................... Aaa/AAA 168,069 174,151
FGCI, Pool # B13580, 5.00%, 04/01/19........................... Aaa/AAA 199,803 203,999
FGLMC, Pool # C72047, 7.00%, 09/01/32.......................... Aaa/AAA 4,283 4,550
FGLMC, Pool # A00930, 10.00%, 05/01/20......................... Aaa/AAA 5,693 6,396
FGLMC, Pool # A22212, 5.50%, 05/01/34.......................... Aaa/AAA 313,121 319,307
FGLMC, Pool # C80342, 6.50%, 09/01/25.......................... Aaa/AAA 28,465 30,041
FGLMC, Pool # D85515, 6.50%, 01/01/28.......................... Aaa/AAA 172,918 182,301
FGLMC, Pool # C16503, 6.50%, 10/01/28.......................... Aaa/AAA 2,219 2,338
FGLMC, Pool # C00967, 8.50%, 02/01/30.......................... Aaa/AAA 97,404 106,372
FGLMC, Pool # C01361, 6.00%, 05/01/32.......................... Aaa/AAA 195,610 202,804
FGLMC, Pool # A14640, 5.00%, 10/01/33.......................... Aaa/AAA 945,314 945,165
FNCI, Pool # 303728, 6.00%, 01/01/11........................... Aaa/AAA 182,041 191,442
FNCI, Pool # 535003, 7.00%, 11/01/14........................... Aaa/AAA 99,355 105,466
FNCI, Pool # 357279, 6.00%, 05/01/17........................... Aaa/AAA 295,054 309,820
FNCI, Pool # 701353, 5.00%, 04/01/18........................... Aaa/AAA 155,544 161,356
FNCI, Pool # 780962, 4.50%, 05/01/19........................... Aaa/AAA 230,958 231,838
FNCI, Pool # 695852, 5.00%, 05/01/18........................... Aaa/AAA 303,023 309,674
FNCI, Pool # 722798, 5.00%, 05/01/19........................... Aaa/AAA 237,327 242,536
FNCL, Pool # 481429, 6.00%, 01/01/29........................... Aaa/AAA 422,354 439,064
FNCL, Pool # 522898, 8.00%, 01/01/30........................... Aaa/AAA 74,620 81,146
FNCL, Pool # 526025, 8.00%, 01/01/30........................... Aaa/AAA 48,417 52,647
FNCL, Pool # 704096, 5.50%, 05/01/33........................... Aaa/AAA 724,502 739,125
FNCL, Pool # 743430, 5.50%, 10/01/33........................... Aaa/AAA 379,648 387,310
See notes to financial statements.
15
1838 FIXED INCOME FUND
SCHEDULE OF INVESTMENTS-- CONTINUED OCTOBER 31, 2004
- -----------------------------------------------------------------------------------------------------------------
MOODY'S/S&P PRINCIPAL VALUE
RATING AMOUNT (NOTE 2)
------------ -------- ----------
GNSF, Pool # 6937, 8.50%, 12/15/05............................. Aaa/AAA $ 500 $ 510
GNSF, Pool # 780374, 7.50%, 12/15/23 .......................... Aaa/AAA 175,063 189,842
GNSF, Pool # 417239, 7.00%, 02/15/26........................... Aaa/AAA 264,445 283,266
GNSF, Pool # 569684, 6.00%, 02/15/32........................... Aaa/AAA 119,899 124,966
GNSF, Pool # 588967, 6.00%, 11/15/32........................... Aaa/AAA 4,345 4,529
-------------
TOTAL MORTGAGE BACKED SECURITIES (Cost $5,887,189)...................................... 6,049,370
-------------
U.S. AGENCY OBLIGATIONS -- 9.10%
FFCB, 3.25%, 06/15/07.......................................... Aaa/AAA 210,000 211,179
FHLMC, 5.125%, 11/07/13........................................ Aaa/AAA 250,000 251,973
FHLMC, Sub. Notes, 6.25%, 03/05/12............................. Aa2/AA- 535,000 565,420
FNMA, 6.00%, 5/15/08........................................... Aaa/AAA 170,000 185,376
FNMA, 3.125%, 03/16/09......................................... Aaa/AAA 405,000 395,965
Freddie Mac MTN., 3.60%, 05/7/08............................... Aaa/AAA 165,000 167,144
-------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS (Cost $1,758,981).............................. 1,777,057
-------------
U.S. TREASURY OBLIGATIONS** -- 6.60%
U.S. Treasury Notes, 1.50%, 03/31/06........................... Aaa/AAA 250,000 247,061
U.S. Treasury Notes, 2.75%, 06/30/06........................... Aaa/AAA 225,000 226,107
U.S. Treasury Notes, 2.50%, 10/31/06........................... Aaa/AAA 195,000 194,752
U.S. Treasury Notes, 3.125%, 04/15/09.......................... Aaa/AAA 90,000 89,757
U.S.Treasury Bonds, 5.375%, 02/15/31........................... Aaa/AAA 490,000 532,207
-------------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $1,262,959)....................................... 1,289,884
-------------
SHARES
--------
SHORT-TERM INVESTMENTS -- 3.97%
Evergreen Institutional Money Market Fund - I Shares (Cost $775,472)....... 775,472 775,472
-------------
TOTAL INVESTMENTS (Cost $19,163,192)-- 100.29%................................................... $ 19,590,973
OTHER ASSETS AND LIABILITIES, NET-- (0.29%)...................................................... (57,170)
-------------
NET ASSETS -- 100.00%............................................................................ $ 19,533,803
-------------
- -----------------------------------------------------------------------------------------------------------------
144A Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers. As of October 31, 2004, these securities amounted to
8.30% of net assets. These securities have been determined to be liquid
under guidelines approved by the Board of Trustees.
* The bond's principal and interest payments are insured by MBIA, Inc.,
the parent company of the Fund's sub-advisor, MBIA Capital Management
Corp. (See Note 7).
** While no ratings are shown for U.S. Treasury Obligations, they are
considered to be of the highest quality, comparable to Moody's Aaa rating
and S&P's AAA rating.
See notes to financial statements.
16
1838 INVESTMENT ADVISORS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES OCTOBER 31, 2004
- ---------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME
EQUITY FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at value (identified cost $23,130,894 and $19,163,192,
respectively) (Note 2)............................................... $30,006,263 $19,590,973
Receivables:
Dividends, interest and foreign tax reclaims......................... 61,847 160,684
Reimbursement due from Advisor (Note 4).............................. 16,078 9,574
Other assets............................................................ 9,788 4,407
- ---------------------------------------------------------------------------------------------------------------------------
Total assets....................................................... 30,093,976 19,765,638
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Due to affiliates (Note 4).............................................. -- 2,967
Payable for investment securities purchased............................. -- 194,724
Other accrued expenses.................................................. 53,713 34,144
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities.................................................. 53,713 231,835
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS.............................................................. $30,040,263 $19,533,803
===========================================================================================================================
NET ASSETS CONSIST OF:
Shares of beneficial interest........................................... $ 2,390 $ 2,093
Additional capital paid-in.............................................. 34,311,760 18,528,525
Accumulated net realized gain (loss) on investments..................... (11,180,107) 575,404
Net unrealized appreciation on:
Investments.......................................................... 6,875,369 427,781
Translation of assets and liabilities in foreign currencies.......... 30,851 --
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS.............................................................. $30,040,263 $19,533,803
===========================================================================================================================
Shares of beneficial interest outstanding............................... 2,390,436 2,093,240
NET ASSETS VALUE, offering and redemption price per share
(Net assets/Outstanding shares of beneficial interest)............... $ 12.57 $ 9.33
===========================================================================================================================
See notes to financial statements.
17
1838 INVESTMENT ADVISORS FUNDS
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2004
- ---------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME
EQUITY FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends........................................................... $ 827,999 $ --
Interest............................................................ 3,894 1,157,754
Foreign taxes withheld ............................................. (94,529) --
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment Income................................... 737,364 1,157,754
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 4)................................... 295,166 123,059
Administration fee (Note 4)......................................... 23,613 16,500
Accounting fee (Note 4)............................................. 60,000 40,000
Custodian fees ..................................................... 40,209 8,709
Transfer agency fees (Note 4)....................................... 20,000 20,000
Trustees' fees (Note 4)............................................. 31,922 14,624
Audit fees.......................................................... 23,721 11,034
Legal fees.......................................................... 29,200 25,277
Registration fees................................................... 19,486 17,816
Reports to shareholders............................................. 11,368 5,026
Other............................................................... 28,040 24,598
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses.................................................... 582,725 306,643
Advisory fees waived (Note 4)..................................... (93,109) (123,059)
Reimbursement from Advisor (Note 4)............................... -- (35,511)
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses, net......................................... 489,616 148,073
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income.................................... 247,748 1,009,681
- ---------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY:
Net realized gain (loss) from:
Investment transactions....................................... 5,930,314 651,975
Foreign currency transactions................................. (250,399) --
- ---------------------------------------------------------------------------------------------------------------------------
Total net realized gain..................................... 5,679,915 651,975
- ---------------------------------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of:
Investments................................................... 1,885,748 (414,628)
Translation of assets and liabilities in foreign currencies... (2,098) --
- ---------------------------------------------------------------------------------------------------------------------------
Total change in unrealized appreciation (depreciation)...... 1,883,650 (414,628)
- ---------------------------------------------------------------------------------------------------------------------------
Net gain on investments and foreign currency........... 7,563,565 237,347
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $ 7,811,313 $ 1,247,028
===========================================================================================================================
See notes to financial statements.
18
1838 INVESTMENT ADVISORS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL FIXED INCOME
EQUITY FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED OCTOBER 31, 2004
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income ......................................... $ 247,748 $ 1,009,681
Net realized gain from investment and
foreign currency transactions............................. 5,679,915 651,975
Change in unrealized appreciation (depreciation)
of investments and foreign currency....................... 1,883,650 (414,628)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations.............. 7,811,313 1,247,028
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income.......................................... -- (1,109,577)
Short-term gains............................................... -- (1,390,264)
Long-term gains................................................ -- (1,316,635)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions......................................... -- (3,816,476)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in net assets from Fund share transactions (Note 5)...... (27,861,758) (18,105,906)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in net assets............................................ (20,050,445) (20,675,354)
NET ASSETS:
Beginning of year................................................. 50,090,708 40,209,157
- ---------------------------------------------------------------------------------------------------------------------------
End of year....................................................... $30,040,263 $19,533,803
===========================================================================================================================
FOR THE YEAR ENDED OCTOBER 31, 2003
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income ......................................... $ 256,903 $ 2,946,345
Net realized gain (loss) from investment and
foreign currency transactions............................... (4,412,388) 2,753,015
Change in unrealized appreciation (depreciation) of
investments and foreign currency............................ 13,099,951 (1,582,276)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations.............. 8,944,466 4,117,084
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income.......................................... -- (2,846,887)
Long-term gains................................................ -- (499,526)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions.......................................... -- (3,346,413)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in net assets from Fund share transactions (Note 5)...... (15,360,896) (50,295,065)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in net assets............................................ (6,416,430) (49,524,394)
NET ASSETS:
Beginning of year.............................................. 56,507,138 89,733,551
- ---------------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income of
$0 and $99,458, respectively).............................. $50,090,708 $40,209,157
===========================================================================================================================
See notes to financial statements.
19
1838 INVESTMENT ADVISORS FUNDS
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each fiscal year and other performance information derived from the financial
statements. It should be read in conjuction with the financial statements and
notes thereto.
INTERNATIONAL EQUITY FUND
FOR THE FISCAL YEARS ENDED OCTOBER 31,
- ------------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE - BEGINNING OF YEAR................. $10.50 $8.50 $9.89 $14.59
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS:
Net investment income .......................... 0.10 0.05 0.01 0.03
Net realized and unrealized gain (loss) on
investments and foreign currency transactions.. 1.97 1.95 (1.40) (3.19)
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations............... 2.07 2.00 (1.39) (3.16)
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income....................... -- -- -- --
From net short-term realized gain on investments. -- -- -- (0.22)
From net long-term realized gain on investments.. -- -- -- (1.32)
- ------------------------------------------------------------------------------------------------------------------------
Total distributions............................ -- -- -- (1.54)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE - END OF YEAR....................... $12.57 $10.50 $8.50 $9.89
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................ 19.71% 23.53% (14.05)% (23.94)%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses (net of fee waivers)1................... 1.25% 1.23% 1.10% 1.04%
Expenses (excluding fee waivers)................. 1.48% N/A N/A N/A
Net investment income ........................... 0.63% 0.55% 0.08% 0.26%
Portfolio turnover rate............................. 36.70% 45.93% 31.51% 41.58%
Net assets, end of year (in 000's).................. 30,040 $50,091 $56,507 $72,007
FOR THE FISCAL YEARS ENDED OCTOBER 31,
- ----------------------------------------------------------------------------------------
2000
- ----------------------------------------------------------------------
NET ASSET VALUE - BEGINNING OF YEAR................. $14.57
- ----------------------------------------------------------------------
INVESTMENT OPERATIONS:
Net investment income .......................... 0.01
Net realized and unrealized gain (loss) on
investments and foreign currency transactions.. 0.78
- ----------------------------------------------------------------------
Total from investment operations............... 0.79
- ----------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income....................... --
From net short-term realized gain on investments. (0.45)
From net long-term realized gain on investments.. (0.32)
- ----------------------------------------------------------------------
Total distributions............................ (0.77)
- ----------------------------------------------------------------------
NET ASSET VALUE - END OF YEAR....................... $14.59
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
TOTAL RETURN........................................ 5.06%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses (net of fee waivers)1................... 1.10%
Expenses (excluding fee waivers)................. N/A
Net investment income ........................... 0.04%
Portfolio turnover rate............................. 51.99%
Net assets, end of year (in 000's).................. $101,686
1 1838 Investment Advisers, LP has voluntarily agreed to waive its fees and/or
reimburse the Fund so the total operating expenses do not exceed 1.25% of
average daily net assets.
See notes to financial statements.
20
1838 INVESTMENT ADVISORS FUNDS
FINANCIAL HIGHLIGHTS -- CONTINUED
- --------------------------------------------------------------------------------
The following table includes selected data for a share outstanding throughout
each fiscal year and other performance information derived from the financial
statements. It should be read in conjuction with the financial statements and
notes thereto.
FIXED INCOME FUND
FOR THE FISCAL YEARS ENDED OCTOBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE - BEGINNING OF YEAR......... $10.16 $10.11 $10.49 $9.75 $9.81
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS:
Net investment income1................... 0.39 0.48 0.56 0.61 0.63
Net realized and unrealized gain (loss)
on investments ....................... 0.04 0.08 (0.19) 0.75 (0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.... 0.43 0.56 0.37 1.36 0.59
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
From net investment income............... (0.42) (0.45) (0.56) (0.62) (0.65)
Return of capital........................ -- -- -- -- --
From net short-term realized gain on
investments............................ (0.43) -- (0.16) -- --
From net long-term realized gain on
investments........................... (0.41) (0.06) (0.03) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions................... (1.26) (0.51) (0.75) (0.62) (0.65)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE - END OF YEAR............... $ 9.33 $10.16 $10.11 $10.49 $9.75
====================================================================================================================================
TOTAL RETURN................................ 4.63% 5.67% 3.86% 14.36% 6.33%
RATIOS (TO AVERAGE NET
ASSETS)/SUPPLEMENTAL DATA:
Expenses (net of fee waivers) 2.......... 0.60% 0.60% 0.60% 0.60% 0.60%
Expenses (excluding fee waivers)......... 1.25% 0.84% 0.74% 0.70% 0.75%
Net investment income1 .................. 4.11% 4.59% 5.58% 6.09% 6.57%
Portfolio turnover rate..................... 82.95% 234.92% 205.61% 199.43% 361.63%
Net assets, end of year (in 000's).......... $19,534 $40,209 $89,734 $128,671 $152,319
1 Effective November 1, 2001, the Fixed Income Fund adopted the required
provisions of the AICPA Audit and Accounting Guide for Investment Companies.
The effect of this change for the year ended October 31, 2002 was to increase
net investment income per share by $0.01, decrease net realized and
unrealized gains and losses per share by $0.01 and increase the ratio of net
investment income to average net assets by 0.09%. Per share ratios and
supplemental data for periods prior to November 1, 2001 have not been
restated to reflect this change in accounting principle.
2 1838 Investment Advisors, LP has voluntarily agreed to waive its fees and/or
reimburse the Fund so the total operating expenses do not exceed 0.60% of
average daily net assets.
See notes to financial statements.
21
1838 INVESTMENT ADVISORS FUNDS
NOTES TO THE FINANCIAL STATEMENTS OCTOBER 31, 2004
- -------------------------------------------------------------------------------
NOTE 1 -- DESCRIPTION OF THE FUNDS
The 1838 Investment Advisors Funds (the "Trust") was organized as a Delaware
series business trust on December 9, 1994, and is an open-end, management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Trust's Agreement and Declaration of Trust permits
the Trustees to issue an unlimited number of shares of beneficial interest. The
Trust consists of two Funds: the 1838 International Equity Fund and the 1838
Fixed Income Fund (each a "Fund" and collectively, the "Funds"). The investment
objectives of each Fund are set forth below.
The 1838 International Equity Fund (the "International Fund") commenced
operations on August 3, 1995. The Fund's investment objective is capital
appreciation, with a secondary objective of income. The Fund seeks to achieve
its objective by investing at least 80% of its total assets in a diversified
portfolio of equity securities of issuers located in countries other than the
United States.
The 1838 Fixed Income Fund (the "Fixed Income Fund") commenced operations on
September 2, 1997. The Fund's investment objective is maximum current income,
with a secondary objective of growth. The Fund seeks to achieve its objective by
investing, under normal circumstances, at least 80% of its assets in a
diversified portfolio of fixed income securities.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION. Each Fund's securities, except investments with remaining
maturities of 60 days or less, for which representative market quotations are
available will be valued at the last sale price or official closing price
(closing bid price or last evaluated quote if no sale has occurred) on the
security's principal market or exchange on which it trades. Prices for
securities traded in the over-the-counter market, including listed debt and
preferred securities, whose primary market is believed to be over-the-counter,
normally are supplied by independent pricing services. If market quotations or
official closing prices are not readily available or do not accurately reflect
fair value for a security or if a security's value has been materially affected
by events occurring after the close of the exchange or market on which the
security is principally traded (for example, a foreign exchange or market), but
prior to the NAV calculation, then that security may be valued by another method
that the Board of Trustees believes accurately reflects fair value. Securities
for which market quotations are not readily available and all other assets will
be valued at their respective fair value as determined in good faith by, or
under procedures established by the Board of Trustees. In determining fair
value, the Trustees may employ an independent pricing service. As of October 31,
2004, there were no securities valued by, or under procedures established by,
the Board of Trustees.
FEDERAL INCOME TAXES. Each Fund is treated as a separate entity and intends to
remain qualified as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986 and to distribute all of its taxable income to its
shareholders. Therefore, no federal income or excise tax provision is required.
FOREIGN CURRENCY TRANSLATIONS. The books and records of the International Fund
are maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars on the following basis:
(i) market value of investment securities, assets and liabilities at
the daily rates of exchange, and
(ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing
on the respective dates of such transactions.
The International Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on investments from
the fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of foreign currencies, currency gains
or losses realized between the trade and settlement dates on securities
transactions, the difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the International Fund's books, and the
U.S. dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in the value of assets and
liabilities, other than investments in securities, resulting from changes in
exchange rates.
22
1838 INVESTMENT ADVISORS FUNDS
NOTES TO THE FINANCIAL STATEMENTS-- CONTINUED OCTOBER 31, 2004
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. In connection with portfolio
purchases and sales of securities denominated in a foreign currency, the
International Fund may enter into forward foreign currency exchange contracts
("FFCEC"). Additionally, the International Fund may enter into these contracts
to hedge certain foreign currency assets. Foreign currency exchange contracts
are recorded at fair value. Certain risks may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms of
their contracts. Realized gains or losses arising from such transactions are
included in net realized gain (loss) from foreign currency transactions. There
were no FFCEC to hedge foreign currency assets outstanding at October 31, 2004.
DISTRIBUTIONS TO SHAREHOLDERS AND BOOK/TAX DIFFERENCES. The Fixed Income Fund
distributes net investment income monthly. All other distributions by the Funds
will be made annually in December. Additional distributions may be made by each
Fund to the extent necessary. Distributions of net investment income and net
realized gains are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles in the United States of
America ("GAAP"). These differences are primarily due to differing treatments of
gains or losses on foreign currency transactions and losses deferred due to wash
sales. Net investment income, short-term gains and foreign currency gains are
taxed as ordinary income and long-term gains are taxed as capital gains.
Distributions during the fiscal year October 31, 2004 were characterized as
follows for tax purposes:
ORDINARY CAPITAL TOTAL
FUND INCOME GAIN DISTRIBUTION
----------- ----------- ----------- -----------
International Fund......... -- -- --
Fixed Income Fund.......... $2,499,841 $1,316,635 $3,816,476
Distributions during the fiscal year ended October 31, 2003 were characterized
as follows for tax purposes:
ORDINARY CAPITAL TOTAL
FUND INCOME GAIN DISTRIBUTION
----------- ----------- ----------- -----------
International Fund......... -- -- --
Fixed Income Fund.......... $2,846,887 $499,526 $3,346,413
At October 31, 2004, the components of distributable earnings on a tax basis
were as follows:
UNDISTRIBUTED UNDISTRIBUTED CAPITAL
ORDINARY LONG TERM LOSS UNREALIZED
FUND INCOME CAPITAL GAIN CARRYFORWARD APPRECIATION
- ----------- ----------- ------------ ------------- -----------
International Fund................$ -- $ -- $(11,090,458) $6,816,571
Fixed Income Fund................. 128,629 460,538 -- 414,018
As of October 31, 2004, the following table shows the capital loss carryovers
available to offset possible future capital gains for the following Funds:
FUND AMOUNT EXPIRATION DATE
- ----------- ------------------- -----------------------
International Fund.............. $6,950,076 10/31/2010
$4,140,382 10/31/2011
During the year ended October 31, 2004, the 1838 International Equity Fund
reclassified $247,748 from undistributed net investment income and $2,651 from
paid in capital to accumulated net realized loss on investments to align
financial reporting with tax reporting. During the year ended October 31, 2004,
the 1838 Fixed Income Fund reclassified $438 from undistributed net investment
income to accumulated net realized gain on investments to align financial
reporting with tax reporting.
23
1838 INVESTMENT ADVISORS FUNDS
NOTES TO THE FINANCIAL STATEMENTS-- CONTINUED OCTOBER 31, 2004
- --------------------------------------------------------------------------------
At October 31, 2004, the following table shows for federal tax purposes the
aggregate cost of investments, the net unrealized appreciation/(depreciation) of
those investments, the aggregate gross unrealized appreciation of all securities
with an excess of market value over tax cost and the aggregate gross unrealized
depreciation of all securities with an excess of tax cost over market value.
NET UNREALIZED GROSS GROSS
AGGREGATE APPRECIATION/ UNREALIZED UNREALIZED
FUND TAX COST (DEPRECIATION) APPRECIATION DEPRECIATION
- ----------- ----------- ------------ ----------- -----------
International Fund................$23,220,543 $6,785,720 $7,342,257 $556,537
Fixed Income Fund.................19,176,955 414,018 447,861 33,843
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that may affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
OTHER. Investment security transactions are accounted for on a trade date basis.
The specific identification method is utilized for determining realized gain or
loss on investments for both financial and federal income tax reporting
purposes. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on an accrual basis.
NOTE 3 -- PURCHASES AND SALES OF INVESTMENT SECURITIES
During the fiscal year ended October 31, 2004, purchases and sales of investment
securities, other than short-term investments, were as follows:
INTERNATIONAL FIXED INCOME
FUND FUND
------------ -------------
Purchases......................... $14,239,044 $20,200,721
Sales............................. 41,749,820 41,228,735
Purchases, sales and maturities of U.S. Government securities, during the fiscal
year ended October 31, 2004, were as follows:
INTERNATIONAL FIXED INCOME
FUND FUND
------------ -------------
Purchases......................... $ -- $12,533,741
Sales............................. -- 26,361,597
NOTE 4 -- ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
The Trust, on behalf of each Fund, employs 1838 Investment Advisors, LP (the
"Investment Advisor"), a registered investment adviser under the 1940 Act, to
furnish investment advisory services to the Funds pursuant to an Investment
Advisory Agreement with the Trust dated July 20, 2004. On May 13, 2004, the
Investment Advisor underwent a change of control when MBIA, Inc. sold 1838
Investment Advisors, LLC, the Trust's previous investment advisor, to Andover
Acquisition Co., LP, an affiliate of Orca Bay Partners, together with 1838
Investment Advisors, LLC's management. For a detailed discussion of the change
in control of the Investment Advisor please refer to Note 7. The Investment
Advisor supervises the investment of the assets of the Funds in accordance with
each Fund's investment objective, policies and restrictions.
24
1838 INVESTMENT ADVISORS FUNDS
NOTES TO THE FINANCIAL STATEMENTS-- CONTINUED OCTOBER 31, 2004
- --------------------------------------------------------------------------------
The Trust pays the Investment Advisor a monthly fee at the following annual
rates of each Fund's average daily net assets: 0.75% for the International Fund
and 0.50% for the Fixed Income Fund. The Investment Advisor has voluntarily
agreed to waive its advisory fee and/or reimburse each Fund monthly to the
extent that the total operating expenses (excluding taxes, extraordinary
expenses, brokerage commissions and interest) will exceed the following annual
rates of each Fund's average daily net assets: 1.25% for the International Fund
and 0.60% for the Fixed Income Fund. This undertaking may be rescinded at any
time in the future.
The following table summarizes the advisory fees incurred by the Funds for the
fiscal year ended October 31, 2004:
GROSS ADVISORY FEE NET ADVISOR
ADVISORY FEE WAIVER ADVISORY FEE REIMBURSEMENT
----------- ----------- ----------- ------------
International Fund............. $295,166 $ 93,109 $202,057 $ 0
Fixed Income Fund.............. 123,059 123,059 -- 35,511
1838 Investment Advisors, LP ("1838 LP") also serves as Administrator to the
Trust pursuant to an Administration Agreement with the Trust on behalf of each
Fund dated July 20, 2004. The Administrator is responsible for services such as
financial reporting, compliance monitoring and corporate management. The Trust
paid 1838 LP a monthly asset-based fee at the annual rate of 0.06% of each
Fund's average daily net assets, with a minimum annual fee per Fund of $15,000.
For the fiscal year ended October 31, 2004, 1838 LP's administration fees
amounted to $23,613 for the International Fund and $16,500 for the Fixed Income
Fund.
MBIA Municipal Investors Services Corporation ("MBIA MISC"), a direct,
wholly-owned subsidiary of MBIA Inc., serves as Accounting Agent to the Trust.
As Accounting Agent, MBIA MISC determines each Fund's net asset value per share
and provides accounting services to the Funds pursuant to an Accounting Services
Agreement with the Trust. The Trust pays MBIA MISC a monthly asset-based fee at
the annual rate of $40,000, plus 0.03% of the Fund's average daily net assets in
excess of $50 million for the Fixed Income Fund. For the International Fund the
Trust pays at the annual rate of $60,000, plus 0.03% of average daily net assets
in excess of $50 million. For the fiscal year ended October 31, 2004, MBIA
MISC's accounting fees amounted to $60,000 for the International Fund and
$40,000 for the Fixed Income Fund.
MBIA MISC also serves as the Funds' transfer agent pursuant to a Transfer Agency
Agreement with the Trust. For these services, MBIA MISC receives an annual fee
per Fund of $20,000, and is reimbursed for out-of-pocket expenses. For the
fiscal year ended October 31, 2004, MBIA MISC's transfer agent fees amounted to
$20,000 for each Fund.
MBIA Capital Management Corporation (the "distributor"), a direct, wholly-owned
subsidiary of MBIA Inc., entered into a Distribution Agreement with the Trust to
assist in securing purchasers for shares of each Fund. The distributor also
directly or through its affiliates, provides investor support services. The
distributor receives no compensation for distributing the Funds' shares, except
for reimbursement of its out-of-pocket expenses.
The Trustees of the Trust who are "interested persons" of the Trust, the
Investment Advisor or its affiliates and all personnel of the Trust or the
Investment Advisor performing services related to research, statistical and
investment activities are paid by the Investment Advisor or its affiliates.
25
1838 INVESTMENT ADVISORS FUNDS
NOTES TO THE FINANCIAL STATEMENTS-- CONTINUED OCTOBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 5 -- FUND SHARE TRANSACTIONS
At October 31, 2004, there were an unlimited number of shares of beneficial
interest with a $0.001 par value, authorized. The following table summarizes the
activity in shares of each Fund:
INTERNATIONAL FUND
FOR THE FISCAL YEAR FOR THE FISCAL YEAR
ENDED OCTOBER 31, 2004 ENDED OCTOBER 31, 2003
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------
Shares sold..................................... 250,288 $2,908,449 319,488 $2,920,560
Shares redeemed................................. (2,628,487) (30,770,207) (2,195,911) (18,281,456)
--------- ----------- --------- -----------
Net decrease.................................... (2,378,199) $(27,861,758) (1,876,423) $(15,360,896)
=========== ===========
Shares outstanding:
Beginning of year.......................... 4,768,635 6,645,058
--------- ---------
End of year............................... 2,390,436 4,768,635
========= =========
FIXED INCOME FUND
FOR THE FISCAL YEAR FOR THE FISCAL YEAR
ENDED OCTOBER 31, 2004 ENDED OCTOBER 31, 2003
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------
Shares sold..................................... 254,198 $2,422,201 255,303 $2,619,947
Shares issued to shareholders in
reinvestment of distributions............... 360,135 3,379,515 297,492 3,031,642
Shares redeemed................................. (2,476,839) (23,907,622) (5,472,108) (55,946,654)
--------- ----------- --------- -----------
Net decrease.................................... (1,862,506) $(18,105,906) (4,919,313) $(50,295,065)
=========== ===========
Shares outstanding:
Beginning of year......................... 3,955,746 8,875,059
--------- ---------
End of year............................... 2,093,240 3,955,746
========= =========
NOTE 6 -- CONCENTRATION OF RISKS
The International Fund invests in securities of foreign issuers in various
countries. These investments may involve certain considerations and risks not
typically associated with investments in the U.S., as a result of, among other
factors, the possibility of future political and economical developments and the
level of government supervision and regulation of securities markets in the
various countries.
26
1838 INVESTMENT ADVISORS FUNDS
NOTES TO THE FINANCIAL STATEMENTS-- CONTINUED OCTOBER 31, 2004
- --------------------------------------------------------------------------------
NOTE 7 - CHANGE OF CONTROL OF THE INVESTMENT ADVISOR (UNAUDITED)
On May 13, 2004, 1838 LLC sold its business to Andover Acquisition Co., LP, an
affiliate of Orca Bay Partners together with 1838 LLC management ("Sale"). After
the Sale, Andover Acquisition Co., LP changed its name to 1838 Investment
Advisors, LP ("1838 LP"). The Sale resulted in an assignment and automatic
termination of the investment advisory agreements between 1838 LLC and the Funds
(the "Prior Agreements") on May 13, 2004. For the period from May 13, 2004 to
July 19, 2004, 1838 LP served as investment advisor pursuant to an interim
investment advisory agreement as permitted by Rule 15a-4 under the 1940 Act. On
July 20, 2004, each Fund's shareholders voted to approve a new investment
advisory agreement between the Funds and 1838 LP that is substantially identical
to the Prior Agreements.
1838 LP is owned by management of 1838 LP together with an investment group led
by Orca Bay Partners. Orca Bay Partners, founded in 1998, is based in Seattle,
Washington and is an affiliate of Orca Bay Capital. Richard D. Hughes, an
operating professional with Orca Bay Partners, is chief executive officer of
1838 LP. 1838 LLC's investment advisory team was retained by 1838 LP with the
same personnel. It is expected that the Sale will result in the augmentation of
the investment advisory team's investment resources and capabilities from an
infusion of new capital.
In order to retain the services of the Fixed Income Fund's portfolio manager
Clifford D. Corso who is not employed with 1838 LP, the Fund also entered into
an interim sub-investment advisory agreement with MBIA Capital Management Corp.
On July 20, 2004, Fund shareholders voted on a proposal to approve a new
sub-investment advisory agreement between the Fund, 1838 LP and MBIA Capital
Management Corp. Prior to the Sale, Mr. Corso was an officer of 1838 LLC and
MBIA Capital Management Corp. He currently is President of MBIA Capital
Management Corp. For the period from May 13, 2004 to December 31, 2004, the
sub-advisor receives no compensation for its services. After December 31, 2004,
1838 LP will pay the Fixed Income Fund's sub-investment advisor out of its own
income an annual fee of 0.05% of the Fixed Income Fund's average daily net
assets, payable on a monthly basis.
NOTE 8 - LIQUIDATION AND TERMINATION OF THE 1838 LARGE CAP EQUITY FUND
(UNAUDITED)
At a meeting held on March 31, 2004, the Board of Trustees of the Trust
unanimously approved the liquidation and termination of the 1838 Large Cap
Equity Fund (the "Large Cap Fund"). The Large Cap Fund's assets were liquidated
as of April 1, 2004, and a final liquidating net asset value of $7.12 was
established. All outstanding shares of the Large Cap Fund had been redeemed and
operations were terminated as of the close of business on April 19, 2004.
27
1838 INVESTMENT ADVISORS FUNDS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF THE 1838 INVESTMENT ADVISORS FUNDS
We have audited the accompanying statements of assets and liabilities of
International Equity Fund and Fixed Income Fund, each a series of 1838
Investment Advisors Funds, including the schedules of investments, as of October
31, 2004, and the related statements of operations for the year then ended, the
statements of changes in net assets and the financial highlights for each of the
two years in the period then ended. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for each of the three years in the
period ended October 31, 2002 were audited by other auditors whose report dated
December 12, 2002 expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 and financial highlights. Our procedures
included confirmation of securities owned as of October 31, 2004 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
International Equity Fund and Fixed Income Fund as of October 31, 2004, the
results of their operations for the year then ended, the changes in their net
assets and the financial highlights for each of the two years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
TAIT, WELLER & BAKER
Philadelphia, PA
December 3, 2004
28
1838 INVESTMENT ADVISORS FUNDS
SHAREHOLDER INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
TAX INFORMATION
We are required by the Internal Revenue Code to advise you within 60 days of the
Funds' fiscal year end as to the federal tax status of distributions paid by the
Funds during such fiscal year.
The 1838 Fixed Income Fund paid distributions of $0.4095 per share from net
long-term capital gains during the fiscal year ended October 31, 2004. Pursuant
to section 852 of the Internal Revenue Code, the 1838 Fixed Income Fund
designated $1,316,635 as capital gain distributions for the fiscal year ended
October 31, 2004.
29
1838 INVESTMENT ADVISORS FUNDS
ADDITIONAL INFORMATION REGARDING THE TRUSTEES AND OFFICERS OF THE TRUST
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
POSITION(S) LENGTH OF
HELD WITH THE PRINCIPAL OCCUPTION AND TIME SERVED;
NAME, ADDRESS AND AGE TRUST COMPLEX DIRECTORSHIPS DURING THE PAST FIVE YEARS TERM OF OFFICE
- -----------------------------------------------------------------------------------------------------------------
W. Thacher Brown (56) President, Chairman Retired. Formerly President and Director, 1995 to
2701 Renaissance and Trustee of each 1838 Investment Advisors, LLC present;
Boulevard, Fourth Floor, Fund in the Trust (successor company to 1838 Investment indefinite
King of Prussia, PA 19406 Complex Advisors, Inc. and 1838 Investment
Advisors, L.P.) (1988 - 2004); President
and Chief Executive Officer, 1838 Investment
Advisors, Inc. (1988 - 1998); Formerly
President, MBIA Asset Management, LLC
(successor company to MBIA Asset
Management Corp.); Director, 1838 Bond-
Debenture Trading Fund; Airgas, Inc.
and Harleysville Mutual Insurance
Company, Harleysville Group
- -----------------------------------------------------------------------------------------------------------------
Charles D. Dickey, Jr. (86) Trustee of each Fund Retired. Formerly Chairman and CEO of 1995 to
2701 Renaissance in the Trust Complex Scott Paper Company (retired as CEO 1983; present;
Boulevard, Fourth Floor, retired as Director, 1988); Formerly indefinite
King of Prussia, PA 19406 Director of General Electric Company
(retired 1991).
- -----------------------------------------------------------------------------------------------------------------
Frank B. Foster, III (70) Trustee of each Fund Chairman, DBH Assoc. (1987-Present); 1995 to
2701 Renaissance Boulevard, in the Trust Complex Director, OAO Technology Solutions Inc. present;
Fourth Floor, (NASDAQ) (1997-2004); Director; indefinite
King of Prussia, PA 19406 Airgas Inc. (1986-2004).
- -----------------------------------------------------------------------------------------------------------------
Robert P. Hauptfuhrer (72) Trustee of each Fund Director, Quaker Chemical Corp. 1995 to
2701 Renaissance Boulevard, in the Trust Complex (1977-Present). present;
Fourth Floor, indefinite
King of Prussia, PA 19406
- -----------------------------------------------------------------------------------------------------------------
Johannes B. van den Berg Vice President & Managing Director, 1838 Investment 1995 to
(47) Portfolio Manager of Advisors, LP (successor company to present;
2701 Renaissance the International 1838 Investment Advisors, LLC, 1838 indefinite
Boulevard, Fourth Floor, Equity Fund Investment Advisors, Inc. and 1838
King of Prussia, PA 19406 Investment Advisors, L.P.) (1997 -
Present); Managing Director and
Portfolio Manager, MeesPierson
1838 Investment Advisors (1994-1998);
President, MeesPierson Capital
Management, Inc. (1994-1998).
30
1838 INVESTMENT ADVISORS FUNDS
ADDITIONAL INFORMATION REGARDING THE TRUSTEES AND OFFICERS OF THE TRUST
(UNAUDITED)
- --------------------------------------------------------------------------------
POSITION(S) LENGTH OF
HELD WITH THE PRINCIPAL OCCUPTION AND TIME SERVED;
NAME, ADDRESS AND AGE TRUST COMPLEX DIRECTORSHIPS DURING THE PAST FIVE YEARS TERM OF OFFICE
- -----------------------------------------------------------------------------------------------------------------
Clifford D. Corso (42) Vice President President of MBIA Capital Management Corp. 1997 to
2701 Renaissance & Portfolio and Chief Investment Officer, MBIA present;
Boulevard, Fourth Floor, Manager of the Insurance Corp. (2004-Present); Managing indefinite
King of Prussia, PA 19406 Fixed Income Fund Director, 1838 Investment Advisors, LLC
(successor company to 1838 Investment
Advisors, Inc. and 1838 Investment
Advisors, L.P.) (1998-2004); Vice President
and Senior Portfolio Manager, MBIA Capital
Management Corp. (1994-1998). President and
Trustee of the MBIA Capital/Claymore
Managed Duration Investment Grade Municipal
Fund.
- -----------------------------------------------------------------------------------------------------------------
John J. Kelley (45) Vice President, Vice President-Chief Compliance Officer, 2004 to
2701 Renaissance Treasurer, 1838 Investment Advisors, LP (successor present;
Boulevard, Fourth Floor, Secretary and company to 1838 Investment Advisors, LLC, indefinite
King of Prussia, PA 19406 Chief Compliance 1838 Investment Advisors, Inc. and
Officer of each 1838 Investment Advisors, L.P.)
of the Funds in (2004-Present); Vice President, 1838
the Trust Investment Advisors LLC. (1999-2004);
Complex Vice President, Secretary and Chief
Compliance Officer, 1838 Bond-Debenture
Trading Fund.
Additional information about the Board of Trustees and Officers can be found in
the Statement of Additional Information (SAI) and available upon request without
charge by calling 877-367-1838.
PORTFOLIO PROXY VOTING POLICIES AND PROCEDURES (UNAUDITED)
- --------------------------------------------------------------------------------
The Funds have adopted the Advisor's proxy voting policies and procedures to
govern the voting of proxies relating to the voting securities of the Funds. You
may obtain a copy of these proxy voting procedures, without charge, by calling
(800) 232-1838 or on the SEC's website at http:// www.sec.gov.
Information regarding how the Funds voted proxies relating to portfolio
securities during the most recent 12 month period ended June 30, 2004 is
available, without charge, by calling (800) 232-1838 or on the SEC's website at
http:// www.sec.gov.
QUARTERLY STATEMENT OF INVESTMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Each Fund files a complete statement of investments with the Security and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, D.C. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
31
INVESTMENT ADVISER
AND ADMINISTRATOR
----------------
1838 INVESTMENT ADVISORS, LP
2701 RENAISSANCE BOULEVARD
FOURTH FLOOR
KING OF PRUSSIA, PA 19406
DISTRIBUTOR
----------------
MBIA CAPITAL MANAGEMENT CORPORATION
113 KING STREET
ARMONK, NY 10504
ACCOUNTING AND
TRANSFER AGENT
----------------
MBIA MUNICIPAL INVESTORS SERVICE CORPORATION
113 KING STREET
ARMONK, NY 10504
CUSTODIAN
----------------
WACHOVIA NATIONAL BANK
123 S. BROAD STREET
PHILADELPHIA, PA 19109
LEGAL COUNSEL
----------------
PEPPER HAMILTON LLP
3000 TWO LOGAN SQUARE
EIGHTEENTH & ARCH STREETS
PHILADELPHIA, PA 19103
AUDITORS
----------------
TAIT, WELLER & BAKER
1818 MARKET STREET
SUITE 2400
PHILADELPHIA, PA 19103
1838
INVESTMENT ADVISORS FUNDS
-------------------------
INTERNATIONAL EQUITY FUND
FIXED INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2004
AR 10/03
ITEM 2: Code of Ethics
The Board of Trustees has adopted a code of ethics that applies to
the principal executive officer, principal financial officer, principal
accounting officer or controller of the Registrant, 1838 Investment Advisors,
LLC and MBIA Capital Management Corporation, and to persons performing similar
functions.
ITEM 3: Audit Committee Financial Expert
The Board of Trustees of the registrant has determined that Frank B.
Foster, III, the Chairman of the Board's Audit Committee, possesses the
technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to
qualify as an "audit committee financial expert," and has designated Mr. Foster
as the Audit Committee's financial expert. Mr. Foster is an "independent"
Director pursuant to paragraph (a)(2)of Item 3 to Form N-CSR.
ITEM 4: Principal Accountant Fees and Services
(a) - (d) Set forth in the table below are audit fees and non-audit related fees
billed to the registrant by its principal accountant (the "Auditor") for the
audit of the registrant's annual financial statements and services provided by
the Auditor in connection with statutory and regulatory filings during and for
the registrant's fiscal years ended October 31, 2003 and 2004.
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
Fiscal Year Ended Audit Fees Audit-Related Fees Tax Fees (1) All Other Fees
October 31,
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
2003 31,000 6,000
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
2004 23,500 4,000
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------
(1) These fees related to services consisting of the review of U.S. federal
income tax returns and annual excise distribution calculations.
(e) The Audit Committee of the registrant (the "Committee") shall pre-approve
all auditing services and permitted non-audit services (including the fees for
such services and terms thereof) to be performed for the registrant by its
independent public accountants in one of two methods. Under the first method,
the engagement to render the services would be entered into pursuant to
pre-approval policies and procedures established by the Committee, provided (i)
the policies and procedures are detailed as to the services to be performed,
(ii) the Committee is informed of each service, and (iii) such policies and
procedures do not include delegation of the Committee's responsibilities under
the Securities Exchange Act of 1934 (the "Exchange Act") to the registrant's
management. Under the second method, the engagement to render the services would
be presented to and pre-approved by the Committee (subject to the de minimus
exceptions for non-audit services described in Section 10A(i)(1)(B) of the
Exchange Act that are approved by the Committee prior to the completion of the
audit). The Chairman of the Committee will have the authority to grant
pre-approvals of audit and permissible non-audit services by the independent
public accountants, provided that all pre-approvals by the Chairman must be
presented to the full Committee at its next scheduled meeting. The registrant
will provide for appropriate funding as determined by the Committee, for payment
of compensation to the independent public accountants and to any consultants,
experts or advisors engaged by the Committee. All of the audit, audit-related
and tax services described above for which the Auditor billed the registrant
fees for the fiscal years ended October 31, 2003 and 2004 were pre-approved by
the Audit Committee.
(f) Not applicable
(g) Not applicable
(h) Not applicable
ITEM 5: Audit Committee of Listed Registrant.
Not applicable.
ITEM 6: Schedule of Investments.
Schedule is included as part of the report to shareholders filed under Item 1 of
this form.
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
Not applicable
ITEM 11: CONTROLS AND PROCEDURES.
(a) The Registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded that the
Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c)
under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing date of
the report that includes the disclosure required by this paragraph, based on
their evaluation of these controls and procedures required by Rule 30a-3(b)
under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under
the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the Registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the Registrant's last fiscal half-year (the
Registrant's second fiscal half-year in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 11: EXHIBITS. The following exhibits are attached hereto:
(a)code of ethics
(b)certifications
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.
1838 Investment Advisors Funds
BY: /s/ W. Thacher Brown
--------------------
W. Thacher Brown
Chairman and President
Date: January 5, 2005
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/ W. Thacher Brown
--------------------
W. Thacher Brown
Chairman and President
(Principal Executive Officer)
Date: January 5, 2005
BY: /s/ John J. Kelley
----------------------
John J. Kelley
Secretary and Treasurer
(Principal Financial Officer)
Date: January 5, 2005