UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
AMENDMENT NO. 1
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08718
IPS Funds
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(Exact name of registrant as specified in charter)
9111 Cross Park Drive, E-120, Knoxville, TN 37923
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(Address of principal executive offices) (Zip code)
CITCO Mutual Fund Services, Inc.
83 General Warren Boulevard, Suite 200
Malvern, PA 19355
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(Name and address of agent for service)
Registrant's telephone number, including area code: 800-232-9142
Date of fiscal year end: 11/30/2004
Date of reporting period: 11/30/2004
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the Commission not later than 10 days after the transmission to stockholders of
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ITEM 1.
[LOGO] IPS FUNDS
Annual Report
November 30, 2004
IPS MILLENNIUM FUND IPS NEW FRONTIER FUND
www.ipsfunds.com
IPS Funds 2004 Annual Report
Dear Fellow Shareholders:
IPS Funds have outperformed the S&P 500 on a risk-adjusted basis for our
2004 fiscal year, the second consecutive year that we have outperformed the
market. The strategies we began putting in place the beginning of 2001 to
improve our valuation and sell discipline have truly produced the benefits we
had hoped for, and we expect that they will continue to do so. Be sure to read
our bi-monthly Portfolio Manager Diary ( http://www.ipsfunds.com/ ) for more
insight into what we are buying and selling and why, and how we analyze
companies and view the stock market and economy.
Analysis of Our Performance & Risk
This is the second consecutive year that we have been able to report to
you that we have outperformed the S&P 500 based on risk-adjusted returns, which
is our goal. Our disciplined valuation and sell strategy is paying off. As you
are aware, we feel that investors do not pay enough attention to risk,
especially in secular bear markets such as we are in today. This is why we have
included a chart, for several years now, of the risk we take relative to the
stock market. Risk-adjusted returns are, in our opinion, a far better indicator
of the quality of fund management than are raw returns, because they indicate
how careful your managers are in attaining those returns.
Risk-adjusted returns are the only way investors can know whether a
particular return has been obtained recklessly, or with a great deal of care to
minimize the downside risk. Without understanding their risk-adjusted returns,
investors simply don't know how much risk they are taking to obtain their raw
returns. Below is a summary of our returns on a raw numbers, and on a
risk-adjusted basis. Be sure to review the more comprehensive returns under the
separate discussion for each Fund.
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Risk Adjusted Returns for FY 2004
Raw 12-month Risk* Risk-Adj.
------------ ----- ---------
Returns Returns
------- -------
PS Millennium Fund 12.28% 1.83 6.71%
IPS New Frontier Fund 14.74% 2.37 6.22%
S&P 500 Index 12.88% 2.18 5.91%
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Table 1. *Risk is defined as the standard deviation of the most
recent 13 monthly returns.
We are concerned that the overall market has become overvalued as a result
of the strong cyclical bull market of 2003 - 2004. A big part of the reason for
our superior risk-adjusted returns is that we aren't out chasing great stories
like so many investors, we are out chasing value. The stock market in general is
selling at higher valuations than historic norms, valuations from which no major
bull market has ever begun. It is our belief that the current cyclical bull
market in stocks that began in March, 2003 has run its course, and that the risk
to investors is now strongly to the downside. We believe that we are entering a
less benign market period beginning in 2005, when a disciplined approach to
valuation will truly begin to pay off.
The universe of stocks from which we select your companies is all those
stocks with Free Cash Flow (FCF) yields above 8.0%. We define FCF as Cash From
Operations in the Statement of Cash Flows, minus the Capital Expenditures
necessary to maintain and grow the business. Thus, all of your companies
generate large amounts of FCF in excess of the immediate needs of the companies
to maintain and grow their business. This FCF is available to pay or increase
dividends, accelerate research and development, pay down debt, ramp up their
growth rate, enable them to under-price competitors, or to buy competitors
during bad times in order to improve their competitive position.
Furthermore, the stock price must be low enough so that the FCF/Share
produces a yield over 8.0%. This is not a long list of companies because,
frankly, there aren't that many companies in the U.S. that are that profitable
on a cash basis, and that are also that cheap. We maintain a list of such stocks
that's updated automatically every night with new prices and any new company
financial reports. It's easy to review the list each day and see what's
changing, and where value is in the stock market. Two years ago, the value was
in well-known, large cap growth stocks. Today that's no longer the case. These
companies have virtually all been pushed up by the market to the point where the
risk-reward ratio is very much against investors.
1
Where we have been finding value for most of this year, though, is much
more frequently in small and mid cap stocks that are relatively less well known,
and often with low trading volume. This means they are not favorites of big
institutional buyers because there simply aren't enough shares for them to buy
without driving up the share price, or so few that they cannot get out if
something goes wrong.
For example, typical buys for your funds, especially over the last 6
months, have been companies like CenturyTel (CTL), Great Plains Energy (GPX),
Health Net (HNT), Raytheon (RNT) and Coca Cola Bottling (COKE). These are not
relatively well known companies, and have low trading volumes, yet we have done
well with stocks like these as a group. As a result of this disciplined buying,
we have continued to keep our level of risk low, while still earning returns
comparable to or greater than that of the stock market, as defined by the S&P
500 Index.
The risk we've taken to achieve our returns has also decreased for both
Funds over the last year. We have brought our risk (standard deviation of most
recent 13 monthly returns) for Millennium down to 1.83%, and for New Frontier
down to 2.37%, compared with a similar risk measure for the S&P 500 of 2.18%.
Our Conclusions
In our 2004 Semi-Annual Report to Shareholders, we concluded that "...
gains going forward will be much harder to come by because the underlying
fundamental improvements are not there to support further gains in our view." We
also stated that "... investors, in our judgment, should be extremely wary of
expecting returns even remotely like 2003 for some time to come. This has become
a stock picker's market, and the greatest profits will go to those investors who
are the most highly disciplined...."
The second half of the year would appear to have borne out those
statements. As we've said before, we will not make money on every stock, or in
every month, or even every quarter or every year. But at IPS Funds we feel that
we have in place the discipline and methodology needed to give our shareholders
the best possible chance of doing well over the coming years, no matter what
kind of market we are in. We believe 2005 will be one of the more interesting
years for stocks that we've seen in quite some time. Thank you for your patience
and loyalty.
Robert Loest, Ph.D., CFA Gregory A. D'Amico
Senior Portfolio Manager President
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IPS Millennium Fund
2004 Performance & Risk Analysis
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IPS Millennium Fund outperformed the S&P 500 in the second half of FY
2004, but due to the conservative posture of the Fund, fell short by 0.6% for
the 12 month fiscal year on a raw numbers basis. We did out-perform on a
risk-adjusted basis, as you can see in Table 1 above. Our Sharpe Ratio remains
in positive territory, meaning that we are outperforming 10-year T-Notes, which
is our absolute return goal no matter what the market does. Our cash position a
year ago was about 21%, and at the close of our 2004 FY it was 26%, so our
returns have been achieved despite a large cash position.
The cash position of Millennium Fund is not a judgment regarding the
market, or a timing decision, it's simply what remains when we cannot find any
more stocks to buy. As our large caps have risen above fair value and we have
sold them, they've become increasingly difficult to replace with stocks that are
similarly as undervalued as those were when we first bought them. As the year
has worn on, we have increasingly seen well-known, large cap stocks become
overvalued, and value in the market has migrated down-cap to small and mid cap
stocks. This is evident from the performance disparity between large and small
cap companies and mutual funds over the course of 2004.
2
IPS Millennium Annualized Total Returns
November 30, 2004
[The following table was depicted as a bar chart in the printed material.]
6 Mos. 1 Yr. 3 Yrs. 5 Yrs. Inception
------ ----- ------ ------ ---------
IPS Millennium 6.44% 12.28% -0.23% -12.06% 9.69%
S&P 500 5.55% 12.88% 2.70% -1.68% 11.78%
Figure 1: Above total returns include dividend & capital gains
distributions not shown here. The performance data given above represent
past performance, which is no guarantee of future results. The investment
return and principal value will fluctuate, so that the value of your
shares, when redeemed, may be worth more or less than their original cost.
Current performance may be better or worse than the performance data
quoted above. Income & capital gains distribution information is also
included in the Prospectus, or call 800.249.6927 for the most recent
annual or semi-annual report, or view it in Adobe format on the index
page.
6 1 3 5 Inception
Months Year Years Years (01/03/95)
------ ---- ----- ----- ----------
IPS Millennium Fund 6.44% 12.28% -0.23% -12.06% 9.69%
S&P 500 Index 5.55% 12.88% 2.70% -1.86% 11.78%
Average Annual Returns as of 11/30/04
We are currently requiring an 8.0% minimum FCF yield before we will
consider a stock, using an assumption of 5.0% for the 10-year T-Note, and an
equity risk premium of 2.5% - 3.5%. This means that for most of our companies we
are discounting future FCFs at about 7.5% - 8.5%. We feel that our current
hurdle rates reflect adequately the risk currently in stocks, and that over any
reasonable period of time we should do well. Nevertheless, the migration of
value down-cap means that increasingly, the companies where we are finding value
have too small a trading volume for Millennium to buy.
The consequence of this is that cash builds up, as it should when we
cannot find stocks that meet our criteria. We believe that currently most of the
stocks that would normally fall within Millennium's buying universe are simply
so overvalued that the risk-reward equation is, by a large margin, against
shareholders. The risk of a loss at current valuation multiples far outweighs
the potential for gains, using our estimate of fair value based on a company's
free cash flow.
What lies behind this approach is simply that stocks and stock markets
have a strong tendency to oscillate around some central tendency of value. This
behavior is termed by statisticians "reversion to the mean." In other words,
when a stock's price departs very far from its central tendency of value, it
tends to return to it. For us, the central tendency of value is a stock's fair
value based on FCF. We want a portfolio of stocks whose prices are likely to
mean revert upward, not downward. Virtually all large cap stocks today are
trading at valuations that, in our opinion, virtually ensure a downward mean
reversion at some point. We don't play that game, so Millennium is likely to
have a large cash position for as long as the market is trading well above fair
value.
3
As can be seen in Fig. 2 below, we have continued to lower the volatility
of our monthly returns in Millennium. This is in preparation for a market-wide
downward mean reversion. It is partly a consequence of our large cash position,
and partly due to the fact that our stocks, being strongly undervalued under our
analytical methodology, tend not to go down as much as the overall market during
a pull-back, again reducing volatility. We believe this will give us an
opportunity when the market corrects to buy superior companies at much lower
valuations.
IPS Millennium Risk vs. Broad Stock Market
November 30, 2004
[The following table was depicted as a mountain chart in the printed material.]
IPS Value S&P
Millennium Line 500
---------- ---- ---
1.44% 2.01% 1.79%
1.45% 1.84% 1.48%
1.71% 1.90% 1.49%
1.87% 1.89% 1.48%
6/96 2.11% 2.12% 1.47%
3.13% 2.86% 2.24%
3.12% 2.85% 2.18%
3.37% 2.93% 2.42%
3.38% 2.93% 2.34%
3.81% 2.83% 2.73%
12/96 4.00% 2.78% 2.88%
4.08% 2.82% 3.12%
4.48% 2.84% 3.11%
5.03% 3.12% 3.50%
5.05% 3.11% 3.69%
6/97 5.64% 3.61% 3.85%
5.57% 3.67% 3.89%
5.94% 3.76% 4.11%
5.44% 3.08% 4.29%
5.56% 3.17% 4.33%
6.00% 3.63% 4.59%
5.97% 3.61% 4.62%
12/97 5.73% 3.47% 4.41%
5.61% 3.53% 4.25%
5.77% 3.85% 4.32%
5.47% 3.85% 4.34%
4.71% 3.51% 3.90%
5.12% 3.91% 4.02%
6/98 4.74% 3.57% 3.93%
4.96% 4.04% 3.98%
6.13% 5.96% 5.58%
6.91% 6.22% 5.52%
6.73% 6.44% 5.72%
6.75% 6.46% 5.66%
12/98 7.37% 6.52% 5.71%
7.73% 6.53% 5.73%
8.20% 6.69% 5.92%
8.73% 6.36% 5.77%
8.83% 6.86% 5.72%
8.98% 6.87% 5.83%
6/99 8.70% 6.85% 5.84%
8.85% 6.89% 5.96%
8.66% 6.75% 5.95%
6.85% 4.54% 4.02%
6.85% 4.43% 4.02%
6.82% 3.99% 3.67%
12/99 7.92% 3.96% 3.66%
7.90% 4.05% 3.92%
8.68% 4.05% 3.89%
8.66% 4.23% 4.41%
10.39% 4.34% 4.52%
10.95% 3.47% 4.52%
6/00 11.38% 3.45% 4.45%
11.58% 3.29% 4.29%
11.93% 3.72% 4.40%
12.18% 3.62% 4.72%
13.37% 3.48% 4.62%
14.98% 4.09% 4.91%
12/00 14.70% 4.40% 4.88%
13.38% 4.90% 4.69%
14.57% 5.01% 5.12%
12.85% 5.30% 5.33%
14.05% 5.35% 5.04%
13.53% 5.30% 5.03%
6/01 13.48% 5.31% 5.04%
12.46% 5.40% 4.94%
12.53% 5.57% 5.13%
10.64% 6.51% 4.88%
11.07% 6.78% 4.96%
11.64% 7.29% 5.59%
12/01 10.41% 7.05% 5.30%
10.12% 6.90% 5.29%
10.03% 6.47% 5.13%
8.69% 6.63% 4.76%
8.53% 6.44% 4.74%
6.80% 6.12% 4.11%
6/02 6.87% 6.38% 4.39%
6.87% 7.10% 4.69%
6.25% 7.11% 4.73%
5.92% 7.51% 5.19%
5.02% 6.84% 5.66%
4.81% 7.27% 5.90%
12/02 3.60% 6.85% 5.52%
3.41% 6.63% 5.47%
3.41% 6.64% 5.47%
3.43% 6.66% 5.53%
3.48% 6.94% 5.99%
4.15% 7.64% 6.07%
6/03 4.20% 7.62% 6.08%
3.98% 7.38% 5.77%
3.54% 6.37% 5.28%
3.66% 6.44% 5.31%
3.78% 5.45% 4.21%
3.78% 5.37% 3.75%
12/03 3.81% 4.89% 3.71%
3.55% 4.29% 3.03%
3.30% 3.98% 2.72%
2.96% 3.62% 2.71%
3.08% 4.07% 2.90%
2.97% 3.59% 2.32%
6/04 2.67% 2.82% 2.09%
2.81% 3.54% 2.46%
2.80% 3.52% 2.46%
2.69% 3.42% 2.45%
2.43% 3.34% 2.38%
1.83% 3.28% 2.18%
12/04 1.88% 3.32% 2.27%
1.93% 3.50% 2.13%
Figure 2. Volatility is expressed as the standard deviation of the 13 most
recent monthly returns. Standard deviation is considered a broad,
inclusive measure of risk, unlike beta, which is a narrower definition.
Changes in the Fund
Millennium has undergone some major changes over the course of the year in
our investment sector concentrations, taking profits where companies and sectors
have exceeded our estimate of fair value, and adding to those sectors where we
can still buy at a large discount from fair value. During the year we have
lightened up on consumer discretionary companies, primarily Regal Entertainment
(RGC), which we sold for a profit after they had distributed over $10/share in
dividends in little more than a year.
We believe that 1) a weakening dollar; 2) one of the lowest savings rates
in the world (only 0.2%); 3) an aging population (like Japan's or Europe's) that
is simply spending less on `stuff;' 4) the absence of the strong fiscal and
financial stimuli of previous years; 5) persistent poor job and wage growth; 6)
the bottoming of interest rates and the Fed's determination to continue raising
them; 7) a huge and growing trade deficit that mandates a forced decline in
consumer spending by the Fed; and 8) the maxing out of the home equity borrowing
mania, all leave consumer spending with nowhere to go but down. We cannot think
of any period since the Great Depression when there have been so many negative
factors for consumer spending. Because the consumer makes up about two-thirds of
the American economy, this makes us cautious on the stock market and the economy
overall.
We reduced Industrials from over 15% of the fund to under 4%, because the
fiscal stimulus of the last three years has resulted in strong recoveries, these
companies tend to be early stage beneficiaries, and we believe this recovery has
peaked. We are now beginning to see projected growth rates and EPS estimates
coming down. We sold all our Materials stocks (formerly 16% of the fund) because
demand from Asia, especially China, as well as a global economic recovery, drove
up the prices of commodities to extremes, and with it the stocks. We felt it was
time to exit.
4
We have more than doubled our Financial sector, to over 13% of the Fund
from 5.5% a year ago. We sold consumer and financial services companies Cendant
Corp. (CD) and First Data (FDC) for reasons discussed above regarding consumer
spending. We have added insurance companies Aflac (AFL), American International
Grp (AIG) and W.R. Berkley (BER). All have competitive advantages, are well-run
and undervalued, and are less exposed to a consumer spending pull-back.
We increased the Health Care sector from 2.6% of the Fund a year ago to
12.5% today. This is an area where people have to spend money in order to insure
themselves against financial disaster. We simply haven't any choice. The only
issue is how consumers will spend the money, and which companies will benefit.
There are risks as well, primarily due to government regulation, but we believe
we are invested in companies that are less exposed than most in this sector.
Telecom services has been increased from about 6.5% of the Fund to nearly
10%, and we increased the Utility sector from about 6% to over 15% of Millennium
Fund. Telecom appears to us to be in the process of reducing competition through
consolidation, and prices are cheap for most of the service companies.
Government regulation is receding, dividends are high and well-covered, and FCF
is exceptionally stable.
The overall effect of the changes we've made during the year is to reduce
the exposure of the Fund to cyclical factors, and also to greatly reduce the
Fund's exposure to a pull-back or cessation in growth of consumer spending. The
proceeds have been reinvested in stocks that have stable business-to-business
operations, or as in Health Care, companies that are exposed to sectors where
spending will inevitably rise due to demographic or some other major factor that
will take many years to reverse.
We believe that this makes us less risky, and better positioned to weather
the inevitable cyclical downturn in the stock market after two years of gains.
Cyclical bull markets rarely exceed two years in duration, and that is
especially true within the context of a secular bear market. Millennium Fund has
ridden this cyclical bull about as far as we think it can go, and it's time to
become more defensive.
As we said in our last report to you, "The huge, positive aspect of this
is that we have absolutely no doubt that these conditions will, sometime in the
next few years, create a potential return environment for stocks that most of us
are unlikely to see again in our lifetimes. Such unusual opportunities are the
pole of highly chaotic geopolitical and economic conditions, and investors must
be prepared for them when they come." We believe that time is now within a
couple of years. Investors will have to be patient, but in investing, the one
character trait that pays the biggest dividends of all is patience.
Thank you once again for the faith you've shown in sticking by us in the
tough early years of a new secular bear market. We trust that our improved sell
discipline will continue to generate superior risk-adjusted returns, and allow
our investors to better weather the inevitable storms without sacrificing
returns.
Robert Loest, Ph.D., CFA
Senior Portfolio Manager
5
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IPS New Frontier Fund
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2004 Performance & Risk Analysis
IPS New Frontier Fund has outperformed the S&P 500 on a risk-adjusted
basis, as you can see from Table 1 in the introduction, and on an absolute
return basis as well for our 2004 fiscal year, as you can see in Fig. 3 below.
It has also dramatically shrunk the 3-year annualized return deficit relative to
the S&P 500, from approximately 19% in our 2003 Annual Report to 2.7% now.
In addition, New Frontier's Sharpe Ratio (a measure of the margin by which
a fund outperforms a risk-free investment - in our case the 10-yr. T-Note) has
been not only consistently positive, but higher that that of the overall stock
market as represented by the S&P 500. The cash position of the Fund has risen
modestly, from 15.4% to 18.7%. New Frontier has not accumulated as much cash as
Millennium because it is better able to buy meaningful positions in smaller
companies, and that's where the value has been for us in 2004.
As you can see from Figure 4, the market's volatility has stabilized the
last several months, while we continue to bring down the risk of the New
Frontier Fund. As with Millennium, we are currently requiring an 8.0% minimum
FCF yield before we will consider a stock, using an assumption of 5.0% for the
10-year T-Note, and an equity risk premium of 2.5% - 3.5%. This means that for
most of our companies we are discounting future FCFs at about 7.5% - 8.5%. We
feel that our current hurdle rates reflect adequately the risk currently in
stocks and that over any reasonable period of time we should do well.
IPS New Frontier Annualized Returns
November 30, 2004
[The following table was depicted as a bar chart in the printed material.]
6 Mos. 1 Yr. 3 Yrs. 5 Yrs. Inception
------ ----- ------ ------ ---------
IPS New Frontier 7.23% 14.74% 0.03% -21.76% -5.07%
S&P 500 5.55% 12.88% 2.70% -1.86% 2.21%
Figure 3: Above total returns include dividend & capital gains
distributions not shown here. The performance data given above represent
past performance, which is no guarantee of future results. The investment
return and principal value will fluctuate, so that the value of your
shares, when redeemed, may be worth more or less than their original cost.
Current performance may be better or worse than the performance data
quoted above. Income & capital gains distribution information is also
included in the Prospectus, or call 800.249.6927 for the most recent
annual or semi-annual report, or view it in Adobe format on the index
page.
6
Average Annual Returns as of 11/30/04
6 1 3 5 Inception
Months Year Years Years (08/03/98)
------ ---- ----- ----- ----------
New Frontier Fund 7.23% 14.74% 0.03% -21.76% -5.07%
S&P 500 Index 5.55% 12.88% 2.70% -1.86% 2.21%
Our prospectus for New Frontier allows us to be more aggressive than
Millennium. We stated in our last report to you, "The "growth" sectors of the
stock market are clearly selling for far more than fair value, and indeed at
levels much higher than has historically been the case, and the risk-reward
potential is clearly not only lower than that of the overall stock market, but
the downside risk is greater than upside potential return. We are anticipating,
of course, but our discipline will either confirm that hypothesis or not, and
our FCF Yield Bar discipline will allow us to adjust accordingly."
This has indeed proven to be the case, as small and mid cap stocks have
outperformed large cap stocks for 2004. Our FCF Yield Bar discipline also
performed well. By automatically restricting our universe of potential stocks to
those with FCF yields of 8% or greater, we found ourselves increasingly being
restricted to small and mid cap stocks, while it screened out most of the large
caps, which are overvalued according to our valuation discipline.
Unlike with Millennium Fund, this has worked to our advantage. New
Frontier Fund is small enough to buy many of these undervalued companies when
the trading volume is too small to allow Millennium to own a meaningful
position. The result has been greater flexibility for New Frontier and a higher
return than that for Millennium. Smaller, more thinly traded companies produce
greater volatility (risk) however, so one must be careful to buy at a
sufficiently greater discount from fair value to justify this additional risk.
This we have been able to do. Although New Frontier's risk-adjusted return is
lower than that of Millennium (see Table 1 in the introduction), it is still
well above that of the S&P 500. We have once again accomplished our goal of
outperforming the S&P 500 on a raw numbers basis, and also on a risk-adjusted
basis.
IPS New Frontier Risk vs. Broad Stock Market
November 30, 2004
[The following table was depicted as a mountain chart in the printed material.]
Value S&P
IPSFX Line 500
----- ---- ---
7.160% 6.595% 5.817%
6.490% 4.544% 4.025%
7.114% 4.428% 4.018%
8.354% 3.994% 3.664%
12/99 11.225% 3.956% 3.652%
11.852% 4.051% 3.913%
12.441% 4.054% 3.886%
12.892% 4.232% 4.400%
15.526% 4.341% 4.510%
16.502% 3.469% 4.510%
6/00 17.466% 3.454% 4.441%
18.052% 3.294% 4.288%
17.988% 3.723% 4.398%
18.824% 3.624% 4.714%
20.236% 3.475% 4.616%
22.192% 4.091% 4.915%
12/00 21.226% 4.397% 4.881%
18.599% 4.900% 4.694%
20.872% 5.012% 5.120%
19.210% 5.302% 5.331%
21.429% 5.347% 5.040%
20.917% 5.300% 5.030%
6/01 20.724% 5.306% 5.036%
18.548% 5.401% 4.940%
18.557% 5.566% 5.126%
16.767% 6.513% 4.876%
17.301% 6.781% 4.956%
17.598% 7.288% 5.594%
12/01 15.726% 7.049% 5.296%
15.615% 6.904% 5.285%
15.125% 6.466% 5.126%
11.987% 6.632% 4.762%
11.110% 6.437% 4.735%
7.878% 6.124% 4.111%
6/02 7.971% 6.380% 4.389%
8.125% 7.097% 4.686%
7.439% 7.114% 4.733%
7.079% 7.511% 5.187%
6.315% 6.839% 5.659%
6.019% 7.266% 5.899%
12/02 4.742% 6.853% 5.521%
4.675% 6.628% 5.475%
4.665% 6.645% 5.474%
4.367% 6.664% 5.531%
3.954% 6.938% 5.986%
4.517% 7.635% 6.066%
6/03 4.538% 7.620% 6.083%
4.024% 7.383% 5.772%
3.212% 6.374% 5.285%
3.302% 6.441% 5.314%
3.565% 5.451% 4.209%
3.576% 5.374% 3.755%
12/03 3.577% 4.887% 3.710%
3.283% 4.293% 3.033%
3.071% 3.984% 2.722%
2.848% 3.616% 2.715%
2.973% 4.072% 2.897%
2.882% 3.592% 2.322%
6/04 2.636% 2.816% 2.093%
3.010% 3.544% 2.463%
3.048% 3.518% 2.463%
2.778% 3.418% 2.449%
2.686% 3.337% 2.384%
2.369% 3.277% 2.176%
12/04 2.332% 3.317% 2.266%
2.619% 3.504% 2.132%
Figure 4. Volatility is expressed as the standard deviation of the 13 most
recent monthly returns. Standard deviation is considered a broad,
inclusive measure of risk, unlike beta, which is a narrower definition.
7
Changes in the Fund
New Frontier has undergone some major changes in where we are finding
value over the course of the year. The Consumer Staples sector, absent a year
ago, is now 11.4% of the Fund. Other than this, the main change to the fund that
is not similar to those discussed under IPS Millennium Fund, is that we have
increased the percentage of the Fund that is invested in small cap stocks.
National Presto Industries (NPK) and Coca Cola Bottling (COKE), for example,
have trading volumes under 10,000 shares/day. SourceCorp (SRCPE) only averages
about 70,000 shares/day. Small cap stocks such as these have trading volumes
that are too low for Millennium to take meaningful positions in.
In the interests of saving money and trees, we refer you to a fuller
discussion of fund changes for Millennium fund above, since the rest of the
changes in stocks and sectors are similar for both funds.
Thank you once again for the faith you've shown in sticking by us in the
tough early years of a new secular bear market. We trust that our improved sell
discipline will continue to generate superior risk-adjusted returns, and allow
our investors to better weather the inevitable storms without sacrificing
returns.
Robert Loest, Ph.D., CFA
Senior Portfolio Manager
================================================================================
** The above outlooks reflect the opinions of IPS Advisory, Inc., are subject to
change, and any forecasts made cannot be guaranteed.
** Past performance is no guarantee of future results. Share price and
investment return will vary so that, when redeemed, an investor's shares may be
worth more or less than their original cost.
** The S&P 500 Index is a widely-recognized, capitalization-weighted, unmanaged
index of 500 large U.S. companies chosen for market size, liquidity and industry
group representation, and has been adjusted to reflect total return with
dividends reinvested. Returns for periods greater than one year are annualized.
The Value Line Arithmetic Composite Index differs from the S&P 500 in that it is
an equal-weighted index of approximately 1,700 stocks of all different sizes
that is more broad-based than the S&P 500 Index. Neither the Value Line
Arithmetic Composite Index nor the S&P 500 Composite Index figures reflect any
fees or expenses.
** Portfolio composition is subject to change at any time and references to
specific securities, industries and sectors referenced in this letter are not
recommendations to purchase or sell any particular security. See the
accompanying Schedule of Investments for the percent of a Fund's portfolio
represented by the securities or industries mentioned in this letter. At any
time you may view the most recent fund portfolio securities on our website at
www.ipsfunds.com.
** This annual report is not authorized for distribution to prospective
investors unless it is preceded or accompanied by a current
IPS Funds Profile or Prospectus.
** Citco Mutual Fund Services Distributors, Inc. 1/2003
For more information, please contact IPS Funds at:
Phone: 800.249.6927 1225 Weisgarber Road
865.524.1676 Web Site: www.ipsfunds.com Suite S-380
Fax: 865.544.0630 Email: info@ipsfunds.com Knoxville, TN 37909
================================================================================
8
A Note about Duplicate Mailings
You will receive the Fund's shareholder report every six months. To reduce Fund
expenses, we try to identify related shareholders in a household and send only
one copy of the report. This process, known as "householding," will continue
indefinitely unless you instruct us otherwise. If you prefer not to have these
documents householded or are currently receiving more than one report per
household, please call us at 800.249.6927. At any time you may view current
shareholder reports on our website, www.ipsfunds.com.
Privacy Policy
We collect nonpublic personal information about you from the following sources:
* Information we receive from you on applications and other forms;
* Information about your transactions with us, our affiliates, or
others; and
* Information we receive from a consumer reporting agency.
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law.
We restrict access to nonpublic personal information about you to those
employees who need to know that information to provide products or services to
you.
We maintain physical, electronic, and procedural safeguards that comply with
federal standards to guard your nonpublic personal information.
Proxy Voting Summary
IPS Advisory, Inc. has written Proxy Voting Procedures designed to ensure that
proxies are voted consistent with written standards, and solely in the best
interests of shareholders. Please call IPS Advisory, Inc. (IPSA) at 800.232.9142
if you would like to receive a copy of our Proxy Voting Procedures and
Guidelines at no charge to you, or view them on our Web site at
http://www.ipsfunds.com. You may also call for information on how we voted a
proxy for a specific company. IPSA does not cross reference votes on a specific
issue with the stocks to which it applies.
You can also review or obtain a copy of the Proxy Voting Procedures by visiting
the Securities and Exchange Commission's Public Reference Room in Washington,
D.C. or by sending your request and a duplicating fee to the Public Reference
Room Section of the Commission, Washington, DC 20549-6009. Information on the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-202-942-8090 or by sending a message via E-mail to publicinfo@sec.gov.
Reports and other information about the Funds can also be viewed online on the
Commission's Internet site at http://www.sec.gov.
Proxies shall be voted in the best interests of shareholders, with an emphasis
on voting against any management proposals that act in general to insulate
companies from the discipline of the market or accountability to shareholders.
In addition, IPSA will generally vote in favor of any shareholder proposals that
will result in restrictions on animal testing, environmental pollution, and
other ethical concerns. Due to the nature and small size of IPSA, in our opinion
there are no material conflicts of interest likely to arise in voting proxies
for our fund shareholders.
Specific guidelines are set forth to address voting in regard to:
A. Corporate Governance;
B. Takeover defense and related actions;
C. Compensation proposals;
D. Capital structure;
E. Social & environmental responsibility;
F. Size of the board;
G. Appointment of Outside Directors;
H. Multiple Directorships;
I. Incentive Stock Award programs;
J. Conflicts of Interest
9
Expenses
As a shareholder of an IPS Fund, you incur two types of costs: direct costs,
such as wire fees; and indirect costs, including management fees, and other Fund
operating expenses. This example is intended to help you understand your
indirect costs, also referred to as "ongoing costs," (in dollars) of investing
in the Fund, and to compare these costs with the ongoing costs of investing in
other mutual funds.
This example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire six-month period of June 1, 2004, through
November 30, 2004.
Actual Expenses
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested at the beginning of the period, 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 "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 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 ongoing costs of investing in the Fund
and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees or low
balance 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 direct costs were included, your
costs would be higher.
IPS Millennium Fund Expenses Paid
During Period*
Beginning Ending June 1, 2004
Account Value Account Value Through
June 1, 2004 November 30, 2004 November 30, 2004
Actual $1,000.00 $1,064.40 $ 7.22
Hypothetical
(5% return before expenses) 1,000.00 1,018.00 7.06
* Expenses are equal to the Fund's annualized expense ratio of 1.40% , which is
net of any expenses paid indirectly, multiplied by the average account value
over the period, multiplied by 183 days/366 days (to reflect the one-half year
period). The Fund's ending account value on the first line in the table is based
on its actual total return of 6.44% for the six-month period of June 1, 2004 to
November 30, 2004.
IPS New Frontier Expenses Paid
During Period*
Beginning Ending June 1, 2004
Account Value Account Value Through
June 1, 2004 November 30, 2004 November 30, 2004
Actual $ 1,000.00 $ 1,072.30 $ 7.25
Hypothetical
(5% return before expenses) 1,000.00 1,018.00 7.06
* Expenses are equal to the Fund's annualized expense ratio of 1.40%, which is
net of any expenses paid indirectly, multiplied by the average account value
over the period, multiplied by 183 days/366 days (to reflect the one-half year
period). The Fund's ending account value on the first line in the table is based
on its actual total return of 7.23% for the six-month period of June 1, 2004, to
November 30, 2004.
10
PORTFOLIO HOLDINGS
The SEC adopted a requirement that all Funds present their categories of
portfolio holdings in a table, chart or graph format in the their annual and
semi-annual shareholder reports, whether or not a schedule of investments is
utilized. The following tables, which present portfolio holdings as a percentage
of net assets, are provided in compliance with such requirement.
IPS Millennium Fund November 30, 2004
- --------------------------------------------------------------------------------
Top Ten Holdings Asset Allocation
(% of Net Assets) (% of Net Assets)
Eastman Kodak Co. 6.81% Utilities 15.32%
FPL Group, Inc. 6.27% Financials 13.36%
Verizon Communications, Inc. 4.90% Health Care 12.58%
CenturyTel, Inc. 4.89% Telecom Services 9.80%
Kindred Healthcare, Inc. 4.87% Consumer Discretionary 7.35%
AFLAC, Inc. 4.47% Information Technology 5.20%
Sunrise Senior Living, Inc. 4.47% Consumer Staples 4.09%
Fresh Del Monte Produce, Inc. 4.09% Industrials 3.37%
W.R. Berkley Corp. 4.05% Energy 2.93%
Great Plains Energy 3.96%
----- -----
48.78% 74.00%
===== =====
- --------------------------------------------------------------------------------
IPS New Frontier November 30, 2004
- --------------------------------------------------------------------------------
Top Ten Holdings Asset Allocation
(% of Net Assets) (% of Net Assets)
National Presto Industries 7.79% Health Care 17.21%
Coca Cola Bottling 7.50% Financials 16.48%
Storage Technology Corp. 6.67% Consumer Discretionary 15.10%
Health Net, Inc. 5.45% Consumer Staples 11.43%
W.R. Berkley Corp. 5.19% Information Technology 6.67%
Sunrise Senior Living, Inc. 4.91% Telecom Services 5.18%
Kindred Healthcare, Inc. 4.69% Industrials 4.69%
AFLAC, Inc. 4.30% Energy 4.51%
Fresh Del Monte Produce, Inc. 3.93%
Eastman Kodak Co. 3.74%
----- -----
54.17% 81.27%
===== =====
- --------------------------------------------------------------------------------
11
IPS MILLENNIUM FUND
Schedule of Investments
November 30, 2004
- --------------------------------------------------------------------------------
COMMON STOCKS - 74.00% Market
Shares Value
------ -----------
Consumer Discretionary - 7.35%
Dura Automotive Systems, Inc.* 40,000 $ 364,000
Eastman Kodak Co. 140,000 4,579,400
-----------
4,943,400
-----------
Consumer Staples - 4.09%
Fresh Del Monte Produce, Inc. 100,000 2,750,000
-----------
Energy - 2.93%
Marathon Oil Corp. 50,000 1,972,000
-----------
Financials - 13.36%
AFLAC, Inc. 80,000 3,009,600
American International Group, Inc. 40,000 2,534,000
Crawford & Co. 30,000 235,500
Phoenix Cos., Inc. 40,000 488,000
W.R. Berkley Corp. 60,000 2,721,000
-----------
8,988,100
-----------
Health Care - 12.58%
Health Net, Inc.* 80,000 2,177,600
Kindred Healthcare, Inc.* 120,000 3,276,000
Sunrise Senior Living, Inc.* 70,000 3,006,500
-----------
8,460,100
-----------
Industrials - 3.37%
Raytheon Co. 50,000 2,017,000
Sourcecorp, Inc.* 15,000 249,450
-----------
2,266,450
-----------
Information Technology - 5.20%
Storage Technology Corp.* 120,000 3,496,800
Telecom Services - 9.80%
CenturyTel, Inc. 100,000 3,292,000
Verizon Communications, Inc. 80,000 3,298,400
-----------
6,590,400
-----------
Utilities - 15.32%
FPL Group, Inc. 60,000 4,219,800
Great Plains Energy 90,000 2,664,900
National Fuel Gas Co. 60,000 1,692,000
TransCanada Corp. 70,000 1,731,100
-----------
10,307,800
-----------
TOTAL COMMON STOCKS (Cost $46,547,531) 49,775,050
-----------
Principal
Amount
------------
SHORT-TERM INVESTMENTS - 26.03%
Federated Cash Trust Series II, Rate 0.67%(a) 17,504,811 17,504,811
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $17,504,811) 17,504,811
-----------
TOTAL INVESTMENTS (Cost $64,052,342) - 100.03% 67,279,861
Liabilities in Excess of Other Assets, Net - (0.03%) (21,316)
-----------
Total Net Assets - 100.00% $67,258,545
===========
(a) Variable rate security, the coupon rate shown represents the rate at
November 30, 2004
* Non-income producing security
The accompanying notes are an integral part of these financial statements.
12
IPS NEW FRONTIER FUND
Schedule of Investments
November 30, 2004
- --------------------------------------------------------------------------------
COMMON STOCKS - 81.27% Market
Shares Value
------ ----------
Consumer Discretionary - 15.10%
Dura Automotive Systems, Inc.* 10,000 $ 91,000
Eastman Kodak Co. 4,000 130,840
National Presto Industries 6,000 272,040
Netflix, Inc.* 3,000 34,140
----------
528,020
----------
Consumer Staples - 11.43%
Coca Cola Bottling 5,000 262,100
Fresh Del Monte Produce, Inc. 5,000 137,500
----------
399,600
----------
Energy - 4.51%
Marathon Oil Corp. 4,000 157,760
----------
Financials - 16.48%
AFLAC, Inc. 4,000 150,480
American International Group, Inc. 2,000 126,700
Crawford & Co. 15,000 117,750
W.R. Berkley Corp. 4,000 181,400
----------
576,330
----------
Health Care - 17.21%
Health Net, Inc.* 7,000 190,540
Kindred Healthcare, Inc.* 6,000 163,800
NDCHealth 4,000 75,520
Sunrise Senior Living, Inc.* 4,000 171,800
----------
601,660
----------
Industrials - 4.69%
Raytheon Co. 2,000 80,680
Sourcecorp, Inc.* 5,000 83,150
----------
163,830
----------
Information Technology - 6.67%
Storage Technology Corp.* 8,000 233,120
----------
Telecom Services - 5.18%
CenturyTel, Inc. 3,000 98,760
Verizon Communications, Inc. 2,000 82,460
----------
181,220
----------
TOTAL COMMON STOCKS (Cost $2,717,319) 2,841,540
----------
Principal
Amount
-----------
SHORT-TERM INVESTMENTS - 18.72%
Federated Cash Trust Series II, Rate 0.67%(a) 654,536 654,536
----------
TOTAL SHORT-TERM INVESTMENTS (Cost $654,536) 654,536
----------
TOTAL INVESTMENTS (Cost $3,371,855) - 99.99% 3,496,076
Other Assets less Liabilities, Net - 0.01% 240
----------
Total Net Assets - 100.00% $3,496,316
==========
(a) Variable rate security, the coupon rate shown represents the rate at
November 30, 2004
* Non-income producing security
The accompanying notes are an integral part of these financial statements.
13
The IPS Funds
Statements of Assets and Liabilities
November 30, 2004
IPS IPS
Millennium Fund New Frontier Fund
------------- ------------
ASSETS:
Investments, at value (cost $64,052,342 and $3,371,855, respectively) $ 67,279,861 $ 3,496,076
Receivable for capital shares sold 2,129 300
Dividends receivable 154,750 3,500
Interest receivable 10,963 406
------------- ------------
Total Assets 67,447,703 3,500,282
------------- ------------
LIABILITIES:
Payable for capital shares redeemed 112,324 --
Payable to Advisor 76,834 3,966
------------- ------------
Total Liabilities 189,158 3,966
------------- ------------
Total Net Assets $ 67,258,545 $ 3,496,316
NET ASSETS CONSIST OF:
Capital stock $ 355,956,859 $ 21,476,133
Accumulated net realized loss on investments sold (292,972,437) (18,163,114)
Accumulated undistributed net investment income 1,046,604 59,076
Net unrealized appreciation on investments 3,227,519 124,221
------------- ------------
Total Net Assets $ 67,258,545 $ 3,496,316
Shares outstanding (no par value, unlimited shares authorized) 2,310,351 413,658
Net asset value, redemption price and offering price per share $ 29.11 $ 8.45
============= ============
- ---------------------------------------------------------------------------------------------------------------
The IPS Funds
Statements of Operations
For the Year Ended November 30, 2004
IPS IPS
Millennium Fund New Frontier Fund
----------- ---------
INVESTMENT INCOME:
Dividend income $ 2,056,051 $ 110,029
Interest income 32,007 1,181
----------- ---------
Total investment income 2,088,058 111,210
----------- ---------
EXPENSES:
Investment advisory fee 1,015,371 49,400
----------- ---------
Total expenses 1,015,371 49,400
----------- ---------
NET INVESTMENT INCOME 1,072,687 61,810
----------- ---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions 11,334,708 693,912
Change in unrealized appreciation on
investments (3,870,253) (266,124)
----------- ---------
Net realized and unrealized gain on investments 7,464,455 427,788
----------- ---------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 8,537,142 $ 489,598
=========== =========
The accompanying notes are an integral part of these financial statements.
14
The IPS Funds
Statements of Changes in Net Assets
IPS IPS
Millennium Fund New Frontier Fund
--------------------------- ---------------------------
Year Year Year Year
Ended Ended Ended Ended
November 30, November 30, November 30, November 30,
2004 2003 2004 2003
--------------------------- ---------------------------
OPERATIONS:
Net investment income $ 1,072,687 $ 293,223 $ 61,810 $ (1,360)
Net realized gain on investment transactions 11,334,708 5,755,999 693,912 403,298
Change in unrealized appreciation (depreciation) on investments (3,870,253) 5,165,824 (266,124) 317,337
--------------------------- ---------------------------
Net increase in net assets resulting from operations 8,537,142 11,215,046 489,598 719,275
--------------------------- ---------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (319,306) -- (2,734) --
Net realized gains -- -- -- --
--------------------------- ---------------------------
Total dividends and distributions (319,306) -- (2,734) --
--------------------------- ---------------------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 3,023,913 26,855,423 300,726 304,324
Shares issued to holders in reinvestment of dividends 310,882 -- 2,690 --
Cost of shares redeemed (23,678,012) (53,329,597) (960,353) (1,082,410)
--------------------------- ---------------------------
Net decrease in net assets resulting from capital share transactions (20,343,217) (26,474,174) (656,937) (778,086)
--------------------------- ---------------------------
TOTAL DECREASE IN NET ASSETS (12,125,381) (15,259,128) (170,073) (58,811)
NET ASSETS:
Beginning of period 79,383,926 94,643,054 3,666,389 3,725,200
--------------------------- ---------------------------
End of period* $ 67,258,545 $ 79,383,926 $ 3,496,316 $ 3,666,389
=========================== ===========================
* Including accumulated undistributed net investment income of $ 1,046,604 $ 293,223 $ 59,076 $ --
=========================== ===========================
- ---------------------------------------------------------------------------------------------------------------------------------
IPS Millennium Fund
Financial Highlights
Selected per share data is based on a share of common stock outstanding throughout each period.
Year Ended Year Ended Year Ended Year Ended Year Ended
November November November November November
30, 2004 30, 2003 30, 2002 30, 2001 30, 2000
------- ------- ------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 26.03 $ 22.43 $ 29.43 $ 49.29 $ 55.93
Income from investment operations:
Net investment income (loss) 0.41 0.08 (0.07) (0.10)(1) 0.04
Net realized and unrealized gain
(loss) on investments 2.78 3.52 (6.93) (19.72) (6.30)
------- ------- ------- -------- --------
Total from investment operations 3.19 3.60 (7.00) (19.82) (6.26)
------- ------- ------- -------- --------
Less distributions:
Dividends from net investment income (0.11) -- -- (0.04) --
Distributions from net realized gains -- -- -- -- (0.38)
------- ------- ------- -------- --------
Total dividends and distributions (0.11) -- -- (0.04) (0.38)
------- ------- ------- -------- --------
Net asset value, end of period $ 29.11 $ 26.03 $ 22.43 $ 29.43 $ 49.29
======= ======= ======= ======== ========
Total return 12.2% 16.0% (23.79% (40.25)% (11.36)%
Supplemental data and ratios:
Net assets, end of period (000's) $67,259 $79,384 $94,643 $184,467 $409,247
Ratio of net operating expenses to average net assets 1.40% 1.40 1.34% 1.19% 1.11%
Ratio of net investment income (loss) to average net assets 1.48% 0.36 (0.27% (0.23%) 0.08%
Portfolio turnover rate 77.8% 169.37 209.20% 115.45% 27.88%
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
The accompanying notes are an integral part of these financial statements.
15
IPS New Frontier Fund
Financial Highlights
Selected per share data is based on a share of common stock outstanding throughout each period.
Year Ended Year Ended Year Ended Year Ended Year Ended
November November November November November
30, 2004 30, 2003 30, 2002 30, 2001 30, 2000
------- ------- ------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 7.37 $ 5.97 $ 8.45 $ 17.04 $ 29.39
Income from investment operations:
Net investment income (loss) 0.14 (0.01) (0.08) (0.11)(1) (0.25)(1)
Net realized and unrealized gain
(loss) on investments 0.95 1.41 (2.40) (8.48) (11.36)
------- ------- -------- -------- --------
Total from investment operations 1.09 1.40 (2.48) (8.59) (11.61)
------- ------- -------- -------- --------
Less distributions:
Dividends from net investment income (0.01) -- -- -- --
Distributions from net realized gains -- -- -- -- (0.74)
------- ------- ------- -------- --------
Total dividends and distributions (0.01) -- -- -- (0.74)
------- ------- ------- -------- --------
Net asset value, end of period $ 8.45 $ 7.37 $ 5.97 $ 8.45 $ 17.04
======= ======= ======= ======== ========
Total return 14.74% 23.45% (29.35)% (50.41)% (40.92)%
Supplemental data and ratios:
Net assets, end of period (000's) $ 3,496 $ 3,666 $ 3,725 $ 6,230 $ 11,077
Ratio of net operating expenses to average net assets 1.40% 1.40% 1.40% 1.40% 1.40%
Ratio of net investment income (loss) to average net assets 1.75% (0.04)% (1.11)% (1.00)% (0.92)%
Portfolio turnover rate 126.2% 213.8% 300.19% 187.61% 78.61%
(1) Net investment income per share is calculated using ending balances prior to
consideration of adjustments for permanent book and tax differences.
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
IPS Millennium Fund and IPS New Frontier Fund
Notes to the Financial Statements
November 30, 2004
1. Organization
The IPS Millennium Fund and the IPS New Frontier Fund (the "Funds") are each a
series of the IPS Funds (the "Trust"). The Trust was organized as an Ohio
business trust on August 10, 1994, and is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end diversified
management investment company. The principal investment objective of the IPS
Millennium Fund ("Millennium Fund") is long-term capital growth. The IPS
Millennium Fund is a diversified fund. The principal investment objective of the
IPS New Frontier Fund ("New Frontier Fund") is capital growth. The New Frontier
Fund is non-diversified and therefore can invest a greater percentage of its
assets in fewer securities than a diversified fund. To the extent the Fund
invests its assets in fewer securities, the Fund is subject to greater risk of
loss if those securities decline in value. Nonetheless, the Fund intends to
qualify as a registered investment company for income tax purposes, which means
the Fund intends to fulfill the Internal Revenue Code diversification
requirements applicable to registered investment companies. The Funds commenced
operations on January 3, 1995 and August 3, 1998, respectively. In January 2005,
the shareholders of the Funds will be asked to approve a proposed merger into a
new fund.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with accounting principles generally accepted in the
United States of America ("GAAP").
(a) Investment Valuation
Securities, which are traded on a recognized stock exchange, are valued at
the last sale price on the securities exchange on which such securities
are primarily traded. Securities traded on the over- the-counter market
and listed securities for which there were no transactions are valued at
the last quoted bid price. Debt instruments maturing within 60 days are
valued by the amortized cost method. Any securities for which market
quotations are not readily available are valued at their fair value as
determined in good faith by IPS Advisory, Inc. (the "Advisor") pursuant to
guidelines established by the Board of Trustees.
16
(b) Federal Income and Excise Taxes
The Funds intend to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute
substantially all net investment company taxable income and net capital
gains to shareholders in a manner, which results in no tax cost to the
Funds. Therefore, no federal income or excise tax provision is required.
(c) Distributions to Shareholders
Dividends from net investment income are declared and paid annually.
Distributions of net realized capital gains, if any, will be declared and
paid at least annually. Distributions to shareholders are recorded on the
ex-dividend date. The Funds may periodically make reclassifications among
certain of their capital accounts as a result of the recognition and
characterization of certain income and capital gain distributions
determined annually in accordance with federal tax regulations which may
differ from generally accepted accounting principles.
(d) Securities Transactions and Investment Income
Investment transactions are recorded on the trade date for financial
statement purposes. The Funds determine the gain or loss realized from
investment transactions by comparing the original cost of the security lot
sold with the net sale proceeds. Dividend income is recognized on the ex-
dividend date and interest income is recognized on an accrual basis.
Acquisition and market discounts are amortized over the life of the
security.
(e) Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements; and the reported
amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
3. Capital Share Transactions
Transactions in capital shares were as follows:
Year Ended Year Ended
November 30, 2004 November 30, 2003
IPS Millennium Fund $ Shares $ Shares
------------ --------- ------------ ----------
Shares sold $ 3,023,913 109,885 $ 26,855,423 1,210,673
Shares issued in reinvestment
of dividends 310,882 11,570 -- --
Shares redeemed (23,678,012) (860,489) (53,329,597) (2,380,589)
------------ --------- ------------ ----------
Net increase (decrease) ($20,343,217) (739,034) ($26,474,174) (1,169,916)
============ ============
Shares outstanding:
Beginning of period 3,049,385 4,219,301
--------- ---------
End of period 2,310,351 3,049,385
========= =========
Year Ended Year Ended
November 30, 2004 November 30, 2003
IPS New Frontier Fund $ Shares $ Shares
------------ --------- ------------ ----------
Shares sold $ 300,726 38,016 $ 304,324 48,206
Shares issued in reinvestment
of dividends 2,690 353 -- --
Shares redeemed (960,353) (122,394) (1,082,410) (174,976)
------------ --------- ------------ ----------
Net increase (decrease) ($ 656,937) (84,025) ($ 778,086) (126,770)
============ ========= ============ ==========
Shares outstanding:
Beginning of period 497,683 624,453
--------- ----------
End of period 413,658 497,683
========= ==========
17
4. Investment Transactions
The aggregate purchases and sales of investments, excluding short-term
investments, by the Funds for the year ended November 30, 2004, are summarized
below. There were no purchases or sales of long- term U.S. government
securities.
IPS Millennium Fund IPS New Frontier Fund
------------------- ---------------------
Purchases $42,562,138 $3,424,025
Sales $62,997,784 $4,114,847
At November 30, 2004, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
IPS Millennium Fund IPS New Frontier Fund
------------------- ---------------------
Unrealized appreciation $3,357,951 $176,941
Unrealized depreciation (130,432) (52,720)
---------- --------
Net unrealized appreciation on
investments $3,227,519 $124,221
========== ========
At November 30, 2004, the cost of investments for federal income tax purposes
for the Millennium Fund and the New Frontier Fund were $64,052,342 and
$3,371,855, respectively.
The Funds' tax-basis capital gains and losses are determined only at the end of
the fiscal year. At November 30, 2004, the Millennium Fund had an accumulated
net realized capital loss carryover of $292,972,437, with $21,814,534 expiring
in 2008, $234,768,275 expiring in 2009, and $36,389,628 expiring in 2010. The
New Frontier Fund, at November 30, 2004, had an accumulated net realized capital
loss carryover of $18,163,114, with $2,611,293 expiring in 2008, $13,651,050
expiring in 2009, and $1,900,771 expiring in 2010. To the extent the Funds
realize future net capital gains, taxable distributions to their shareholders
will be offset by any unused capital loss carryovers.
5. Investment Advisor
The Funds have an agreement with IPS Advisory, Inc. (the "Advisor"), with whom
certain officers and directors of the Funds are affiliated, to furnish
investment advisory services to the Funds. Under the terms of the agreement, the
Advisor will pay all of the Funds' operating expenses, excluding brokerage fees
and commissions, taxes, interest and extraordinary expenses. The Funds are
obligated to pay the Advisor a fee computed and accrued daily and paid monthly
at an annual rate of 1.40% of their average daily net assets to and including
$100,000,000, 1.15% of such assets from $100,000,001 to and including
$250,000,000, and 0.90% of such assets in excess of $250,000,001. Total fees
earned by IPS Advisory, Inc. during the year ended November 30, 2004, for the
Millennium Fund and the New Frontier Fund were $1,015,371 and $49,400,
respectively.
6. Beneficial Ownership
The beneficial ownership, either directly or indirectly, of more than 25% of the
voting securities of a fund creates a presumption of control of the fund, under
Section 2(a)(9) of the Investment Company Act of 1940. As of November 30, 2004,
Charles Schwab & Co., for the benefit of its customers, beneficially owned over
49% of the Millennium Fund.
7. Distributions to Shareholders
The tax character of distributions paid during the fiscal years 2004 and 2003
was as follows:
Millennium Fund
Distributions paid from: 2004 2003
---------- ---------
Ordinary Income $ 319,306 $ --
Long-Term Capital Gain -- --
---------- ---------
$ 319,306 $ --
========== =========
18
New Frontier Fund
Distributions paid from: 2004 2003
------ -------
Ordinary Income $2,734 $ --
Long-Term Capital Gain -- --
------ -------
$2,734 $ --
====== =======
As of November 30, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Millennium New Frontier
------------- ------------
Undistributed ordinary income (loss) $ 1,046,604 $ 59,076
Undistributed net realized capital losses (292,972,437) (18,163,114)
Net unrealized appreciation/(depreciation) 3,227,519 124,221
------------- ------------
$(288,698,314) $(17,979,817)
============= ============
Any difference between book basis and tax basis unrealized appreciation
(depreciation) is attributable primarily to the deferral of wash sales.
8. Change of Auditors
On January 20, 2004, McCurdy & Associates CPA's, Inc. ("McCurdy") notified the
Funds of its intention to resign as the Funds' independent auditors upon
selection of replacement auditors.
On January 23, 2004, the Funds' Audit Committee and Board of Directors selected
Cohen McCurdy, Ltd. ("Cohen") to replace McCurdy as the Funds' auditors for the
fiscal year ending November 30, 2004, to be effective upon the resignation of
McCurdy.
On March 12, 2004, upon receipt of notice that Cohen was selected as the Funds'
auditor, McCurdy, whose audit practice was acquired by Cohen, resigned as
independent auditors to the Fund. McCurdy's reports on the IPS financial
statements as of December 16, 2003 contained no adverse opinion or disclaimer of
opinion nor were they qualified or modified as to uncertainty, audit scope or
accounting principles. During the period December 16, 2003 through the date of
engagement of Cohen, there were no disagreements with McCurdy on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved to the satisfaction of McCurdy would
have caused the Advisor to make reference to the subject matter of the
disagreements in connection with its reports on the Funds' financial statements
for such periods.
Neither the Funds nor anyone on its behalf consulted with Cohen on items which
(i) concerned the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Funds' financial statements or (ii) concerned the
subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of
Regulation S-K) or a reportable event (as described in paragraph (a)(1)(v) of
said Item 304).
19
REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM
To The Shareholders and
Board of Trustees
IPS Funds
We have audited the accompanying statements of assets and liabilities of IPS
Funds (comprising, respectively, the Millennium Fund and the New Frontier Fund),
including the schedules of portfolio investments, as of November 30, 2004, the
related statements of operations, changes in net assets, and the financial
highlights for the year then ended. These financial statements and financial
highlights are the responsibility of the IPS Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The statement of changes in net assets
for the year ended November 30, 2003 and the financial highlights for the
periods indicated prior to November 30, 2004 were audited by McCurdy &
Associates CPA's, Inc., whose audit practice was acquired by Cohen McCurdy, Ltd.
McCurdy & Associates CPA's, Inc. expressed unqualified opinions on those
statements.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
investments and cash held by the custodian as of November 30, 2004 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
IPS Funds as of November 30, 2004, the results of its operations, changes in its
net assets, and the financial highlights for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
Cohen McCurdy, Ltd.
Westlake, Ohio
January 7, 2005
20
Independent Trustees (Unaudited)
====================================================================================================================================
Term of # of
Office Portfolios
and in Fund Other
Position(s) Length of Complex Directorships
Held with Time Principal Occupation(s) Overseen Held by
Name, Address and Age the Trust Served During Past Five Years by Trustee Trustee
====================================================================================================================================
Veenita Bisaria, 43, Independent Since Financial Analyst, Tennessee 3 None
12416 Fort West Drive Trustee inception Valley Authority (1997-
Knoxville, TN 37922 of Funds Present); Director of Business
in 1995 Planning at Lockheed Martin
Energy Systems (Prior to
1997); Chartered Financial
Analyst (CFA).
- ------------------------------------------------------------------------------------------------------------------------------------
Woodrow Henderson, 46, Independent Since Director of Planned Giving for 3 None
6504 Clary Lane Trustee inception the University of Tennessee at
Knoxville, TN 37919 of Funds Knoxville.
in 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Billy Wayne Stegall, Jr., 47, Independent Since Account Executive, Colonial 3 None
316 Stonewall Street Trustee inception Life & Accident (1995-
Memphis, TN 38112 of Funds Present); Teacher of history
in 1995 and economics at Austin East
High School in Knoxville,
Tennessee (Prior to 1995).
- ------------------------------------------------------------------------------------------------------------------------------------
Interested Trustees & Officers (Unaudited)
====================================================================================================================================
# of
Portfolios
Term of in Fund
Office and Principal Complex
Position(s) Length of Occupation(s) Overseen
Held with Time During Past Five by Other Directorships
Name, Address and Age the Trust Served Years Trustee Held by Trustee
====================================================================================================================================
Greg D'Amico*, 41, President, Since President of IPS 3 IPS Advisory, Inc.; Director
IPS Advisory, Inc. Chief inception Advisory, Inc. of Young Entrepreneurs'
SEC Registered Investment Advisor Financial of Funds in Organization (YEO);
9111 Cross Park Dr. Officer, 1995 Personal & Child Safety,
E-120 Treasurer LLC
Knoxville, TN 37923 and Trustee
- ------------------------------------------------------------------------------------------------------------------------------------
Robert Loest*, 61, Vice Since Chief Executive 3 IPS Advisory, Inc.
IPS Advisory, Inc. President, inception Officer of IPS
SEC Registered Investment Advisor Secretary of Funds in Advisory, Inc.;
9111 Cross Park Dr. and Trustee 1995 Financial Analyst
E-120 Charter; Ph.D. in
Knoxville, TN 37923 Biology.
- ------------------------------------------------------------------------------------------------------------------------------------
* An "interested person" of the Trust, as defined in the Investment Company Act
of 1940, due to his relationship with the Advisor.
Board Committees
The Board has the following standing committee as described below:
- ------------------------------------------------------------------------------------------------------------------------------------
Audit Committee
- ------------------------------------------------------------------------------------------------------------------------------------
Members Description Meetings
- ------- ----------- --------
Veenita Bisaria, Responsible for advising the full Board with respect to At least once annually. Last meeting
Independent Trustee accounting, auditing and financial matters affecting the occurred on January 21, 2005.
Woodrow Henderson, Trust.
Independent Trustee
Billy Wayne Stegall, Jr.,
Independent Trustee
21
ITEM 2. CODE OF ETHICS.
(a) The registrant has, as of the end of the period covered by this
report, adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party.
(b) During the period covered by this report, there were no amendments to
any provision of the code of ethics.
(c) During the period covered by this report, there were no waivers or
implicit waivers of a provision of the code of ethics.
(d) The registrant's code of ethics is filed herewith.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees. The aggregate fees billed for each of the last two
fiscal years for professional services rendered by the registrant's
principal accountant for the audit of the registrant's annual
financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or
engagements for those fiscal years were $18,900 and $18,000 for
fiscal years ended November 30, 2004 and 2003, respectively.
(b) Audit Related Fees. The aggregate fees billed in each of the last
two fiscal years for assurance and related services by the
registrant's principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements
and not reported under paragraph (a) of this item were $0 and $0 for
the fiscal years ended November 30, 2004 and 2003, respectively.
(c) Tax Fees. The aggregate fees billed in each of the last two fiscal
years for professional services rendered by the principal accountant
for tax compliance were $1,300 and $1,650 for the fiscal years ended
November 30, 2004 and 2003, respectively.
(d) All Other Fees. The aggregate fees billed in each of the last two
fiscal years for products and services provided by the registrant's
principal accountant, other than the services reported in paragraphs
(a) through (c) of this Item was $565 for the fiscal year ended
November 30, 2004.
(e) 1. The audit committee does not have pre-approved policies and
procedures. Instead, the audit committee or sub-audit committee
approves on a case-by-case basis each audit or non-audit service
before the accountant is engaged by the registrant.
2. There were no services described in each of paragraphs (b)
through (d) of this item that were approved by the audit committee
pursuant to paragraph (c)(7)(i)(C) Rule 2-01 of Regulation S-X.
(f) Not applicable. The percentage of hours expended on the principal
accountant's engagement to audit the registrant's financial
statements for the most recent fiscal year that were attributed to
work performed by persons other than the principal accountant's
full-time, permanent employees was zero percent (0%).
(g) All non-audit fees billed by the registrant's accountant for
services rendered to the Fund for the fiscal years ended November
30, 2004 and November 30, 2003 are disclosed in (b)-(d) above. There
were no audit or non-audit services performed by the registrant's
accountant for the registrant's adviser.
(h) Not applicable
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
Included in Annual 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. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There has been no material changes to the procedures by which shareholders may
recommend nominees to the registrant's board of trustees.
ITEM 10. 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") 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
and Rule 15d-15(b) under the Securities Exchange Act of 1934, as
amended.
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)
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.
(a)(1) Code of Ethics required to be disclosed under item 2 is attached
hereto.
(a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 are attached hereto.
(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 is attached hereto.
SIGNATURES
[See General Instruction F]
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.
IPS Funds
By /s/ Greg D'Amico
-------------------------------------
Greg D'Amico
PRESIDENT
By /s/ Greg D'Amico
-------------------------------------
Greg D'Amico
TREASURER
Date 02/08/2005
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/ Greg D'Amico
-------------------------------------
Greg D'Amico
PRESIDENT
Date 02/08/2005
By /s/ Greg D'Amico
-------------------------------------
Greg D'Amico
TREASURER
Date 02/08/2005